Criminal Investigation BureauFebruary 2022 Tax News
Tax preparers play a key role in identifying and preventing fraudulent tax filings
Franchise Tax Board's (FTB's) Criminal Investigation Bureau (CIB) investigates violations of the California Revenue and Taxation Code, which include crimes of state income tax evasion, state income tax fraud, asset concealment, and preparer fraud (more on this later).
Special agents, who are fully sworn peace officers, conduct the investigation and may write and execute search warrants and interview witnesses and subjects. As a tax preparer, you may be included and requested to provide information related to the investigation involving your client.
Tax preparers are expected to have some knowledge of their clients’ finances, which includes sources of income, investments, and expenditures to be able to prepare accurate income tax returns. As such, you are a very important witness if an investigation is found necessary. If your client is under criminal investigation special agents may request, or seize (pursuant to a search warrant) records pertaining to your client, such as:
- Federal and state income tax returns, sales tax returns, and payroll tax returns
- Personal and business ledgers, work papers, schedules, journals, income statements, cash receipts and disbursement journals, profit & loss statements, financial statements, etc.
- Sources of income and supporting documentation
- Expense records and supporting documentation
- Any communication (written/electronic) with the client pertaining to their tax preparation and finances
As a witness to the preparation of your client's income tax returns, you will be interviewed by a special agent and asked:
- Your education, years of experience preparing tax returns and types of returns prepared (individual, corporation, partnerships, limited liability companies, etc.)
- Your relationship with the client (number of years you have prepared returns for the client, types of services provided to the client, types of returns prepared for the client, etc.)
- Income items reported on the returns, source documents, work papers, and communication with the client about the income reported
- Expense items reported on the returns, supporting documentation, and communication with the client about the expenses reported
- Knowledge about the client's businesses and record keeping
- Bookkeeping services and other known accountants or tax preparers
- Who provides the records for the tax preparation, how often are they provided, and how are they provided (email, dropped off, fax, etc.)
- Are the completed returns discussed and reviewed with the client
- What is the process for signing and filing the completed returns
It is important to maintain communication with your clients to ensure they have correctly been advised on what is considered income that needs to be reported, types of expenditures and deductions allowed, and the importance of maintaining income and expense records to support items reported on their tax returns.
While the information we have shared describes the most common examples for when you may interact with FTB's special agents (as mentioned above), special agents also conduct criminal investigations related to preparer fraud.
The tax community is a tremendously valuable resource for the tax filers of our state. Thousands of tax preparers work tirelessly to prepare tax returns in support of our residents and the state year after year. There are however, a small percentage who do not follow the rules, and this is where CIB must work to identify these preparers in support of the reputation of the many.
Unfortunately, we have had to conduct several preparer fraud investigations over the years where we have found a tax preparer to have aided, assisted, or advised their client in the preparation of state income tax returns that are fraudulent or false as to any material matter. In order to prevent preparer fraud, please be mindful of the following:
- Don’t report fraudulent deductions on your clients' tax returns
- Don’t include tax credits on your clients' tax returns that your clients are not entitled to claim
- Don’t prepare fraudulent 1099 or W-2s when the business is cash paying employee wages
- Don’t prepare a double set of returns to conceal clients refunds being directed to the preparers bank account(s)
These investigations often identify tax preparers attempting to find ways to improperly increase their client's state income tax refund. By doing so, the tax preparer may believe it will increase the likelihood the client will continue to use their services in future years, and lead their clients to refer their services to friends, family members, business associates, etc.
Through investigation and prosecution of unscrupulous tax preparers, FTB special agents work to not only protect the taxpayers of California, and help ensure the public's continued trust in the state income tax process, but also the reputation of the tax preparer community and the services they provide.