With a more or less self-governing tax system, there are always going to be opportunities for fraud. New deductions and expenses create an environment that can make cheating tempting – and the new first-time homebuyer’s credit is no exception. However, the Internal Revenue Service (IRS) is warning taxpayers that they are serious about investigating and pursuing fraud. Last week, the IRS announced its first successful prosecution related to fraud involving the first-time homebuyer credit. Eileen Mayer, Chief, IRS Criminal Investigation, warned: “We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction.”
And the IRS now has a winning streak, of sorts. On Thursday, July 23, 2009, James Otto Price III, a tax preparer in Florida pleaded guilty to preparing a client tax return where he improperly claimed the first-time homebuyer credit. He faces up to three years in jail, a $250,000 fine, or both.
There are more cases in the pipeline. As of last week, the IRS has 24 open criminal investigations involving the homebuyer’s credit. To combat fraudulent homebuyer’s credit, the IRS has cautioned that they are using a variety of screening tools, including computer software to determine inconsistencies in returns. The clear message that they hope to send: don’t even think about cheating.
I know it’s tempting. Times are tough and this is a huge credit. It’s also confusing enough that I think it lends itself to people looking for wiggle room. I just counted and there are 53 questions in my inbox related to the homebuyer’s credit (I’ll be posting answers to a few this week). Many of them are fair questions of the “do I qualify?” type. A few are walking the line of “how can I change the situation to qualify?” type. And a couple are “how would the IRS know if I cheated?” type.
If you have questions about the credit, make sure you find the answers before you act. You can either Ask The Taxgirl, consult with your own tax pro or call the IRS at 1.800.829.1040.
Hey, everybody cheats one way or another (except me, of course!).
Decades ago the Supreme Court said it was lawful for a taxpayer to arranhe his affairs so as to be subject to the least tax. I teach Real Estate at the college level; real estate investment is greatly tied in with the tax laws, so I have to know something about taxes. My tax returns are works of art, that I prepare myself because I’ve never met a tax preparer who knows as much about my taxes as I do. However, I have documentation for every item in those returns.
I’ve been audited four times. The first time the IRS ended up owing ME money. The second time I owed them a couple hundred dollars because one deduction was disallowed; I should have asked to see someone up the line because I know I was right, even though the auditor disagreed.
The third time was a wash. The fourth time they cancelled the audit because they were asking about the same thing they asked the year before, and for which no tax was due.
The upshot is that if you know what you’re doing, and you’ve got the evidence to back it up, there should be nothing to fear in an audit. Show up with a couple of briefcases with everything neatly sorted out. They ask a question, you reach in and get the supporting documentation in moments. After a few times they may well “give up” — “this guy has his proof, there’s not enough blood to squeeze from this turnip.”
The IRS is a horrible agency, and the income tax is a terrible system. My apologies to those who earn a living in that field, but we really should look at streamling collections by moving toward a flat tax.
JBruce,
The quote you are looking for is found right on my home page cause its one of my favs:
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”
Judge Learned Hand
Sorry, but that’s a misquote. What Judge Hand actually wrote in Helvering v. Gregory, 69 F. 2d 809 (2d. Cir. 1934), aff’d 293 U.S. 465 (1935) was:
“[A] transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes. (citations omitted) Therefore, if what was done here, was what was intended by section 112 (i) (1) (B), it is of no consequence that it was all an elaborate scheme to get rid of income taxes, as it certainly was. Nevertheless, it does not follow that Congress meant to cover such a transaction, not even though the facts answer the dictionary definitions of each term used in the statutory definition. It is quite true, as the Board has very well said, that as the articulation of a statute increases, the room for interpretation must contract; but the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create…. To dodge the shareholders’ taxes is not one of the transactions contemplated as corporate ‘reorganizations.'”
Judgment for taxpayer reversed and deficiency affirmed.
In context, Judge Hand was writing about the *limits* to tax planning: there must be a “business purpose”, interlinked steps are joined together, and substance controls over form. ‘G