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Friday, February 28, 2003


Bradley M. Cohen and Kathy A. Cohen were victims of participants in tax preparer Joseph M Grey�s, um, unorthodox theories regarding the tax treatment of incorporated microbusinesses. However, the extent to which the Cohen�s tax troubles in this case can be blamed on Mr. Grey is questionable. The bulk of the additional taxes and penalties in this case resulted from the Cohen�s failure to account for hundreds of thousands of dollars deposited into the S corporations� bank accounts on either their individual or corporate returns, and their subsequent claims of having lost all relevant business records. What can definitely be blamed on Mr. Grey was the need to recharacterize compensation paid to him by the corporations as employee income and therefor disallow or move to schedule A all of the claimed schedule C deductions.

Beyond that, Mr. Grey�s responsibility is murky. The case states that he has filed both their business and personal tax returns since around 1983, and Mr. Grey�s dba name lists him as a public accountant. Certainly if he was just their tax preparer he is not responsible for their lack of business records, but if he had any further accounting duties with them, he should have made sure their mid-nineties records were in order, or quit. The Cohens were also penalized for giving no reason for the late filing of their taxes. Again, it is difficult to blame Mr. Cohen without knowing more, especially considering the dearth of business records kept by the Cohen�s. Also, the IRS only discovered all of the unreported income because they were investigating the corporation�s failure to pay employment taxes, which makes Mr. Grey responsible for the whole case in a strictly logical causality sense. But unless he actually knew of the unreported income himself, he could not be considered �responsible� in any moral or ethical sense for his clients� deceptions.

What this case teaches taxpayers is they need to make choice between aggressive tax avoidance and outright tax evasion, because aggressive positions attract IRS scrutiny that will inevitably uncover deception. Tax professionals can not advise their clients of this in those words, of course, because that comes dangerously close to aiding criminal behavior. You can however, notify your clients of the intense financial scrutiny that aggressive positions will invite, and hope they put two and two together and make the choice they wish to live by.

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