Basic Tax Math – Pt. 2 – Big Refund Promises??

No – I don’t make convincing commercials like this for clients

I once drove by a tax preparation office in the suburbs of a large city giving away free leather jackets to those that walked in with their tax documents. The entire mass of humanity in their office were donned in brown leather jackets ….. They were all promised BIG refunds for wearing the uniform..

The first audit I ever represented for a client was one where the taxpayer was audited to produce evidence against a tax preparer that was under investigation for fraud. The CID (IRS Criminal Investigation Division) was following a gentleman that had an office within a few minutes of a large hospital that used many travel nurses. He marketed himself as a professional that understood travel healthcare providers and could guarantee a BIG refund. And get BIG refunds he did… for himself. The preparer would provide the client a return with one set of numbers to sign off on, but would file another return with inflated deductions. He would pocket the difference by having his fee deducted from the refund – his fee was equal to the difference in the two returns plus a normal fee. All of the clients got what they expected – he got more. CID raided his offices while he was in Las Vegas. I found out by calling local businesses to see if his operation was legit.

When I walked through the original return with the client, she did not know where many of the numbers came from. “He made them up I guess”. The return the client was provided already had a significant refund as a hook. But the IRS transcript of the return that was filed did not match the copy the client had for their records.

Whenever you are promised a BIG refund, its no different from being promised the doubling of a stock that a broker is promoting. Its all a gimmick. A real tax professional knows that a refund means you paid in too much tax withholding for the income you earned. Not due to some sort of magic or adding mythological relatives to your list of dependents. A true tax professional is looking for the lowest tax liability both with the return they are preparing and the future returns they may do for the client. I constantly tell clients to manage their tax, not their refund. Consistently big refunds are usually a sign of poor financial management. The best refund is no refund. The best return is nothing due, nothing refunded.

Whenever a prospective client asks: “Can you give me a big refund?” I should be asking, “Can you tell me why you have more tax withholding than you need?” Of course, this is when we encounter the shroud of mystery thrown around taxes. Some really believe it is magic…..