The art of the steal: Will reform fight tax cheats?

One of the claims made by proponents of last year’s once-in-a-generation tax reform act was that it would limit the scope for taxpayers to cheat on their returns by lowering the complexity of the Tax Code — but so far, tax professionals seem pessimistic.

“Tax reform failed to properly fund the IRS. Pervasively inadequate enforcement budget allocations have caused and will continue to more robustly cause taxpayers to be less than fully forthright with their practitioners,” said John Dundon, an Enrolled Agent and president of Taxpayer Advocacy Services in Englewood, Colorado. “Circular 230 lacks the teeth to bridge the gap.”

“The potential exists for it to increase, perhaps exponentially, because I don’t think that the IRS will have enough security measures in place given all the code changes,” said EA Laurie Ziegler at Sass Accounting in Saukville, Wisconsin.

“The incidence of fraud, certainly on personal returns, will drop,” said Morris Armstrong, an EA and registered investment advisor with Armstrong Financial Strategies, in Cheshire, Connecticut. “If you think about it, you have eliminated a whole category where people may have had the opportunity to pad the return with imaginary expenses. The whole 2106, unreimbursed employee expenses has gone the way of civility. Imaginary advisor fees, investment seminar fees and tax return fees are gone."

“There will be opportunities for people to cheat on the refundable credit side,” Armstrong said, “and of course by not reporting all income.”

A printout of Congress's tax reform bill, "The Tax Cuts and Jobs Act," alongside a stack of income tax regulations

“As a forensic accountant specializing in divorce litigation support, I see a great deal of tax avoidance because it coincides with less income reporting and correspondingly lower child support and alimony payments,” said Susan Carlisle, a CPA with Carlisle Dorafshani Wohl and Associates, in Los Angeles.

“Almost everyone doesn’t like to pay taxes,” she said. “Small businesspeople, along with professionals, are more often particularly adept at reducing their taxable income. The IRS knows this. [Some] are so willing to play the audit lottery that they brazenly eliminate reporting a substantial portion of their income while simultaneously burying much of their personal expenses among their actual business expenses. The new tax laws will do little or nothing to change their stripes.”

Pad them now

If anything, Carlisle added, the new qualified business income deduction will continue to lower the amount of taxes they pay “because potentially another 20 percent of their taxable income will be reduced. Those who commit fraud will continue to do so,” Carlisle said. “Those that do not will seek the advice of tax professionals to learn how to allocate payroll and net flow-through income so as to maximize the new qualified business income deduction.”

“Because it will take some time for many preparers and IRS personnel to get familiar with the tax reform rules and start setting up audit programs to deal with the new laws, there will probably be more people trying to game the deduction system, just in different ways,” said CPA Brian Stoner in Burbank, Calif.

“Since many of the itemized deductions will be gone, there will probably be less fraud in that area, but business meals are a whole different problem, with the requirements for a deduction being so nebulous that it may make it a potential area of concern,” he said. “Plus with the IRS budget issues, there may not be resources to deal with a lot of the changes until later, which may lead many to pad deductions now when they think they can take better advantage.”

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