My cousin works as a waiter and mentioned that last year his tax preparer got him almost all his taxes back, which felt suspicious to me. He also said the preparer told him to claim the return as self-prepared, which seemed like a red flag. My cousin asked me to review the return to understand what the preparer did.
He earned around $125k in wages (including tips) on his W-2 Box 1 and had about $20k withheld in federal taxes. On Schedule 1, Line 8z, there was a $100k expense listed with the note, “Non-service related gifts IRC 102a Tax/Tip adjustment.” It looks like the preparer was trying to treat his tips as an expense. This seems illegal, right? My cousin had only one W-2 and nothing else. Has anyone seen something like this before? I thought the IRS would catch this, but maybe it’s because the return was filed recently.
It might take 18 months, but he’ll probably get a notice to repay the money along with penalties and interest.
This is a common tax protestor trick where they claim tips are non-taxable gifts. A tip is payment for a service, not a gift. It doesn’t meet the definition of a gift under tax law. Your cousin will owe the tax, plus penalties for underpayment and failure to pay, and interest. There might also be a $5,000 civil penalty.
The preparer is what’s called a ghost preparer. They do shady things but make you sign the return as self-prepared, so the IRS holds you responsible. Your cousin needs to find a professional (CPA, enrolled agent, or tax attorney) to amend the return ASAP. Here’s a resource to find credentialed preparers:
Sounds like the preparer tried to argue that tips are gifts. That’s shady and bound to get flagged sooner or later. Your cousin will probably face a big tax bill after an audit.
I’ve seen cases where the IRS sends a letter asking people to withdraw questionable returns or face fines. An amended return might help avoid harsher penalties.
Oaklan said:
I’ve seen cases where the IRS sends a letter asking people to withdraw questionable returns or face fines. An amended return might help avoid harsher penalties.
I’ll make sure he gets the return amended. Thanks for the advice.
Oaklan said:
I’ve seen cases where the IRS sends a letter asking people to withdraw questionable returns or face fines. An amended return might help avoid harsher penalties.
The IRS will contact him eventually. Even if someone else prepares the return, the taxpayer is responsible for it when they sign. Check the statement above the signature next time.