Discussion:Aiding and abetting fraud

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Discussion Forum Index --> Tax Questions --> Aiding and abetting fraud


Nilodop (talk|edits) said:

9 April 2014
This article from the CPA Journal is a good and current reference. http://viewer.zmags.com/publication/bce2f8b9#/bce2f8b9/52

I am posting it because I see the word "fraud" used in TA posts so often, and in ways that tell me there are some misunderstandings about what, exactly, constitutes fraud. There is no shortage of good articles on the topic, but this one is recent and from a good source. I hope it is helpful.

EatonCPA (talk|edits) said:

9 April 2014
I have a really big problem with one of the assertions in that DeMiro case. The accounting firm is considered to have aided and abetted in part because they knew he wasn't investing the money?

Certainly I think the accounting firm in this case has some problems here given the shoddy recordkeeping and the fact two returns were adjusted on audit. These were obviously not clean books. But the assertion of the trustee sounds like, even if the books were completely clean and error free and 100% accurately depicted the true transactional history, the firm would still be guilty of aiding and abetting just because they knew the money wasn't being invested as it should. Wow, what a slippery slope. What's next - are banks going to start holding us liable when someone defaults on their loan because we prepared accounting records or returns that showed they weren't making their loan payments but instead jetting off to Vegas every weekend? Conversely, all income is taxable, even if gained in the commission of a crime. Am I guilty of drug dealing if I prepare a tax return for someone who does engage in that activity?

Makes you wonder why anyone would want to be a tax preparer anymore.

Nilodop (talk|edits) said:

9 April 2014
It's April 9. If your sense of humor is remotely like mine, I hope you'll get at least a little smile out of this Pearls Before Swine strip of today. http://www.gocomics.com/pearlsbeforeswine#.U0V1sMawg6U

Captcook (talk|edits) said:

9 April 2014
I saw this myself this morning. "...a leetle aggressive." Made my morning.

Ckenefick (talk|edits) said:

9 April 2014
Am I guilty of drug dealing if I prepare a tax return for someone who does engage in that activity?

Agreed that it is getting ridiculous. But to your point, some banks refuse to work with "legal" drug dealers in places like Colorado, because the activity is illegal at the federal level. Whatever.

EatonCPA (talk|edits) said:

9 April 2014
Hahahaha Len, that's awesome. Sad thing is, I have clients who would probably do that if left to their own devices. *Sigh*. It's almost over right??

Southparkcpa (talk|edits) said:

9 April 2014
Interestingly... IF the fact pattern is what the prosecutor states, perhaps the preparer had a greater responsibility. Aiding? Doubtful. But enabling? Perhaps.

We have all seen or heard of returns for residents we know live in our state but file as FLA residents? I won't. But it happens.

The tax preparation industry in many areas needs some cleaning up. If you are on this site, that interest alone speaks volumes.

There are many returns prepared by businesses praying on the poor, etc...promise of big refunds. I heard a story the other day of a young girl who is not in college. Yet..the preparer put her in college, got her a large refund and asked for cash under the table.

Something need be done to clean up the slackers.

Ckenefick (talk|edits) said:

9 April 2014
IRS should include an "Ill-gotten Gains" tax form as part of the 1040 package, or at least a line on the face of the 1040.

Coddington (talk|edits) said:

9 April 2014
The Ponzi scheme case in the linked article is about a motion to dismiss. Typically, to defeat the motion to dismiss you have to show that there is more than a scintilla of evidence to support the allegations. The line-by-line G/L review and the advice to the bookkeeper should be enough to do that. Whether (and the degree to which) a tax senior manager at a compliance shop should understand the client's business well enough to recognize that they're filing a false return, well, that's an interesting, but separate question.

Ckenefick (talk|edits) said:

9 April 2014
The firm would still be guilty of aiding and abetting just because they knew the money wasn't being invested as it should.

I didn't get that far into it, but that sounds like a pretty big leap to me.

So, we have a situation with investors investing. Apparently, capital contributions were booked to Loans. IRS makes a big huge adjustment. What, exactly, was the nature of that IRS adjustment?

Spell Czech (talk|edits) said:

9 April 2014
"There are many returns prepared by businesses praying on the poor, etc." As a preparer myself, I know for sure that I often turn to prayer when other things, like balanced books, client honesty, decades of experience, and the like, aren't coming up with a good result on a return I'm preparing. But praying on "the poor" I've never heard of. Could Gazoo or Fr. Mackeldoodie have some tools they would be willing share with us in this area?

Southparkcpa (talk|edits) said:

9 April 2014
Spell...

It seems every year I read about a large "chop shop" type preparing company charging "extra" for large refunds by using EIC, etc.... typically in areas where the client is uneducated.

Nilodop (talk|edits) said:

9 April 2014
I prey they do.

Ckenefick (talk|edits) said:

9 April 2014
typically in areas where the client is uneducated

This is called price discrimination...

What you don't want to do in these situations is aid the seller in upping the price on you, by giving the wrong answer. You need to answer questions as dishonestly as possible in certain cases, to get the lowest price.

"Mr. Kenefick, is this children's computer purchase for personal home use?"

"No it's not. It is for use in a small business."

http://www.mcafee.cc/Papers/PDF/ABAPriceDiscrimination.pdf

EatonCPA (talk|edits) said:

11 April 2014
Chris - from the list of reasons the BK trustee felt the accounting firm was aiding and abetting DeMiro:

1 - The firm knew the debtors purported to invest funds for investors, but instead used the funds for the company’s daily business expenses and DeMiro’s personal luxury expenses.

2 - The firm provided substantial assistance by continuing to provide accounting services “despite obvious signs of fraud.”

3 - The firm had “actual notice and/or showed deliberate ignorance that a diversion of the Assignors’ funds was to occur or was ongoing.” This enabled the debtors to “temporarily evade the IRS’ and others’ detection of the Ponzi scheme and furthered the fraud itself.”

Having knowledge of and working for and producing work product on behalf of someone engaging in a crime in and of itself makes the accountant party to that crime, or so says the trustee. Hopefully at trial, a judge disagrees. I doubt this will be a clean decision though given the other alleged malfeasance by that firm.

I never saw anything outlining the reason for the audit or what the findings were other than a few million assessed in penalties. I read one independent story on this case and I'm guessing the audit was triggered by the FBI investigation because what got him caught was a County treasurer who wanted proof of the investments and didn't get any. Which brings me around to my main point - it sounds like no one was really paying any attention to him or performing any due diligence in relation to the "investments," which is not our purview unless we happen to be the accountant for said investors.

I feel for those folks and I personally wouldn't work with a client committing fraud like that, but I'm not ok with our industry having to accept responsibility for someone's criminal mischief or overall fiduciary lapses just because they were our clients and we prepared accurate financial records and returns for them (accurate being a key point of course).

Ckenefick (talk|edits) said:

11 April 2014
Yeah, I mean, seems like a real, real loose connection. It's one thing if we're actually cooking the books or assisting with cooking the books. But if investor money comes in and gets spent for non-investment purposes, and the accountant merely accounts for things that way, I don't see any cooking of the books, like Madoff did or Health South, or Enron or Worldcom. And if there's no cooking, and if accountant is held liable, this means accountant is held liable for not telling anyone about something unrelated to accounting. This speaks to your #1. And, if accountants prepared the tax return, not so sure they were permitted to disclose anything under Sec 7216.

And #2, pretty much the same thing. And look what Edward Snowden did: He reported what he believed to be malfeasance, and instead of being thanked, he's labeled a traitor.

I'm still at a loss for the IRS adjustment. If the IRS adjustment stemmed from all this money not being treated as taxable income, as opposed to capital contributions, that doesn't make complete sense. The diversion happened after the capital contributions were made. The capital contributions were still capital contributions. Maybe the money was moved to a related entity, who knows.

What if a mutual fund says it will invest 50% in Int'l Equities, but inadvertently style drifts such that 60% of the portfolio is invested in foreign equities. Accountant prepares the financial statement which reveals this fact. Investors suffer a loss and sue the fund. Are we to believe the accounting firm could be held liable too?

Gazoo (talk|edits) said:

11 April 2014
I think the thing here is to always keep things on a hypothetical level with the client.

Harry Boscoe (talk|edits) said:

11 April 2014
Is the TaxAlmanac software really slow this morning? I waited here long enough that I coulda gone to the kitchen for a beer...

So, I read the article about the case about the CPA....

Can a preparer who *files* his client's tax return be charged with *filing* an incorrect return if that return, which was *filed* by the preparer, turns out to be incorrect? Or fraudulent, or late, or incomplete? Where's the legal definition of the *current* usage of the verb "to file" as in what tax preparers do with their clients' income tax returns these days. I think we've been here before, but not quite in the context of legal liability for what's *in* the tax return that has be *filed* by a preparer. Is the tax *preparer* in that context referred to as the "filer" of the return? Should he be referred to as the "preparer-filer"? What are his professional/legal/technical responsibilities when he *files* a tax return? Did the professional responsibilities get redefined when the usage of the word, "file," changed?

Does anybody know if there's a place in the law or the regs that says, in effect, "...the word "file" shall include the actions taken by a preparer of a tax return when he sends the income tax return of his client, by whatever means (i.e., electronically, by FedEx, by U.S. Mail, by courier), to the IRS...."

I'm pretty sure that the money coming from the clients of this fraudster isn't "capital contributions". It's in fiduciary trust, it's not the company's money, it's more like a loan. Calling it "capital contributions" is making things even more sloppy. Where *was* it booked, and who booked it? Has that person also been charged with whatever the crime is?

Ckenefick (talk|edits) said:

11 April 2014
I'm pretty sure that the money coming from the clients of this fraudster isn't "capital contributions". It's in fiduciary trust, it's not the company's money, it's more like a loan. Calling it "capital contributions" is making things even more sloppy.

I hear you. Either it's a direct investment in fraudster's entity (capital contribution) or it's some type of agency relationship (brokerage statements). I didn't see a lot of details as to the accounting. But either way, I still don't get the IRS's adjustment. Either way, investor contributions are not income to the receiving entity.

Can a preparer who *files* his client's tax return be charged with *filing* an incorrect return if that return, which was *filed* by the preparer, turns out to be incorrect?

Various situations come to mind in thinking about this situation. Can you give us a specific set of facts so we know what you're thinking? Are you talking about the situation wherein client gives false info to preparer which is unbeknownst to preparer, then preparer prepares the return, then client signs it, and then preparer mails it in?

Harry Boscoe (talk|edits) said:

11 April 2014
I'm not asking whether a particular action might be a no-no. I'm asking if there's a definition of "to file an income tax return" that includes specifically what this term means, including perhaps some things that are *nowadays* right, wrong, required or prohibited, that we didn't even think about forty or more years ago, because to "file" a tax return was done *only* by the taxpayer. Or his agent, I guess.

Is today's definition of the term "file" - as it seems now to include sending the return to the IRS - simply a use of the term to include the agency that I alluded to above, or is there a *new* and expanded term, perhaps with rules accompanying it?

I noticed in reading the article that the term was used the new way, and I noticed in something official that was referenced in the article that the term was used the new way, officially, I think.

Ckenefick (talk|edits) said:

11 April 2014
Gotcha. I didn't catch that in the article. But, quite a bit was made of this word "file" with respect to the new rules involving required e-filing. Remember? Basically, the rules apply to preparers who "file" X number of returns electronically. So, the conclusion was that "filing" was the physical act of filing, at least with respect to the e-file mandate. That is, if you prepare 10,000 paper returns and hand deliver them to your 10,000 clients and your clients mail them all in, you have filed zero returns, and you have filed zero returns electronically...so the e-file mandate doesn't apply to you.

EatonCPA (talk|edits) said:

11 April 2014
I don't know that the IRS adjustments were related to the income monies at all. Could be they disallowed a bunch of expenses. The details on that were rather scarce but the implication was that the books were a mess, there were large transactions the in-house bookkeepers could not explain or tie out, and the accounting firm knew the books weren't tying out. Allegedly. And in that set of circumstances, the accounting firm very likely did knowingly file a false return. Those are the allegations made by the trustee prior to the bullet points I posted above. If those allegations end up being true, that accounting firm is screwed (and rightly so). It's going to make any decision in this case potentially messy because there appears to have been some shoddy accounting going on. Now, is that specific to aiding and abetting in the fraud or just overstating expenses? And would any decision make a clarification between the responsibility of an accounting firm when the accounting itself is bad or when the accounting is good, just the nature of the transactions was not what it was billed to be to a third-party?

For the record, there was some accountability made up the chain of those who invested in this scam - board members, commissioners, finance officers etc, since apparently not a one did any due diligence. DeMiro was also running his business under a brokerage firm - Brookstone IIRC - and they too were pursued for damages. I'm not sure on DeMiro's end who went to jail besides him (10 years). Very big mess and one I hope none of us find ourselves in. But it certainly puts me in mind of things like the bank comfort letters where they want us to stipulate removal of funds won't hurt the bottom line. We all know why they do that. With a case and precedent like this, maybe they wouldn't even need us to stipulate to make us responsible if someone defaults.

Harry Boscoe (talk|edits) said:

11 April 2014
"... the accounting firm very likely did knowingly file a false return" says Eaton. Where can I read the rules that apply to the tax preparer when a false tax return has been prepared and "filed" by the preparer?

If I prepare a paper tax return and my client signs the return and asks me to mail it to the IRS for him, am I the "filer" of that return in the context that I would be if the return were electronic and e-filed?

Ckenefick (talk|edits) said:

11 April 2014
For the record, there was some accountability made up the chain of those who invested in this scam - board members, commissioners, finance officers etc, since apparently not a one did any due diligence.

That is one thing I was definitely wondering about. And, this is why the big brokerage houses will not let their advisors advise on making an investment, even off the record, to a client when the brokerage house will not do, or cannot do, its own due diligence. Yet, brokers still do it, without letting their firm know about. It's calling "selling away" from the firm.

http://en.wikipedia.org/wiki/Selling_away

Harry Boscoe (talk|edits) said:

11 April 2014
Does the preparer who e-files his client's return have some greater responsibility for its content than does the preparer who agrees to mail a paper return signed by the taxpayer/client to the IRS for its content?

Nilodop (talk|edits) said:

11 April 2014
The discussion above about the meaning of "to file" probably contains more thought on the issue than has been applied by anyone at IRS. And it is scary. I especially like the point Ck makes about preparers who e-file. If IRS figured out that we. as a profession, could just start mailing hard copies to our clients for them to file via USPS or otherwise (might save USPS from bankruptcy), they'd pretty quickly address the issue and, I believe, conclude that it is the taxpayer who is "filing" even when we e-file their returns. But that's just my thought. Who knows where it would lead? They sure as hell don't want 100 million more 1040s coming in as hard copy.

Harry Boscoe (talk|edits) said:

11 April 2014
I'm beginning to think that the charges against the accounting firm may have nothing to do with the content of the tax return, but that the returns they prepared are being used to support the charges against the accused parties in the court case, which happens to include the accounting firm.

What were the adjustments that IRS made? Oh, yeah, asked and answered...

Coddington (talk|edits) said:

11 April 2014
I think it was irresponsible for the professor to write this article, since she is a JD and should understand the difference between defeating a motion to dismiss based on more than a scintilla of evidence and a verdict against the firm based on a much higher level of proof. This isn't a precedent in the normal sense of the word.

Ckenefick (talk|edits) said:

11 April 2014
Where can I read the rules that apply to the tax preparer when a false tax return has been prepared and "filed" by the preparer?

You can start here:

http://www.klasing-associates.com/criminal-tax-defense/tax-preparer-fraud/

I'm still wondering if you're describing a situation wherein the preparer knew the return was false, or had reason to believe it was false, or if preparer was just an innocent bystander who was given false information without knowing it. Anyway...

The act of filing, or at least "who" filed it is irrelevant for most criminal charges that can apply to preparers.

I mean, if the preparer knew the return to be false, yet didn't physically file it, it doesn't matter. The preparer can be hit with a slew of criminal charges.

If you're talking about a guy that didn't prepare the return, but just dropped a friend's false return in the mail, you'd have to tell us: Did the guy know his friend's return was false at the time the guy mailed it or not?

Spell Czech (talk|edits) said:

11 April 2014
"I think it was irresponsible for the professor..."

Not only that, but I think she used IRS' as the possessive of IRS.
We all know that the possessive of IRS is IRS's.

Ckenefick (talk|edits) said:

11 April 2014
I'm beginning to think that the charges against the accounting firm may have nothing to do with the content of the tax return

That's how I took it. Basically, they're charging that the accounting firm knew the money wasn't being invested as it should have been, and therefore, the accounting firm should have notified everyone that invested, or at least the authorities. And since they didn't, they must be held liable. Please.

And I'm with Coddington. It's too outrageous. There's too loose of a connection here.

Lenny, next time post something that makes sense, like I do with all of my posts.

Nilodop (talk|edits) said:

11 April 2014
It's slow season and you all needed a filler. Now I'm gonna read what I posted.

EatonCPA (talk|edits) said:

11 April 2014
Forget the filed semantics argument for a moment - at the least, the accounting firm prepared those tax returns the IRS ripped apart for ... whatever. The trustee suing the firm alleges the firm did it knowingly. If true, that's a pretty big problem. We can all see preparer penalties or other professional sanctions coming down for that. Does it also hold, however, that the accounting firm was then guilty of aiding and abetting in fraud and is financially culpable?

Chris - I agree the trustee probably thinks the accounting firm should have blown the whistle at some point. There's a professional ethics nightmare. However if you put points two and three together, it seems to imply she thinks at the very least they should have disengaged from the client entirely, thus preventing DeMiro from filing any kind of return. That in the absence of those filings, someone (the IRS or whomever) would have scrutinized DeMiro sooner and thus caught on to the obvious fraud. I think the trustee is rather naive.

Coddington, I get the distinction you are making, that at this point the accounting firm hasn't been found guilty of anything yet. My concern is what happens if they do lose and this trustee is sitting here alleging accountants should be held liable for fiscal irresponsibility by a client simply because we knew about it via looking at financial records and then had the audacity to issue some type of work product (accurate or not). Point being, even if the books had been pristine and the IRS had not made any adjustments to the returns, I bet this trustee still goes after the accounting firm for aiding and abetting. That's scary and the fact this has even the possibility of becoming precedent if the accounting firm losses the case is chilling.

Ckenefick (talk|edits) said:

11 April 2014
Does it also hold, however, that the accounting firm was then guilty of aiding and abetting in fraud and is financially culpable?

Many years ago, the talk of the town was financial statement audits, and whether or not an investor could sue the accounting firm. You know, entity goes bust and investor tries to sue the accounting firm.

Sounds like in Demiro's case, accounting firm was presented with evidence that didn't add up, yet accounting firm prepared tax returns using that bad information. So, accounting firm had reason to know something was awry. But the investor suit seems a bit terciary to me. Doesn't sound like anything accounting firm did was to be presented to investors. I think the argument being made it that the accounting firm tried to conceal things from the IRS. And if that happened, an IRS audit would be avoided and IRS wouldn't be able to blow the whistle. Therefore, if IRS can't blow the whistle, investors are none the wiser and are harmed when the thing ultimately blows up. Thus, accountant's actions indirectly harm the investors in that the tax return disclosures were false, thereby not instigating an IRS examination, which would have likely revealed the falsities. Again, seems like a very tertiary, "loose connection," type argument to me, especially seeing that the IRS actually caught it.

Given that, I'm thinking accounting firm actually did the investors a favor. If the tax returns had been prepared properly, then they might actually have not led to an audit. In which case, IRS never comes in to audit. In which case, the fraud perpetuates, and all the while, the losses to investors accumulate. So, the more I think about it, any purported falsities stemming from the accounting actually led to Demiro being caught, thereby doing the investors a favor...in that losses were cut early, before 100% of the assets were gone. The accounting firm should be thanked. Also, one wonders how Sec 6103 might play in all of this.

Coddington (talk|edits) said:

11 April 2014
I agree with you, Eaton. That's why I spent some time discussing upthread whether a tax senior manager in a tax compliance role should be allowed to have his or her head up his or her a** when it comes to understanding the taxpayer's business well enough to form an opinion that the taxpayer is violating the law. I realize CPAs have a duty to the public that EAs and attorneys do not, but, last I heard, it does not go so far as to require uncovering fraud if they prepared an accurate tax return. I'm guessing the facts got garbled in the article or the reported ruling and the CPA firm did not prepare an accurate return. But I don't know. I'd expect it to get kicked at summary judgment.

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