The Power to Do Evil: The Ethical Dilemma

Over 2,000 years ago Plato, Socrates, Aristotle and the Stoics were debating ethics. Fast forward to our modern day and we find our moral compass challenged daily and on a much deeper level.

Less than two months ago I faced the second largest ethical dilemma of my career. About eight years ago I faced my biggest ethical challenge. I will share both stories here today and the outcome. My struggles should prove fertile ground for contemplation of your own moral judgment.

As a society we think of certain people as more prone to ethical lapses. This might be the result of the professions involved. Police officers make repeated ethical decisions every day. Judges, prosecutors and even jury members must deal with their personal ethics and that of others. But law enforcement or military personnel aren’t the only ones thrust into serious choices. Attorneys and doctors are forced into making decisions that might not seem ethical at first, but they are often forced to make a choice and fast. No choice is an ethical choice all too often with serious consequences.

Your favorite accountant also faces ethical issues. I’m enrolled to practice before the IRS (EA) and that means I have an ethical code of conduct forced upon me (Treasury Circular 230). But it isn’t enough! Every decision I make in my office has some level of ethical consideration involved. The bare-bones guidelines governing EAs is only a framework. Many decisions must be made quickly in the gaps.

Non-professionals also deal with ethics. The demand to choose the most ethical route might be less rapid-fire, but everyone still faces tough choices from time to time. By revealing my two most difficult decisions of my career I hope to get you thinking about choices you make in life and the moral and ethical issues involved. There is no doubt the comment section will be lively with this one as opinions vary widely when ethical choices are discussed.




I Did it Right and Paid Hush Money

This one happened less than two months ago and is still a festering thorn in my tail.

In Wisconsin we have a personal property tax for businesses only. In January a form comes in the mail to list all the business assets outside the building. Computers are exempt from the tax, but desks, phone systems, copiers and faxes do count. The value of the property is decreased each year for depreciation in estimated value. The value is then taxed at the rate real property rate.

My client received his personal property tax forms in January two years ago. The report is due March 1st. This is a serious issue. Most business clients don’t have their financials in to me by the time I need to file the personal property tax report. When most clients are quizzed on new purchases they generally draw a blank until they need a deduction on their income tax return. By then it’s too late for the personal property report.

As preparer I’m required to sign the return attesting the report is true and accurate to the best of my knowledge under threat of perjury. Even though the return might be wrong, I don’t know this until after the fact and usually after the due date.

The client in question purchased a large piece of equipment two years ago. It was missed on the first return for the reason listed above. Then, last January, we added the new equipment to his disclosure. This added close to $100,000 to his business’s personal property. His bill from the municipality would jump from a few hundred dollars to $2,000.

Last December the bill came in and he flipped. We did everything right, but he was mad we didn’t cheat on his personal property tax report. After several rounds of debate he demanded I pay him half the tax owed.

Here is where the ethical dilemma turns ugly. His business and personal return alone isn’t enough for me to even consider such an outrageous demand. But he’s connected to one of my five largest clients. Losing all that business will be noticeable. I paid the $1,000.

You can grill my tail in the comments. You are 100% right. I was wrong to pay half his tax bill in the name of saving a client.

Of course, you know what happened next, right? Well, in December he got his personal property tax bill and in January he got the forms to report this year’s information. My office manager filled it out last year and filled it out the way the client wanted this year and put my name on it to sign. I refused. I made it abundantly clear this office will neither prepare nor sign another personal property tax report for this client ever again! If he wants to cheat I will have no part of it.

My office manager hand delivered the personal property tax forms back to the client with my response. She pointed out the offending machine and he made it clear he will not report it.

Things have been frosty since. I did the right thing except for writing a check. In the end it is almost a certainty I will lose one of my biggest clients and all work connected to them. It probably would have been better if I cut ties immediately.




Ethical Discussion

The ethical dilemma above is clear to see in hindsight. I did a lot right and also committed what I consider a grievance error.

Every option available creates an ethical problem. If I comply I’m an accomplice to fraud. If I do what I did I only pushed the unethical act back on the client. And if I fire the client I push the ethical issues to the next tax professional. As you can see, even no choice, standing like a deer in the headlights, is still a clear choice with ethical implications.

What would you have done? Do you think I was wrong? Would you have written a check to keep a client? Paying a client’s tax isn’t illegal. I committed no crime. I was only asked to prepare a false return and refused. Morally the ground I stand on is higher. But we are talking ethics, kind readers. The decision isn’t always so clear cut in such cases.

My Greatest Ethical Challenge Ever

I have a reputation for handling very difficult cases against the IRS. I have a tax attorney in D.C. on speed dial. Her rate starts at $1,000 per hour. For the dirtiest cases we call her in.

The case in discussion here didn’t involve outside help. I did this one all on my own.

Sometimes when an accounting or tax firm gets into tax trouble I’m called in. It makes for a unique situation, for sure. The IRS usually laughs when they see me defending the competition. When I was done with Revenue on this case the laughing had stopped.

The tax firm involved had about $800,000 of profits annually. They are a slightly larger firm than mine. An audit revealed some irregularities and the IRS assessed them with $1.2 million in back taxes, penalties and interest. It was rightfully owed.

The auditor made a few errors in assessing tax. When I pushed back I was threatened with preparer penalties. I was called into the IRS office. I brought the only paperwork I would need. The agent made it clear I was in serious trouble. This is when I pulled out the federal court paperwork already filled out. You see if you want to attack a tax professional you don’t do so in Tax Court where you need to prove your innocence. You go to federal court where you are presumed innocent until proven guilty. I finished my argument with, “You file any penalties against me and I file this in federal court. I want to see the prosecutor dumb enough to get his butt chewed by a federal judge over preparer penalties against an individual who DIDN’T PREPARE THE RETURN!”

The auditor swallowed her tongue. I remember her words clearly, “I’m glad you told me this.” I’m sure she did. Of course she could have looked at her paperwork before she levied the threat to back me off a case. As I left I turned back and very quietly said, “You’re going to regret doing this.” I was pissed.

Six months later the IRS couldn’t collect a penny and the auditor was gone.

Through a series of procedural maneuvers I backed the IRS into a corner. Eventually they sent a guy from the appeals office in Dallas. That’s a long trip for little ol’ me.

The meeting with the appeals officer, client and me happened in my conference room. My client was grilled for assets. He kept professing he had few assets. Most of the client’s income was off the table. (That story would be a long post in and of itself.) At one point the agent asked the client if he had any expensive jewelry. My client said no.

But that was a lie! He just bought his wife a $25,000 ring. I saw the receipt. That was one nice rock!

When the inquisition was finished I filed the coup de grace and had my client deemed uncollectable. Not bad for a guy who owed over a million and pulled in close to a million annually.

One of my CPAs at the time asked me if what I did was ethical. I defended myself by saying it would have been unethical of me NOT to defend the client to the nth degree. After all these years I’m no longer certain.

As happens all too often, the client dodged a bullet and went right back to the well. This time he brought a bigger shovel. I took a pass. He was no longer a client. But there is no doubt in my mind I enabled his behavior.




Ethical Discussion

I take a big chance sharing these stories. I kept the details vague for a reason. All information that would lead to identifying the client has been removed.

Tax professionals are a large part of this blog’s readership. IRS agents and state revenue departments also drop in unannounced. By sharing my ethical standards I expose myself to risk of sanction or retaliation. However, these issues are too important to ignore. Hiding from the truth doesn’t make my profession better. Only by sharing my experiences and choices can the demographic grow.

When over a million dollars are on the line we are starting to talk serious money. The ethical implications are huge.

I never said a word when the agent asked my client about jewelry. If I were asked I would have told the truth. But I wasn’t asked and the IRS agent had no reason to believe I had additional information.

What are the ethical implications? If I spoke up I would have betrayed the client I was representing. Can you imagine an attorney throwing his client under the bus? I felt it was the same thing. Now I’m not so certain.

Enrolled agents have virtually no privilege with clients. People need to understand licensed tax professionals (CPAs and EAs) have to comply with most IRS requests for information or face penalties and/or sanction. Only attorneys have privilege with clients.

This final story bothers me on two levels. First, the size of the amount due was large. This wasn’t a minor issue. Once you cross into seven figures the gloves come off. The second problem for me was my actions enabled the client. He went back to digging a new hole.

The worst part of this ethical dilemma was why I did it. An IRS agent pissed me off by her low level of professionalism. I used my 30 years of experience to gut her just because I could. It sounds like smart talk, but because I won the game I actually walked the talk. And when the dust settled I had to contemplate my CPA employee’s comment: Was what I did ethical?

The real questions should be: Why don’t I fight at that level all the time? For one I don’t have the energy. And second, most cases don’t have the facts to accomplish what I did.




Time for a Debate

This is where you can tell me how wrong I am.  The second ethical issue above is a large number while the first issue above is highly questionable.

What would you have done? If you hire a tax pro would you expect that kind of defense? When it comes to taxes is it anything goes? I hope not. I think my moral compass is better aligned than that.

In each instance every action I took was an ethical choice. “No decision” was also an ethical choice! Firing the client only kicks the can to the next tax professional.

Treasury Circular 230 is clear on the matter. Section 10.21 states tax professionals governed by the rules of Treasury Circular 230 must inform the client of errors and the consequences. In other words I have to tell you if you are cheating when you probably already know you are cheating! I also have to tell you the potential penalties. There is nothing in there saying I have to fire the client! However, I think it’s clear I’m not allowed to sign a return attesting its accurate when I know it isn’t. But I can still keep representing the client. Talk about a conflict of interest (which is covered in the circular, too).

I hope we can get a lively debate in the comment section. The personal property report issue is what triggered this post. I’m very interested in how you would handle the situations I had.

My goal is to get you to think about the ethical implications of your decisions. Many times life gives us all bad options and not much time to make said choice. Doctors make life and death decisions in a heartbeat. The police, prosecutors and judge can destroy an innocent life with one bad decision.

And tax professionals can make or break the personal finance issues of clients. Retirement, early or not, is affected by tax choices. The answers are rarely crystal clear.

This isn’t about right or wrong. It’s about making a choice when all the answers are wrong. About making the most ethic choice of those available.



Keith Taxguy

23 Comments

  1. Christina on March 12, 2018 at 9:01 am

    You know what stop beating yourself up about it I read this twice just to get a clear understanding. You did the right thing in both situations. I really feel you have great morals and your ethics are on point. you handle each situation to the best of your ability. Yeah sure you might have lost a couple of good clients but you need to remember there are many others you will be able to work with and the clients you take care of now I’m pretty sure that they would appreciate your sound judgement in those moments you where faced with. It just goes to show you are doing the right way about handling things and gives them the security to know your not a Guy that is a fake front. I think you handled those situations just fine… Just smile and let it go.😁

  2. FullTimeFinance on March 12, 2018 at 10:25 am

    I wouldn’t have given the check in the first case, but in either case I think you did the right thing. Sometimes business ethics differ from personal ones. At that time you need to follow whichever is stronger in the moment.

    For example as a manager and even in my role today I’m sometimes aware when someone will lose their job before they are. I have an obligation not to tell them until management says so, even if they are about to do something like buy a new car.

    Ultimately in your second scenario unless you were asked directly or to attest I feel you have an obligation to defend your client to the maximum you can.

  3. WCRN on March 12, 2018 at 10:36 am

    All this talk of uncollectable and off-table income really makes me think I need a tax professional!

  4. Pete on March 12, 2018 at 10:41 am

    I personally think that you acted ethically in both situations, and certainly did not break any laws.
    There is an old business saying that states that 95% of your problems come from 5% of your clients.
    I would not have paid the tax bill of the first client. It was not stated, but I would assume that he would want you to continue paying for half, or help him cheat, as you did state. Either way, he is one of the 5% that you are better off not having to represent.
    My field of expertise is Medicine, and we in the profession face ethical and moral dilemmas on a daily basis. Both in the medical treatment of our patients, and more specifically, with insurance fraud. Some patients want you to back date insurance claims, or use incorrect coding to increase the patient’s level of reimbursement. Many times patients will threaten to leave the practice if their request is not honored. I have made it a standard practice to tell the patient that if I am willing to cheat their insurance company, then why would I not be willing to cheat them also.
    My standard practice is to do what allows me to sleep at night. At some point we must face God and explain our behavior.

    • Keith Taxguy on March 12, 2018 at 11:05 am

      Well said, Pete.

  5. Ben on March 12, 2018 at 11:01 am

    Just wanted to vehemently disagree with one thing you repeat here a few times.

    In some of these cases, standing back is a completely ethical choice.

    The fact that this just kicks the can to another pro is none of your business, and it shouldn’t be part of your consideration.

    For example, if you see an easy to commit crime, would you think it’s entice to commit it, just because someone else with otherwise definitely do it?

    Make it clear that it’s illegal and move on. Their future decisions are theirs alone.

    • Keith Taxguy on March 12, 2018 at 11:08 am

      Ben, I meant to communicate “no response” or “no action” is an ethical choice and maybe even the correct one.

      The rest of your comment is blunt. I like it. Sometimes the blunt answer is the right one; no waffling allowed.

  6. Mick on March 12, 2018 at 2:47 pm

    I have no problem with how you handled the first case. I think I would have been incensed and had a different response to a client demanding I pay half of their rightfully owed tax because I would not abet then in law breaking.

    On the second case, you represented your client well and legally saved them a small fortune. However, “$1.2 million in back taxes, penalties and interest. It was rightfully owed.” Rightfully owed to whom? The people, tax paying citizens. I hear the as soon radio: if you or more than $25k and the IRS is threatening you…” And the testimonials of huge reductions. And I think, wait a second, if one rightfully owes and one has the means to pay, shouldn’t one pay? I can see an argument about interest and penalties, but is it ethical? And believe me, I don’t love the IRS (but I do love of the curious ways some of their forms have you figure the simplest things), but taxes are part of the cost of doing business in a country where businesses can thrive a level playing field, free of bribes, free of capricious government action, rent seeking etc. At least in theory.
    Sorry to go of on a rant,
    I don’t blame you for legally representing your clients best interest, that is why they hired you. So I don’t see any ethical lapse with what you did, and one doesn’t have to like one’s clients.

  7. Cindy on March 12, 2018 at 3:16 pm

    I read recently that we are a direct reflection of the company we keep. It’s true, sometimes that company will test us – much like a child will test the parent to see just how much they can get away with. You were put in a spot and you did what you had to do to get yourself out of that jam. We are not our brother’s keeper, I think of who is responsible for Michael Jackson’s death? I don’t fault Dr. Murray. MJ would have found a Dr. to give him drugs. Dr. Murray just didn’t remove himself when he knew he was being put in an ethical situation. Cheaters are gonna cheat. What I read in your text was that you severed your relationship with those cheaters in the best way you could given the situation.
    There’s not one of us who hasn’t been put in a situation that we regretted (varying levels of moral/ethical behavior). It’s how we handle ourselves post-knowledge that defines us. And, yes, sometimes a self-righteous a-hole needs to be put in their place (the IRS agent).

  8. Matt on March 12, 2018 at 3:33 pm

    Gut says not to pay the client $1,000 but business owner with employees says to so yes I would have paid it. As a business owner with employees the struggle becomes reality as in you might have to lay off an employee because you lose some business especially a large client. You never stated that but that’s what would have gone through my mind. In this instance I would see it as I don’t want to, shouldn’t have to but will anyway.

    • Keith Taxguy on March 12, 2018 at 4:21 pm

      Actually, Matt, this is a large account so it sits on my desk. No layoffs for employees, but fewer hours for me. Now that I think about I have a client to fire. Then I can take the afternoon off.

      • Tvot on March 13, 2018 at 11:59 am

        Just because he’s a big client, doesn’t mean he’s worth the extra pressure to test your ethics. “ain’t no one got time for that!” lol
        I’m sure you have more people waiting to fill in his time that would be VERY happy to oblige by your rules. And the way things go, you’ll probably end up landing a bigger client than him!

  9. Kim on March 12, 2018 at 4:36 pm

    I practiced for 33 years in a firm, doing tax work, representing clients before the IRS, State and local taxing authorities. I never prepared a personal property tax return (PPT) without having a fixed assets schedule completed, showing all additions and deletions from the prior year. In fact, the PPT was basically a push of the button on the fixed assets software system. If the client wants the write-off for purchasing a new asset, the other side of that coin is that it’s added to the PPT, and ultimately ends up reflected in their personal property tax bill from the local municipality.

    End of issue.

    I had my share of clients over the years who wanted to push the envelope in terms of write-off’s and tax positions, but explaining the gray areas is what clients hire us for. And if they decided to cross the line from tax avoidance and tax evasion, they were no longer a client. But rarely, if ever, did it come to that point.

    I agree with Mick above; you are not an collection agent for the IRS, but when someone cheats, they cheat all the rest of the taxpayers….us.

    Finally, I always lived by the Quality Circle; Quality clients pay Quality fees, which enables you to hire Quality staff, which enables you to serve Quality clients, and so on.

    At the end of the day, all we have is our reputation. When you opened to door to share in paying part of your client’s taxes is when you put your reputation at risk. And NO client is worth ruining your reputation over.

    P.S. My big question is, how did you handle the tax treatment of that client’s tax payment on your Firm’s tax return? Deductible expense or not?

    • Keith Taxguy on March 12, 2018 at 5:14 pm

      Kim, this is a powerful comment we will integrate in my office. We always handles these personal property tax reports as a minor issue. I’m handing this to my office mgr. We have the fixed asset schedule, but clients leave things out. I love your idea of tying the deduction to the reporting.

      My payment is a reduction in fee so it’s a deduction to the company.

  10. Steveark on March 12, 2018 at 9:21 pm

    On example number one, paying the $1,000 extortion to try to keep a larger client was wrong. The fact that the only reason you did it was to protect future income is a huge tip off on that one. On the second one, defending the sleazy client was absolutely ethical. Your knowledge of the $25,000 jewelry was not at issue unless you were questioned about it directly. You are not required to expose a client for verbally lying about something as long as it isn’t included in your body of work. Plus seeing a receipt doesn’t tell you anything about what actually happened to the diamond, it might have gone to the sleaze’s girlfriend as a gift for all you know. I don’t see a shred of grey in either of those.

    • Robert on March 14, 2018 at 12:49 pm

      Steveark – I disagree that paying the $1,000 was wrong. The decision not to commit fraud was correct. The decision to pay the $1,000 was a business decision. My experience as a senior manager in a large insurance company taught me that swallowing the small cost of a denied claim was only a business decision. If the same claim was $1,000,000 we would not have swallowed it. Again, simply a business decision.

    • Social Capitalist on March 18, 2018 at 8:59 am

      Both are interesting dilemmas. The first one is more personal as it is a business choice associated with loss of income. Pay or no pay (I likely would have), neither choice is wrong. The question is, should you turn him in if you think he will cheat in the future? Read on for my answer.
      I believe you missed it on the 2nd one. As his tax preparer you should say nothing. But what about your responsibilities as a citizen? Could you not have anonymously turned him in? You saved him, choosing profit, but everyone else paid for it.
      Too many of your followers (I am one) are letting you off too easy. Personally, I am upset that I (really my children) will now pay your client’s tax bill + interest.
      The crux of the debate comes down to protecting individual liberty (money) or society. I think we have swung too far towards the individual.

  11. Mick on March 12, 2018 at 10:12 pm

    Keith,
    I would also add that, from the way I understand it, in the second case you were called in after the fact. So you were not complicit or even involved with any of the “irregularities” that caught your client in the first place.
    After thinking about that, I would more emphatically state that there was absolutely nothing wrong with what you did, representing your client very well and within the boundaries of the law. And it seems like at least part of your effort was because of the way the IRS treated you–perhaps if they had been more willing to seek a deal or compromise in the first place, they would have ended up with something rather than nothing from your client. I totally get that. No one likes being bullied by a big, powerful govt agency. Good you gave them the what-for! These issues are not black and white. My first reaction against the second client has, with reflection, softened to a less critical view. I could probably argue either way–but I always try to think about both sides of an argument.

    I hope your client realizes what you did for them. They should be kissing your…

  12. Steve H on March 12, 2018 at 10:28 pm

    The $1,000 payment sounds similar to items I’ve encountered many times as an architect. Some clients expect perfection in our designs, but that is not the definition of normal standard of care in our business. The cost to design a custom building from scratch without any minor design flaws would cost more than the construction “fix” uncovered during the construction process. Therefore, a typical custom designed building has construction changes that amount to an additional 5%, give or take a couple percentage points. Some clients absolutely expect the architect to pay for any additional cost that may arise during construction. Sometimes it is the responsibility of the architect and sometime’s it’s not. In some unfortunate cases, we have to eat some costs that rightfully should be borne by the Owner to preserve a profitable relationship. It becomes “the cost of doing business” even if it’s not right. We have to weigh whether the cost is worth it for some clients.

  13. Patrick on March 13, 2018 at 12:05 am

    Hi, I’d forget about the ethics and the morals and just concentrate on the legal situation and be guided by it. Basically, you must not assist another person to commit a crime or you will be an accomplice. It means being aware beyond a reasonable doubt that a crime is about to be committed e.g being knowing beyond a reasonable doubt that the Return or Financial Statements are incorrect. Knowledge can be a dangerous thing. Without the relevant knowledge, no crime will be committed by you. Also without active participation, no crime is committed by you. Depending on the law in y our State, you do not have a reponsibilty to report a suspected or known crime. But see modern money-laundering legislation.

  14. Tvot on March 13, 2018 at 11:54 am

    I agree with your ethics 100% in both situations. But to comment further on the first one, I believe that you probably did the right thing by paying the $1k as long as it was followed by a “I will do it this year, but next year I will not since you now know of the implications.” If that client doesn’t want you to file his return legally, then so be it, let him go. And if your BIG client wants to follow him out the door just because you weren’t willing to file an unjust return, then you might as well open it for him because that means his ethics aren’t in line with yours and who knows when he’ll want you to do the same stuff, only at a higher amount and bigger penalties.

  15. MDS on June 3, 2018 at 6:25 pm

    I wish I understood the countersuit threat to take the IRS person to federal court. I get that somehow it threatened her position, but not why. Regardless, in my line of work, I write off most complaints. Or at least the portion of the fee that comes to me. On a standard bill of $350 I might see $50-100 of the bill. So if a client complains, I just waive my portion of the bill. Thank you for sharing this situation. VERY USEFUL!

  16. Richard on June 21, 2018 at 12:07 pm

    The second case pisses me off. My stepson owes back taxes (some rightfully, some not). As a contractor he didn’t pay his self-employment taxes, but his uncle’s business reported paying him more than he actually received (neither can prove anything). Either way, he is truly uncollectable since he is now making just over minimum wage. The IRS continues to pursue him and take any refunds which he would have otherwise received. He has tried to pay for representation and has just lost more money doing that. I’m not defending his poor money management, but it does piss me off that people who are able to pay can get away with not paying.

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