Your bonus sucked. Your raise didn't meet your expectations. You're tired of working for the Man. Maybe you should consider the exciting world of tax fraud.
As CPAs, our knowledge, training, and experience has positioned us strategically to do fraud right. But do you really have what it takes to commit tax fraud? And by "what it takes" I mean incentive, rationalization, and opportunity. Without those, you're just fraud-curious. With them, you could get your very own episode of American Greed.
The most elusive vertex of the fraud triangle is opportunity. But opportunity abounds in the slightly-more-glamorous-than-cooking-meth world of tax fraud. Every week somebody gets busted, giving us the chance to see how its done and to derive some best practices.
Ernesto Jesus Suarez of Orange, CA, had an impressive scam going on:
Suarez would meet clients at their homes and prepare a largely accurate income tax return on his laptop. If the client was due a refund, Suarez would give the client a check from his personal checking account in the amount stated on the accurate return […] Later, Suarez would prepare a false tax return, including fictitious items such as false spouses, dependents, child or dependent care, and education expenses, in order to increase the refund amount. […] He would then direct the inflated refunds to be deposited into 29 different bank accounts that he controlled.
Brilliant! But how do you pad a return with fake social security numbers? If the name doesn't match the SSN, you're almost guaranteed an audit. Espiridion Adrian Lugo of Phoenix, AZ, was able to overcome this challenge.
He obtained from the Internet the names and Social Security numbers of deceased individuals.
And thanks to ancestry.com's Social Security Death Index, it's just that easy. For only $12.99 per month, you can access a database with over 10 million dead people's social security numbers. Its advanced search feature helps you easily obtain the SSN and date of birth for a dead guy with a name that matches the name on your soon-to-be-fraudulent return. An additional advantage of using dead people's SSNs is that it's really easy to find someone who would be over 65 (if they were still alive) and therefore qualify for a higher standard deduction! Thanks, Utah-based Mormon-owned ancestry.com for making identity theft as easy as A – B – see you in hell!
Ernesto was also smart because he didn't beef up the return by padding deductions. According to a couple of websites on the Internet that I forgot to bookmark and am too lazy to search for again, you increase your chances of being audited if your deductions exceed the normal range for your income, or if you claim refundable credits like the first time homebuyer's credit or the adoption credit. (The Lifetime Learning Credit and the Child and Dependent Care Credit are nonrefundable; the American Opportunity credit is refundable (up to $1000) so be careful with that one.)
But Ernesto got caught, and we can learn from his mistakes.
[He prepared and filed] hundreds of [fraudulent] tax returns.
Ernesto was caught because he got greedy. Sure, the reason he was committing fraud in the first place was greed. But he got greedy with his greed. He filed hundreds of fraudulent returns. You see, the IRS publishes their audit rates, and a full 1 percent of taxpayers with less than $200,000 of earnings gets audited.*
Now if you're stupid, you're thinking, "One of Ernesto's returns was certain to be audited if he filed at least 100 returns." That's like saying, "I flipped heads last time, so this time, it's gotta be tails!" Wrong. The math fairies told me that if Ernesto filed 100 fraudulent returns, he'd only have a 63 percent chance that one of them would get audited. But after filing 500 fake returns, he'd have a 99 percent chance of getting caught.
The trick to not getting caught is to not get greedy. You know what they say, "Pigs get fat, and hogs get slaughtered, but neither go to jail for tax fraud because you can't enter data into UltraTax with a split hoof." If you intentionally limit yourself to only file 10 fake returns, then you have a 90 percent chance of getting away with it scot free. You won't make much money, but on the other hand you won't make much money.
*If I was the IRS I would pad those damn stats. When they appoint me as commissioner of the IRS, we're going to publish that we audit 60 percent of ALL returns, and you're going to feel like the luckiest mofo alive, because in 20 years, you haven't been audited once.