This article was based on Episode #23: Liz Farr’s dramatic story about tax evasion that left Our Beloved Host, Morgan Friedman, and us, with a great amount of valuable lessons. Please watch the complete episode here!
“Well, they’re in a box somewhere.” – Liz Farr’s client
Workers, entrepreneurs, and every earning citizen should avoid tax evasion at all costs. Taxes are a way for us to show our support for the government and the people we represent. It’s true that we might consider evading our taxes under certain circumstances. Despite our best efforts, we were unable to do it. I mean, who in the world would want to face trouble from the IRS and the government to evade some tax? Well, maybe I know someone who might. In fact, Liz Farr’s client, our sharer for this story, evaded his tax for 10 years or so. Sit back, grab some notes, and let’s learn from this horrifying client-horror story.
Liz Farr will share with us a common tax problem that almost every tax-paying worker could relate to. To begin, Liz Farr has been a certified public accountant (CPA) and a professional writer for 15 years. One of the most important jobs of a CPA is preparing the tax returns for anyone. Liz had been in that line of work for years, so she is well equipped with the knowledge and experiences from those long years of hard work.
Liz had no problems with her work during those times. She encountered minor issues and small challenges, but she still managed to solve them all. However, she’s yet to realize that things are about to get worse for her.
In 2006, Liz had a client that gave her the worst experience of her entire career. Let’s give that client a name, actually; for privacy, Liz named that particular client as John Smith. Liz was very thorough with this client, and she even labeled John as an “IRS tax dodge,” and you’ll soon find out why. But if you know what IRS means, you may already have an idea where this story is going.
Moving on, Mr. John Smith walked into Liz’s office located in New Mexico. John had recently moved to New Mexico after selling a 200-acre farm. The purchase was worth 2 million dollars, but he didn’t sell the farm to one buyer. He sold it piece by piece to four buyers, and they all had real estate contracts, which means he was really financing the sale, and the buyers were paying him overtime. The reason why John came to Liz was that he needed his tax return to be done.
Usually, when a new client walks in, Liz would ask for their tax returns from at least the last year up to about three years. Liz does this because she needs to take a look at the kinds of things her client has on their general tax returns and see if she can create opportunities to get back on some refunds and make some changes. Sometimes her clients might have activities in prior years that have repercussions for the future of their tax attributes that carry forward.
Liz then asked John for his tax returns. John just laughed and replied, “Well, they’re in a box somewhere. I haven’t completely unpacked yet.” After that response, John gave Liz a big pile of stuff, and she started working on his tax returns.
Before we continue, let’s first take note of some red flags for you to be aware of.
First red flag
The first red flag was when Liz asked for the account history, and John just laughed and didn’t take it seriously. If a person laughs at a serious matter, he is either hiding something or lying. If a person hires an accountant, it is already given that they need to look at files related to your finances because that is what they do. Liz should have at least felt that John was a bit sketchy when he laughed at her question.
Second red flag
Another red flag was when he made a joke rather than answering Liz’s question seriously. There’s a time and place for humor, and there’s a time and place for a particular business.
Third red flag
John already received the 2 million dollars, and he had no accountant to help him manage that huge amount of money. Accountants will establish a relationship with their clients that can last even for decades. It may not really matter if the client has moved out of state or the accountant has moved out of state. They can still stay in touch and maintain the relationship.
So, knowing that John was looking for an accountant a year after his huge sale, Liz should have a gut feeling that the situation was sketchy. Maybe she had an accountant in Pennsylvania, but not bringing that accountant with him or not getting in touch with his accountant is still sketchy.
Again, having a background check on your clients is very important. Even if your clients are very friendly or have an angelic face, you need to do some due diligence on them for the sake of your working relationship and career.
Going back to the story, John brought Liz a huge amount of stuff about the reinvestment money that he got into some land in New Mexico. John also brought his combined documents of tax reports that go to the IRS and some documents of transactions reported to the IRS. Liz made a copy of all the documents that John brought, and the IRS checked to make sure that their records matched what’s on the tax return.
The IRS does this matching, and if they don’t match, the person will receive a nasty gram from the IRS. So as an accountant, Liz needed to know John’s previous tax returns so that if he got a nasty gram from the IRS saying that the documents didn’t match, she could immediately adjust John’s account and will tell John to charge them an extra amount of money.
Liz continued looking at the documents, and she saw a handwritten compilation of records that John’s wife made. John’s wife was trying to recreate a spreadsheet using a sheet of paper. The problem was that it was not like the online spreadsheet because instead of the rows and columns, John’s wife would draw circles around important financial statuses.
She would have the property taxes on one corner and drew a little circle around it. She also labeled it as utility bills at another corner and drew a little circle again around that. Another one was their phone bills and many more. Liz got that sheet of paper with all these little kinds of circles, squares, numbers, and labels that she couldn’t really tell if it was right or just made-up.
There were never any receipts to back up any of this documentation, so Liz couldn’t really determine if John was just pulling these numbers out of thin air and writing them down, going through a checkbook register, or other records. There is really no way she could tell.
This would have been the sign for Liz to drop John. But as a CPA, she has to assume that all of her clients are being honest and forthright. That is somehow a CPA’s professional standards to assume that they are being honest, but if they see something that doesn’t make sense or contradicts something else that they are getting, then it’s the CPA’s responsibility to investigate or to question the client and ask them about it.
It’s always up to the client on what they want to do about the discrepancy, but if the CPA feels that their clients are behaving in an unethical manner, then it is their responsibility to end the contract with their clients. In other words, when you go to the doctor, and your new doctor asks your medical history, the doctor will have to assume that you are not inventing your medical history out of thin air.
Going back to the story, Liz and John continued this pattern for a couple of years. What’s odd about this is that John always filed his tax returns by mail.
Keep in mind that it was 2006, Liz still had a lot of clients who were filing her by mail. Like they get a printout of their tax returns, sign it with a pen, put it in an envelope, and post it in the mail. Liz continued this process, and every year when it was time to do his tax return to start working, she would always ask about John’s old tax returns from Pennsylvania. But every time Liz asks, John would have a lot of excuses such as “That must have been in the box that got lost,” or “I never found them. Maybe we threw out that stuff when we were getting ready to move.”
Because of Liz’s professional standards, she had no choice but to continue this process for a year. After working with John for so long, Liz noticed something about John’s personality. Liz soon found out that one of John’s hobbies is this thing called cowboy mounted shooting.
Out of curiosity, Liz tried to Google the said sport. She saw videos of cowboys inside a huge arena, having stakes with balloons on top of them, galloping a horse down through the patterns around the stakes, and shooting them with guns. Every time John comes into Liz’s office, he wears his cowboy boots and brags about the horses.
This one time, the firm partners were in Phoenix, and they decided to go to this Rodeo because they didn’t have anywhere else to go. They saw John Smith riding his horse, galloping down, and shooting out balloons there.
Liz continued working, and again, another red flag happened. Liz found out that John wasn’t paying the estimated tax payment that Liz set up for him.
For those who have no idea, in the U.S., if you do not have taxes withheld from your paycheck as an employee, it’s your responsibility to make estimated quarterly payments where you sort of guess what you’re going to owe next year. These are usually based on your tax bill for the prior year, and since John didn’t give Liz his tax return documents for last year, Liz was concerned if John was making them. Liz was struggling to tell if he was or he wasn’t.
2. Professionalism can be broken under some circumstances.
We all know that workers and professionals have working ethics to follow, but sometimes there are circumstances where it needs to be broken.
Psychologists that work in prisons often reveal the dead bodies of the persons that their clients told them, even if it is against their working ethics to disseminate private information. This might not be close to Liz’s situation, but in her case, she needed that tax return for how many times already and still John wouldn’t give it to her and make some excuses.
As an accountant, you have to believe that your client is telling you the truth, but sometimes you have to break that professional standard. Liz had to look for ways to retrieve that tax return because things would go bad for her if she didn’t.
But unfortunately, Liz still believes in John and asks him nicely about this issue. Suddenly, John was a bit agitated and replied to Liz, “I’ll get you those canceled checks or something.” Liz was shocked about John’s reply, but she assumed that maybe John had many things going on.
Liz needs to know John’s tax return since he sold that 200-acre farm in Pennsylvania. John was still receiving payments from his buyers, which means that he still needed to file a Pennsylvania tax return because he still gets income from Pennsylvania. So, instead of asking John repeatedly, Liz showed all the vouchers for his estimated taxes that she made and the tax returns that his account recently received from that recent payment from Pennsylvania.
What John did next was surprising. He grabbed the paper and ripped the tax return in front of Liz. After what happened, Liz had a hunch why John wouldn’t give her the tax returns. This was also Liz’s sign to back out and end their contract because ordinary people would not rip an important paper in front of someone who would be greatly affected by that action. John destroyed that tax return in front of his accountant, and Liz would be the one who would be affected by his actions because she would be the one who would fix the mess.
Still, Liz wasn’t sure where that outrage was coming from, so Liz didn’t yet address it to John. Also, John and the firm owner, where Liz was working, are close friends. That was the reason why the owner didn’t react when Liz told him what had happened. Liz cannot do anything but move on, but what happens next is the stopper for Liz.
One morning, Liz came to work, and their receptionist told her that an IRS agent in the conference room wanted to talk to her and to Carol. Carol was another tax manager in the firm. Liz placed her things and went to the conference hall.
Liz already had an idea why an IRS agent wanted to talk to her, and this is what I meant when I said that Liz would face the consequence of that action. When Liz arrived at the conference hall, a nice young woman was waiting for them. The woman confronted Liz and Carol and told them that she was there because of John Smith.
Liz asked the woman what the problem was, and the woman replied, “Your names were on this power of attorney that we had for some other tax matters. A power of attorney means that the IRS can talk to any tax professionals as if they were talking to the taxpayer themselves.”
Liz can step into the shoes of any of her clients, but they have to be a little more careful about what they say and a little more circumspect because they know the taxpayer’s rights. Even if her clients were terrible, they still try to make sure that they’re protected.
The IRS agent told Liz and Carol that John Smith hadn’t filed any tax returns yet for the past 10 years. That’s not even the crazy part because the IRS agent added that those 10 years weren’t the first because, according to the agent, John had a habit of filing his tax returns every 10 years before the IRS could catch up to him.
Liz was really shocked, and this situation confirmed her gut feeling. The IRS agent gave Liz all of John’s tax return documents, and for the first time, Liz was able to see the amount of money that John owed. John owed about 100,000 dollars, and he had to take out a loan just to pay everything off.
Not only that but John also had to pay the penalties and added interests, so his debt was about 250,000 dollars. Liz was shocked, but because John was still her client, she did everything to protect John. Liz asked for solid proof, and the IRS agent gave her tons of documentation that proved her point.
Apparently, John was getting his tax returns not because he would pay them but because John’s banker needed them so that he could lend him some money to buy more land. John never had any intentions of paying them. He wanted the papers done not for the government entity but for the bank entity.
After receiving that information, Liz approached the firm’s owner and told him everything. Liz and the owner called John and told him that the IRS had come to visit their office. They told John that the IRS informed them about his missing tax returns for the past 10 years and that he was obliged to pay 250,000 dollars. Liz told John that to fix that huge mess, the first thing he had to do was get all those tax returns to the IRS agent.
When Liz told John about paying those tax returns, he got angry. He made an incoherent rant about the government, illegal taxation, and the government taking all of his goods and taking advantage of these working people.
Liz was like, “Holy cow, what is going on?” After a while, John calmed down, and they were able to start talking clearly. They had a plan on getting the IRS agent the tax returns, but unfortunately, it wasn’t applicable to John’s problem because he had about four years’ worth from before he came to Liz. That was between the last time he’d gotten in trouble with the IRS and when he’d come to Liz.
So, Liz tracked down John’s attorney from way back then, who actually had copies of those tax returns, and asked for all of them. The lawyer placed them in Liz’s software, and those handwritten tax returns were all fixed. Liz fixed everything and managed to whittle down the amount from 250,000 dollars to about a hundred thousand.
Liz sent everything to the IRS agent, and she processed them, placed them in the system, and said, “Okay, now we have to make arrangements to pay this debt.” When Liz told John about that, he went into another rage.
John told Liz, “I’m not going to pay that! I don’t have the money, I don’t have anything, all my money is locked up in this land that I’ve bought and I don’t have access to it.”
Liz then told John about another option. Liz explained, “If you can’t pay your full amount due to the IRS, then the IRS has alternative methods of resolving that. One is this process called an offer in compromise or OIC and in this process, the IRS will get a list of all of your assets, all your financial assets, your houses, your boats, your cars, even your artwork collections, anything you have. They want to know about your credit cards and the balances on them, they want to know if there’s any room to take a cash advance anywhere, and then they will evaluate all of that together with your other sources of income.”
She added, “It’s not that complicated because they have a kind of formula where they can figure out how much they can extract from the assets you have or from your income, and they will give you enough to live on. It’s not going to be a luxurious living, they want this to be painful, but it’s a formula that would save you from your debts. The first step is to fill out this paperwork for the IRS that lists all of your assets, all your financial assets, and bank accounts.”
So Liz told him to fill out the form, and again, John went into another rage. He said, “I’m not going to do that! I’m not going to do that and I can’t do that.” Liz replied, “Well, that is the next step in resolving this. You either write the IRS a check for a hundred thousand dollars or make arrangements to pay it off over time. But if you want to reduce the amount that you owe, this is the first step and this is what you have to do.” John still didn’t understand, and he still went into a rage and refused to do so.
After a week, Liz didn’t hear any news from John again, so she figured John pulled up the stakes again, and it was about that time that Liz’s firm accountant, the one who kept the books for the CPA firm came, to Liz and told her that John hasn’t been paying his bills from the beginning until they got into their mess.
All the work that Liz had to do in getting all the tax returns together, working with the IRS, and checking the numbers added up to about four thousand dollars worth of work that John hadn’t paid.
The accountant had been sending John registered letters, but they returned unopened or refused. The accountant of Liz’s firm also tried pulling up the stakes, but it seemed like John had gotten his mail to a P.O. box. Even their firm’s lawyer wasn’t enough, and still, they could not find him.
3. Trust your gut
Liz already had a feeling that John wouldn’t pay them their invoice because somebody who isn’t going to pay the IRS would definitely not pay their other bills. If only Liz had done her due diligence, she would have known early on that John wasn’t paying his tax returns, and she could have ended the contract with John or asked John to pay them in advance. Liz could also ask John for a retainer payment or include in their contract that John needs to pay Liz every month.
Going back, Liz didn’t hear from John again, and she figured that it was out of her hands anymore because it was going to be up to the IRS to seize John’s property. Track all of John’s property down, do whatever they needed to do to collect on this debt, but Liz’s hands were clean. Liz couldn’t do anything anymore, so she moved on.
One day, Liz got a phone call from this guy who said he works for tax relief, and he said that he started working with John Smith. Liz asked the guy where did he get her number, and the guy replied that he saw Liz’s name and contact number on John’s power of attorney. Liz’s name was on all of John’s tax returns.
The guy asked for Liz’s help because they wondered if Liz could check the financial form that John filled out and look if John didn’t miss anything out. Liz agreed to help them and told them about their payment. But they didn’t hear back from that guy, so Liz figured that it didn’t work well for them.
John just vanished in thin air, but a couple of months after that incident, Liz again received a phone call, and this time, it was from John. John talked to Liz and told her that the IRS was garnishing his retirement payments. John was getting social security payments, which was the U.S. federal retirement system. John was getting those, and the IRS was directly taking a portion of it to pay John’s debt.
He added that he made a deal with them that the IRS would stop garnishing his social security if he could get them his tax return for this year and get up to date. Liz replied, “Okay, but you’re gonna have to pay us upfront for that and you’re also going to have to pay us for what you owe.” Surprisingly, John agreed and said, “Okay, fine no problem.”
John told Liz that he would arrive in two hours, so Liz went to the firm bookkeeper and said that John was coming in. She asked the bookkeeper how much John owed them and should tack on an extra thousand to do his tax return.
John arrived, and Liz gave him an invoice for five thousand dollars and said, “You have to pay us this much before we’ll do anything.” John replied that he didn’t have that amount of money and that he couldn’t pay that. John then demanded that he wants to talk to his friend, the firm’s owner. Liz then called the owner of the firm, and the owner told John that they would not be doing the work if John won’t pay Liz.
4. Have a few mandatory requirements before working with your clients.
This lesson is the most important part of Liz’s story. If she had done this, her client-horror story wouldn’t have existed. The tax returns were a necessary requirement that John should have compiled so that Liz could do her best to assist him. But because John was hiding something, Liz was in a difficult spot.
5. Have a clear mind in dealing with situations and always ask for a reason calmly.
When Liz knew John was evading the tax returns, she should have asked him the reason why and started working for solutions from there. The reason would also be the basis if you would continue working with that client or not. If the reason is valid or there is a sense of justice, Liz would be obliged to help her client. But if the reason is not good, that’s the sign to back off.
6. Have a limit on your red flag
Even if sometimes it is not applicable, you need to set the limit of red flags that your client does. The moment where John tore up that tax return should have been the time where Liz would step her foot and say, “That’s it. You had a lot of red flags, and I’m afraid I can’t work with you anymore.”
Liz’s client-horror tale has come to an end. I’m crossing my fingers that you’ll remember every important lesson from her story and that none of the warning signs will lead to you becoming the next person to share his/her client-horror story with me.
This article was based on Episode # 23: Liz Farr’s Story, please watch the complete episode here!