Don't Mess With Taxes

This morning, both sides in the Wesley Snipes tax evasion trial presented their closing arguments. Now it's up to the actor's ostensible jury of his peers.

The defense unexpectedly rested Monday without calling any witnesses. Rather than put a string of celebrities on the stand to underscore Snipes' argument that he simply got bad tax advice, his attorneys opted to rely on the contention that the prosecutors' case was so weak that they bore the "complete failure of their burden."

Courtroom gawkers were no doubt disappointed that the trial was cut short. Among the defense's potential witnesses were Sylvester Stallone, Spike Lee, Muhammad Ali, Goldie Hawn and Woody Harrelson.

According to Snipes' legal team, these celebrities at one time were clients of Starr & Co, a New York-based financial management company whose tax advice Snipes says he followed and now claims was bad.

The company had handled Snipes' accounts between 1993 and 2000. Snipes is accused of paying no tax between 1999 and 2004, despite earnings, according to prosecutors, of almost $38 million. Instead, court documents say, in 1996 and 1997 Snipes sought a tax refund of nearly $12 million.

I've blogged about the Snipes' case most recently here, with even earlier blog mentions linked in that post.

News reports on this latest development can be found in:

• Accountancy Age
• The Sydney Morning Herald
• E! Online
• WFTV, ABC affiliate in Orlando
• CNN
• Associated Press

For some insight into why Snipes' lawyers took their unusual approach, check out this interview with the actor's lead attorney. Bob Bernhoft, conducted Jan. 15 just before the trial began.

Checking out your tax adviser: No one wants to be caught in the situation that Snipes says he found himself in, trusting erroneous filing (or non-filing) advice.

And the IRS understands that taxpayers don't always get the best tax counsel.

No, we're not talking about the much-maligned IRS toll-free hotline. We're talking recommendations from tax professionals.

In that regard, late last month the IRS issued a notice (2008-13) that implements a May 2007 law expanding the tax return preparer penalty, as well as details the heightened the standards of conduct that tax preparers must meet in order to avoid that penalty.

Essentially, the IRS is saying is that when a tax preparer uses a tax move that results in an under-calculation of tax due, there must be a "reasonable belief" that the tax position in question will more likely than not be sustained on its merits. Previously, the standard was one of "realistic possibility."

A tax preparer doesn't have to independently verify or review the items reported on tax returns to determine if they are likely to be upheld if challenged by the IRS; the tax pro can still rely in good faith upon information furnished by the taxpayer or another adviser or third party.

But, says the IRS, if the info appears to be incorrect or incomplete, the tax preparer must make "reasonable inquiries" about it.

So don't try to con your tax pro into taking a questionable tax position on your return. And definitely don't be conned by recommendations you get from your tax adviser that you know in your gut are iffy at best.

To ensure that your tax preparer is reputable and right for your tax needs, here are some steps you can take:

• Check credentials: You want to make sure the preparer has the latest training and information on tax law changes.
• Depend on friends: Get references from friends and family you trust.
• Find out the fees: One-size doesn't fit all when it comes to taxes, so it's important to know how the preparer charges for routine filings and what might be considered additional work at an additional cost. 
• Assess accessibility: Make sure your tax pro will be around after April, both for potential problem resolution advice, as well as general tax planning assistance for next year's return.
• Gauge any guarantee: Different levels of training and certification determine just how much (or little) a professional can help you out if the IRS audits your taxes.

Understand the limits your preparer might have. Does he or she specialize in one particular tax area? That's good if you need that special expertise; not so good if the tax pro doesn't know about the tax items that matter most to you.

And always be sure to find out whether the preparer and/or the firm will pay for any mistakes (additional tax, penalties, interest) on their part.

You'll find more tips on picking a preparer at this IRS Web page.