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THE CASE OF THE MIRACLE PREPARER

July 31, 2006

Ron Lehrer was doing well with his Northern California construction business, but he wasn't happy with his tax preparer, Mary Ann Irrussi. He was grossing $2.5 million to $3 million annually and paying about $45,000 in Federal and state income taxes. He "...wanted a return preparer who would be more responsive to his needs, timely answer his questions, and reduce his inocme tax liability."

Mr. Lehrer thought he found what he was looking for in Anthony Borrelli, a St. Louis preparer. Suddenly tax life was good. The Borrelli-prepared returns "... reported a zero income tax liability for 1999, a $1,523 income tax liability for 2000 (entirely offset by a claimed earned income credit of $2,353), and a $2,325 income tax liability for 2001."

WHEN YOU HEAR ALARM BELLS, SEE WHERE THE SMOKE IS COMING FROM

Mr. Lehrer said "alarm bells did go off" when the tax results were so good, but he filed the returns anyway. It turns out the alarm bells went off for a good reason. Mr. Borrelli, the tax preparer, is now serving a "33-month sentence for crimes relating to filing fraudulent returns." Not surprisingly, Mr. Borrelli's clients got extra audit attention, and the IRS determined that $2,904,032 in extra federal tax for 1999 through 2001. The IRS also assessed the 20% "accuracy-related penalty," for an additional $580,706. By this point the $45,000 tax liabilities that prompted him to switch preparers must have looked pretty good.

Mr. Lehrer settled with the IRS on the deficiency, but went to Tax Court to try to avoid the penalties, on the grounds that he and his wife "reasonably relied" on the preparer.

DUE DILIGENCE, RELATIVELY SPEAKING

The Lehrers hired Mr. Borrelli "...after a relative’s recommendation and a few telephone conversations in which Mr. Borrelli cited some Code provisions." They didn't get any third-party references. Strike against the Lehrers.

The Tax Court found that the Lehrers did provide Mr. Borrelli with the information needed to correctly prepare their returns; score one for the taxpayer.

But the Lehrers lost the tiebreaker:

Although petitioner may have graduated only from high school, he has been managing a construction business generating millions of dollars in revenues for several years, and he personally engaged in hundreds of thousands of dollars of day trading during the years at issue. Petitioners’ income tax liability went from more than $40,000 a year when Ms. Irussi prepared returns for them to essentially zero when Mr. Borrelli prepared the returns. Yet the gross revenues from the construction business remained consistent. Petitioners offered no explanation for the reduced income tax reported on the returns other than the change in return preparer. We cannot excuse a taxpayer who makes little or no effort to discern whether the person the taxpayer has chosen to prepare a return is competent to give tax advice. We find that petitioners did not act in good faith in relying on Mr. Borrelli’s advice.(emphasis added)

The result? The Tax Court upheld the penalties.

The moral? If a relative puts you in touch with an out-of-town tax magician who makes your tax liabilities disappear, make sure it's not just smoke and mirrors.

Cite: Lehrer, TC Memo 2006-156.

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