Mortgage Fraud? Ethics?

Technical topics regarding tax preparation.
#1
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I have a self employed client who wants to not take deductions their s-corp in order to show higher income in order to get a mortgage. I reviewed the tax code and deductions are allowable not mandatory. So leaving them out is not illegal. however f I know they are going to use this to present as income to a mortgage company to get a loan, is there an ethical responsibly I have to prepare the return a certain way? The amount they want to leave out is pretty material. Is this mortgage fraud even if they do not amend the tax return later? Any thoughts and comments are appreciated.
 

#2
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Although I appreciate the delicate situation that the taxpayer has put you in, I don't think anyone on this board is going to come out and say that what you're proposing to do for your client is a smart/safe thing to do. This is especially true if the client has an email thread or a paper trail of him actually telling you that this is what he is doing (artificially inflating his income numbers in order to obtain a loan).
 

#3
Nilodop  
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Somewhere in TPT, this was discussed at length (I think). Have you searched?

Presumably, your client, being ethical and honest, would not amend and claim the deductions after he gets his mortgage. Right? :?: :roll:
 

#4
Frankly  
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There are other reasons why nefarious taxpayers don't wanna report all their expenses, and there are rulings against the practice.
See CCA 200022051 https://www.irs.gov/pub/irs-wd/0022051.pdf

and RR 56-407

Maybe your client could be the subject of a new ruling?
 

#5
Doug M  
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The AICPA issued SSTS's in November 2009. Much more stringent than Cir 230

You should read these before you go forward.
 

#6
JAD  
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Run, don't walk, away. I'd bet your liability insurance carrier would say the same.
 

#7
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Nilodop wrote:Somewhere in TPT, this was discussed at length (I think). Have you searched?

I don’t think he needs to search. His tax conclusion is correct. Purely from a tax standpoint, the IRS couldn’t do anything to him or the taxpayer, absent the EIC being involved.

Ethically/morally, however, it’s obviously a problem. And finally, in terms of getting in trouble for something like this, yes, I think you could. For one thing, you’re part of a conspiracy. And for another, if you are governed by a regulatory body, like a state CPA Board, they could pull your license on a few grounds…the illegal conspiracy referenced above and also because it’s an act discreditable.
 

#8
ATSMAN  
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Don't do it! The bank will come after you because you will most likely be also certifying the "false" income on which the loan underwriting is involved. My red flags go up as soon as a client mentions they are trying to qualify for a loan!
 

#9
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Your gut has already told you there is a problem. It never pays to get involved in monkey business. First of all, it is flat out the wrong thing to do. Second, you can be sure the client will throw you under the bus in a New York minute if things go south. Finally, how would you like it if that client then tells others that you're the go to guy for that sort of thing. It will damage your reputation.
 

#10
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If this is like most clients who want to pull this type of stunt, expect the client to come back after getting the final returns saying, "you know, after looking at the tax I have to pay, I changed my mind. Could you please redo the returns by deducting the business expenses?" That should give you a clue that they're showing one return to the loan company and a different one to the IRS, both of which have your name on them as preparer. If a problem (such as mortgage fraud) comes up later, who do you think the client is going to blame?
 

#11
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DaveFogel wrote: That should give you a clue that they're showing one return to the loan company and a different one to the IRS, both of which have your name on them as preparer.


Or they take the return to another preparer and claim the first guy did not do it right and left off a bunch of deductions!

All the banks have the taxpayer sign a 4506-T......so they will get the one that was filed with the IRS.

If this is a good, longtime client I would have an "are you nuts?" conversation with them and inform them of the mess they are getting into. Obviously if I cannot easily bring them around, I would cut them loose no matter what the relationship. Some people just don't think things thru and when their trusted tax advisor brings the big picture to light they realize you just saved their a$$ from jail.

If this is a newer client, get rid of them. There is no room in your practice for that type of client
 

#12
golfinz  
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I've got one better: I had a LENDER tell me they wanted to review my clients tax return before it was filed so he could confirm that their income was high enough to qualify, and if it wasn't, he wanted to have it "adjusted."

The client and I had a rather firm discussion about this conversation

edit: the lender told me that I was the first CPA to have an issue with this procedure :lol:
 

#13
Doug M  
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The AICPA SSTS's require communication. That makes you a party to the deal that has knowledge.

You get hung either way
 

#14
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Thanks for all the reply's everyone. So I read as many IRS rulings, SSTS's, AICPA Guidelines, and CAL CPA standards etc.. as I could. I even called a few other CPA's I know. There is no clear cut answer but they all lean in one direction, don't do it. So I told my client I was not comfortable with it. I now have one angry ex-client.

Thanks for all the help. I have one less client but I will sleep well tonight.
 

#15
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MoCoCPA65 wrote:There is no clear cut answer

I think that there is. Is it mandatory for a taxpayer to deduct all of his or her allowable deductions where he or she chooses not to do so? 90 years ago, In Appeal of Even Realty Co., 1 B.T.A. 355 (1925), the Board of Tax Appeals (now the Tax Court) considered this question and said:

At the hearing of this appeal, counsel for the taxpayer laid stress upon the language of the statute providing that the deduction shall be allowed. He insisted that allowance indicated an option to the taxpayer to take the deduction or not as he saw fit. Of course a taxpayer may neglect or refuse to make a correct computation of income in a given year and pay a greater tax than he owes — and nobody will force the excess tax back upon him. * * * We do not think the word allow intended any option. As used, it merely means consider or subtract. * * * Instead of saying “the following amounts shall be subtracted,” Congress said “there shall be allowed as deductions,” meaning the same thing. * * * To hold that the use of the word allow and its derivatives indicated an option in the taxpayer to claim his deduction, or to treat the fact entitling him thereto as if it had not occurred and to make future returns on the basis of its nonoccurrence, would lead to many absurdities.* * * If a taxpayer owned a plot of land with two buildings on it, which he bought as a unit, and one of the buildings was destroyed by fire in 1916, but he claimed no deduction for the loss in his 1916 return, should he be permitted on selling the property in 1920 to compute his income without reference to the 1916 loss, thus in effect transferring his loss from a year of low tax rates to one of high rates? * * * The only alternatives to such a ruling would be (1) to put every taxpayer in a position to postpone final determination of his taxes until just before the expiration of the statute of limitations and then to throw his deductions into the year in which they would benefit him the most, or else, and we think this the correct rule, (2) to hold strictly that deductions must all be taken in the year in which their allowance is provided for by statute, and that failure to take them does not preclude the Commissioner, in computing taxes for subsequent years, from determining the taxes for those years upon the facts applicable thereto.
[emphasis in original]
 

#16
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DaveFogel wrote: Is it mandatory for a taxpayer to deduct all of his or her allowable deductions where he or she chooses not to do so?
The answer is no. Your cite leads a lot to be desired in its analysis and doesn’t consider the slew of authority that has been issued since then.

If a taxpayer owned a plot of land with two buildings on it, which he bought as a unit, and one of the buildings was destroyed by fire in 1916, but he claimed no deduction for the loss in his 1916 return, should he be permitted on selling the property in 1920 to compute his income without reference to the 1916 loss, thus in effect transferring his loss from a year of low tax rates to one of high rates?

No one is suggesting that. No one is suggesting a whipsaw. The loss and the basis reduction are two different things.

The only alternatives to such a ruling would be (1) to put every taxpayer in a position to postpone final determination of his taxes until just before the expiration of the statute of limitations and then to throw his deductions into the year in which they would benefit him the most

Not really. No one is suggesting we pick and choose the year to take our deductions. What is being suggested is that the taxpayer either takes deductions in Year X or he doesn’t take them in Year X, that’s it…no one is suggesting we don’t take them in Year X, but then take them in Year Y or some other future year.

The word allowed doesn’t mean must. It means if the taxpayer claims a prescribed deduction, the Service will allow it. If the word allowed means must, when it comes to federal taxation, then there would be no need for the word allowable. There’s been an entire treatise written on this topic, and after considering everything in it, a much stronger case is presented for the notion that the word “allowed” does not mean “must,” except in cases involving the EIC.

MoCoCPA65 wrote:There is no clear cut answer

Rest assured, if you intentionally fail to claim deductions, with the idea of helping a client to qualify for a mortgage by overstating his profit, and that fact is revealed to the lender and proven after the client defaults on his mortgage, that lender would have a very strong case against you for civil conspiracy. And after that lender contacts the State CPA Board (or after you voluntarily disclose the matter in your annual CPA License renewal, which your Board would probably require you to do), the State Board would have a very strong case for pulling your license. And there is also the criminal aspect. There are very clear-cut answers here, the least important of which are those involving the IRS.
 

#17
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Jeff-Ohio wrote: Your cite leads a lot to be desired in its analysis and doesn’t consider the slew of authority that has been issued since then.

I didn't see a single authority cited in your post. What "slew of authority"?
 

#18
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Read the treatise…the one that has been cited and bounced around numerous times already.

http://digitalcommons.law.villanova.edu ... path_info=
 

#19
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Jeff-Ohio wrote:Read the treatise

I don't rely on treatises, especially one that ignores a court case that has dealt with the issue.
 

#20
skassel  
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golfinz wrote:I've got one better: I had a LENDER tell me they wanted to review my clients tax return before it was filed so he could confirm that their income was high enough to qualify, and if it wasn't, he wanted to have it "adjusted."

The client and I had a rather firm discussion about this conversation

edit: the lender told me that I was the first CPA to have an issue with this procedure :lol:


Let's hope that this wasn't recent. There is no question that there were a gazillion nefarious lenders up until the crash, but hopefully most of them are gone.
Steve Kassel, EA
 

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