Fraud Notice 3176C

[Stumpedagain]

I really would appreciate some guidance on this, a new situation for me.  The son of one of my largest clients brought me a fraud notice 3176C on his 2017 tax return.  I have talked to the IRS Examiner and gotten a little more time to do an amended return.  He originally filed a joint return with his girlfriend and they claimed ridiculous amounts on the Sch A for medical ($37000) and employee business exp. ($26000).  He made 25,000 on a W-2, girlfriend claimed $17000 auto expense on a Sch C with income of $15,000.  They have no documentation to back it up.  Sticky point is they are no longer together and he wants to amend his return as single and leave her hanging out to dry.  Should we do that or would it be better to file the 1040X the same as the original (joint) or switch and only report his correct income. These are kids and they paid a preparer to do the return who did not even sign the return, but marked it "self-prepared".  Really need some guidance on how some of you would handle this.  Thanks in advance.

[IRonMaN]

Unless you want to get yourself in a pickle too, I don't think you want to file a joint return for someone that isn't married.  File a proper amended return for him and let the IRS dude track down his former "Mrs".

[qbteachmt]

They are not Kids. They are working adults and will become tax paying citizens (well, he will) with your guidance.

[BobKamman]

I wouldn't call it an amended return, I would do an original with filing status as single and attach a cover letter (also signed under penalty of perjury)  explaining what happened.  Will IRS be convinced they weren't married?  Well, at least they already see how much fraud he was capable of committing.  

"There are three stages of life: youth, maturity, and 'My, you're looking good!'"
Dwight D. Eisenhower

[Skylane]

I definitely agree with the Yote. I would:

1. Prepare amendments for each as single. The girl friend should be contacted if she is not aware of the situation and should be allowed to participate if she chooses assuming that she signed the return and shared the refund.

2. I would submit the 1040Xs with a copy of the notice and a check for the (full) difference. If the girl friend is not participating I would consider submitting an unsigned but watermarked 'draft' with a note giving whatever explanation for her failure to participate is appropriate.

3. I would give Dad a large invoice and a larger stick to knock some sense into his kid.

edit: You might also consider including a 2848

.

[BobKamman]

Some professionals would have ethical problems with doing work for both criminals.  Others would just find it distasteful to deal with the ex-"spouse."  Who wants to be twice as likely to be contacted by a special agent, and perhaps called as a witness before a grand jury?  

[Stumpedagain]

I agree completely, the 1040X instructions say a couple cannot change the filing status from MFJ to single on an amended return, but since taxpayers were not married, do you think this rule would not apply?  I am having a hard time finding any authoritative research on this situation so I do appreciate any experience any of you have had.

[IRonMaN]

They prepared a fraudulent return, I think that took care of any rule following under these circumstances.  I would stick with plan A.

[Stumpedagain]

That is what I was planning but apparently I cannot. 😕

[IRonMaN]

If you are saying the software won't let you do it, you can always use the override function or do it manually.

[Stumpedagain]

Yes, I do know that, I've used the override function on occasion.  I'm saying that I found the statute of limitations for changing the status from MFJ to anything else is April 15 following the tax year; for ANY reason apparently.  And since Texas recognizes common law marriage as someone else mentioned, it may not be an excuse to change the status.  I have not been able to find an authoritative answer to this question, but the statute of limitations does not give any "except for" or "unless".  Believe me, I would rather correct it..of course at this point the IRS is not aware of their marital status (they did marry later, btw but are now divorced), they are only concerned with the excessive deductions.  I appreciate the input...thanks

[BobKamman]

Using a 1040-X to repair a fraudulent joint return falls into the category of "making a silk purse from a sow's ear."

[Stumpedagain]

I understand.  If you will read my response to iron man, you will see that Texas is a state that recognizes common law marriage and the regs do not say that you can change from MFJ to single if it was an error, they say you can't do this after 4/15 or the extension period.  If you can point me to a place that says I can, I would love it.

[sjrcpa]

While TX does recognize common law marriage, did your clients meet the criteria in the "fraud" year for a common law marriage? 

[Stumpedagain]

Yes, I believe so and they were married by the time they filed the return.  They are now divorced and getting her to sign an amended return is going to be sticky...meanwhile Fraud Examiner in Ogden, UT waiting for me to fax him the corrected return by March 11.  What a mess!  If the boy's parents were not one of my oldest and largest clients (which would really hurt to lose) I would just tell them to hit the road/

[BobKamman]

I was wondering whether the expected refund was going to be spent on meth or marijuana, but now that you have mentioned Texas we know it's a case of Lone Star beer.  (Probably every day or two.)  

If the guy mentioned common-law marriage to you, maybe that's what happened.  If you mentioned common-law marriage to him and IRS, you're digging yourself into a deeper hole.

If you're concerned about amending a joint return for two people who aren't married, look up the IRS rules on annulments.  

If the kid's story is "we were married," then forget about an amended joint return and have him sign a letter to the IRS auditor stating that he cannot support any of the deductions and requesting that a notice of deficiency be issued disallowing everything.  (The problem with that, however, is that didn't they come up with some phony Schedule C income?)  

If the kid's story is "we were not married," then provide whatever evidence you have of that, along with an original return with single filing status.  Maybe the best evidence is that they did get married, but in a later year.  

[qbteachmt]

Montana is also a common law marriage state, and by virtue of filing using that status, you would be declared married, because that's what you stated in the filing.

[BobKamman]

Filing a joint return in Montana might be evidence, but not proof of a common-law marriage.

The Montana Supreme Court has set out the elements for creating a valid common law marriage:

• First, the parties must be competent to enter into a marriage.
• Second, the parties entered into the marital arrangement by mutual consent and agreement.
• And finally third, the parties confirmed their marriage by cohabitation and public repute. In the Matter of the Estate of Ober. 62 P.3d 1114, 314 Mont. 20, 2003 MT 7 (2003).

[qbteachmt]

They sure seemed competent to perpetrate one h*ll of a fraud.

[qbteachmt]

I've just gotta state, this is why I love the US tax code and this forum. This is like watching a scrimmage, and I can't wait to learn who comes out on top.

[itonewbie]

You believe so or you have evidence to prove so?  Especially since the couple already separated and may disavow that the marriage ever existed, you may have an impossible task to prove it even if they were indeed in a common law marriage.  Did they file any declaration with the county clerk and did they apply community property laws before and when they divorced?

Agree with Bob that they presenting their story to the IRS, whether or not those are facts, is very different from you representing them before the IRS.  You already know the return is fraudulent (or at least has expenses that lack contemporaneous records), what documents are available to back up the corrected return now and how confident are you that those records are genuine, complete, and accurate, not only for expenses but also income?

With another 10/11 days to go before the corrected return must be filed, are you sure you are able to prepare a complete and accurate 1040X on time (without all the facts and documents already in front of you) and fairly represent the couple, from a due diligence and professional practice standpoint?

As you are aware, the issuance of 3167C letter is an administrative concession of sort.  By caselaw, fraudulent filing cannot be undone by the filing of an amended return.

[qbteachmt]

"By caselaw, fraudulent filing cannot be undone by the filing of an amended return."

🙂

And there's a Flag on the play!

[Stumpedagain]

As a matter of fact, I have decided to file the amended return as MFJ just as the original return was filed.  At this point, the IRS has NOT contested the filing status at all, only the excessive deductions.  I am filing the 1040X removing all the contested deductions, AS PER INSTRUCTIONS FROM THE EXAMINER, hoping this will satisfy.  I decided that to try and change the filing status would just open another box of worms, since the IRS is apparently unaware that they were not married and if asked, I will tell them that as far as I knew, they were married.  The original problem was getting her to sign an amended return and his family wanted him to file single and leave her to hang in the wind.  I have decided that if she refuses to sign, we will file with his signature and a letter stating that she refused to sign the corrected return.  I don't think this is a great solution, but seems to be the best available.  All of you have made valid and helpful suggestions and I am still open to any and all you might have.   Thanks again for all the input. 

[BobKamman]

Worms come in cans.  Pandora, meanwhile, had a jar -- a translation error turned it into a box.  

[itonewbie]

Well, for better or worse, Pandora's box (or jar) has been opened.  What's left in there?  Could be Hope or there's nothing left because all the blessings have escaped, depending on which version of the story you want to go with.

[alwaysalady]

if they were your children wouldn't even have made this snipe comment ... All growing young adults make the most horrendous mistakes or have you forgotten about yours ... smh..