Taxes: 10 Ways to Cheat Like a Pro

For donations of $250 or more, you must have a letter from the charity before filing your tax return. Last year a Tax Court judge ruled that Ruth M. and Daniel Gomez of El Paso, Tex. couldn't deduct $6,100 they tithed in 2005 to their church, even though they had canceled checks and a 2008 letter acknowledging the donations. "We didn't know the law," admits Ruth, 33. "We know so many people do cheat the system. We were doing the right thing and we got red-flagged."

Document employee expenses. Unreimbursed employee business expense deductions are another mail audit magnet. In 2007 hundreds of Secret Service agents received letters disallowing deductions for various job expenses, including oversize suits they bought to fit over bulletproof vests. (You can't deduct clothes you'd otherwise wear off the job.)

William Stevenson, a Merrick, N.Y. tax accountant representing dozens of agents in Tax Court, says the IRS appears to be conceding the big-suit issue, but is being picky on substantiation. "There's no wiggle room. You can't even use credit card statements; you have to have the actual receipts," he warns. (Note that upper-middle-class folks who pay the alternative minimum tax can't deduct employee expenses anyway.)

Use an honest tax preparer. If your tax preparer suggests inflating deductions or winks at unreported income, find another one. The government has targeted sleazy preparers; it goes after them in court and then audits their clients en masse. If you're inclined to finagle, get an honest CPA for cover -- just don't tell him what you're up to.

For a field audit, hire a lawyer. If you've been naughty and are selected for a face-to-face audit, send a representative in your place, advises Charles Rettig, a Beverly Hills tax litigator. If the IRS agent asks a loaded question -- say, about cash receipts -- and a taxpayer lies, he has just committed the felony of making a false statement to a federal official.

"If he asks me a tough question, my answer is 'I'll find out,'" Rettig confides. Plus, he says, thanks to currency transaction reports banks and others must now file, the agent is more likely than ever to know you're lying. To be extra safe, send a lawyer instead of a CPA; what you tell a lawyer has more protection in the event the case turns criminal.

Close secret offshore accounts. The government's efforts to get UBS to turn over the names of 19,000 Americans with Swiss accounts have been much publicized. What's less well known is that Congress has beefed up rewards for squealing to the IRS, giving clerks at every two-bit offshore bank an incentive to copy all the names onto a flash memory stick and rat them out.

Failing to disclose a foreign account is a felony. The government doesn't bring many criminal cases. But the civil penalties are potentially confiscatory. Taxpayers who amend their returns before the IRS gets their names are likely to avoid criminal prosecution and the heaviest penalties. (Hire a lawyer to do this.)

  • 1
  • |
  • 2
  • |
  • 3
Join the Discussion
blog comments powered by Disqus
You Might Also Like...