IMPROPER BOOKKEEPING AND TAX PREPARATION
Most taxpayers would come to their tax preparers and go through the same routine: 1) Turn in whatever documents that they think are pertinent. 2) Provide whatever else what their preparers may ask then 3) Sign the dotted line and nothing of it until the next tax season to go through the same routine again. Little do they know that what their preparers do for them can have major impacts: 1) Proper tax preparation can results in reduced chance of an audit while maximizing deductions (hence minimizing tax liability), legally while 2) Improper tax preparation can result in increased chance of an audit while creating civil and/or criminal penalties against the taxpayer (not the preparer). That’s because only the taxpayer signs under penalties of perjury. Most preparers have virtually no liabilities.
1. SUMMARY OF EXPENSES CONSTITUTES NEGLIGENCE AND FAILURE TO KEEP PROPER RECORDS: The term “negligence” also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly. Sec. 1.6662-3(b)(1), Income Tax Regs. The term disregard” includes any careless, reckless, or intentional disregard. Sec. 6662(c)….An understatement is substantial in the case of an individual if the amount of the understatement for the taxable year exceeds the greater of 10 percent of the tax required to be shown in the tax return for that year or $5,000. Sec. 6662(d)(1)(A).
2. SUMMARY OF EXPENSES MEANS THAT TAXPAYER FAILS TO FOLLOW PROFESSIONAL ADVICES: A taxpayer’s reliance on the advice of a professional will be objectively reasonable only if the taxpayer has provided necessary and accurate information to the professional. Respondent argues that petitioner is liable for the accuracy-related penalty under section 6662(a) because of a substantial understatement of tax under section 6662(b)(2) and petitioner’s negligence or disregard of rules or regulations under section 6662(b)(1).
3. SUBSTANTIAL UNDERSTATEMENT OF TAXES = FRAUD: We find that the understatements for the years at issue were substantial and are evidence of fraud. (Note: This is applicable, whether your bookkeeping were Summary of Expenses or Quick Books).
4. LIST OF FRAUDULENT ACTIVITIES: Courts have developed a nonexclusive list of factors that demonstrate fraudulent intent. Those badges of fraud include: (1) understating income; (2) maintaining inadequate records; (3) implausible or inconsistent explanations of behavior; (4) concealment of income or assets; (5) failing to cooperate with tax authorities; (6) engaging in illegal activities; (7) an intent to mislead; (8) lack of credibility of the taxpayer’s testimony; (9) filing false documents; (10) failing to file tax returns; and (11) dealing in cash.

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