Memo addresses treatment of fraudulently altered returns.

• Author: Beavers, James A.

In a program manager technical advice memorandum, the Office of Chief Counsel (OCC) advised on a number of issues regarding returns where a preparer, after issuing the taxpayers refund anticipation loans, increased the amount of the charitable contribution deductions claimed on the returns without the taxpayers' knowledge or consent to increase the refund received from the IRS.

Background

A tax preparer (dubbed "Horse" in the memo to preserve confidentiality) was a CPA preparing individual income tax returns. Horse prepared approximately 700 returns for tax year 2002, of which approximately 450 were e-filed. Horse prepared the returns with the information provided by the client, printed a copy of that return to give to the client, and gave the clients a check for the refund amount less his $50 fee. These checks were actually refund anticipation loans (RALs) from a financial institution that Horse obtained without the clients' consent.

Prior to transmitting a client's return to the IRS and without the client's knowledge, Horse increased the charitable contribution amount on Schedule A, Itemized Deductions, in order to increase the refund received from the IRS- Horse kept the additional refund amount. His clients were unaware that he had altered their returns.

In some cases, the IRS froze the refunds and did not send the refund amounts to the financial institution that Horse used to provide the RALs. In those cases, the financial institution made demands to the taxpayers for the refund amounts. Many of these taxpayers paid the financial institution the amount of the check they received, and many paid the entire amount of the RAL, including the fraudulent portion that Horse received without their knowledge. The taxpayers were completely unaware that they had received RALs and that their refunds were routed through the financial institution.

Evidence obtained in the IRS's investigation of Horse showed that he also reported fraudulent business expenses for several of his clients on Schedule C, Profit or Loss from Business. Horse reported legal and professional fees paid to him on these Schedules C that in fact were never paid and generated fraudulent invoices for expenses never paid by the Schedule C businesses. It appeared that these fraudulent expenses were created with the clients' knowledge.

OCC's Advice

The OCC addressed the following questions regarding the returns prepared by Horse:

Is a return a nullity if a return preparer increased the...