The Importance of Being Honest

7/19/2012

Nobody really likes paying taxes. Sometimes, even the folks who work for the IRS resent paying the taxes that go towards funding their own salaries. Usually they just grumble about it and go on with their day; but one auditor recently went too far in an attempt to minimize her taxes.  

Jacynthia Quinn spent 20 years as an IRS tax compliance officer in El Monte, California. The IRS audited her and her husband for 2006 and 2007 when she had claimed over $50,000 each year for charitable contributions and medical expenses. The Service disallowed those deductions, among other write–offs, and the case wound up in Tax Court.  

During the case, it came to light that Quinn’s receipts for charitable donations could not be substantiated. Seven different charitable organizations testified that the receipts were altered or fabricated. Furthermore, the documentation Quinn submitted in support of her medical expenses were found to be “doctored” as well.  

The Tax Court ruled in favor of the IRS on every issue and even imposed a civil fraud penalty of $13,000. Additionally, the IRS Restructuring and Reform Act of 1998 requires the IRS to fire any employee who willfully understates their federal tax liability (unless they can show the understatement is due to “reasonable cause”). Since Quinn was unable to convincingly justify her actions, she’s likely to lose her job as well.  

It’s certainly interesting to read about cases like Jacynthia Quinn’s – it’s quite surprising that someone who enforced tax compliance for a living could be so outside compliance herself. And, it’s great to see the IRS enforcing the same rules for its own employees as it does for us. There’s also a valuable lesson to be learned from this situation, even for the majority of us who don’t cheat. During the case, Quinn asserted that she was “‘unaware’ of requirements for substantiating deductions” (an assertion that the Tax Court judge clearly didn’t buy, given her job title). Even for taxpayers who aren’t trying to claim unwarranted deductions on their taxes, it’s imperative to keep clear and substantiated records.  

Dotting the “i’s” and crossing the “t’s” is important for everyone. We handle thousands of audits every year, and we see cases all that time that would have had better outcomes had the taxpayers kept good and detailed records. When you’re audited, the burden is on you – not the IRS – to substantiate your claims. Do yourself a favor and make sure you’ve got the documentation to back you up!