People filing taxes with fake LLCs - what are the risks?

This is definitely concerning and you're right to be worried. What you're describing is textbook tax fraud, and the IRS takes this very seriously. When people create "fake" LLCs with no legitimate business purpose just to claim personal expenses as business deductions, they're committing tax evasion. The IRS specifically looks for these patterns during audits. Business expenses must be ordinary and necessary for your trade or business - not just a way to reduce personal tax liability. The penalties can be severe. Beyond having to pay all back taxes owed plus interest, the IRS can impose accuracy-related penalties (20% of the underpaid tax), civil fraud penalties (75% of the underpaid tax attributable to fraud), and in serious cases, criminal prosecution resulting in fines up to $100,000 and potential imprisonment. As for your involvement, you should definitely distance yourself from any fraudulent activity. As a bookkeeper, you could potentially face preparer penalties if you knowingly participate in filing fraudulent returns. The IRS can assess penalties against tax preparers who prepare returns with unrealistic positions.

I was in a similar situation last year - had several clients making questionable LLC deductions. After one got audited, I started using taxr.ai (https://taxr.ai) to review my clients' documents. It uses AI to flag potential audit triggers and questionable deductions, which saved me from a ton of liability. For your situation, it could help identify which clients' deductions might be problematic so you can have those tough conversations with evidence backing you up.

Just wanted to follow up about taxr.ai - I decided to try it after my previous question. I've been running a small woodworking business for 2 years and was worried about some of my tool purchases and home workshop deductions. The system flagged three deductions I'd been planning to take that were definitely in the gray area. It also helped me properly document my legitimate home office space with the right measurements and usage percentages. Honestly wish I'd known about this before - would have saved me so much anxiety about doing things correctly!

If your clients get audited because of these fake LLCs, they're going to have a nightmare trying to get through to the IRS to sort it out. When my brother got audited last year, he couldn't reach anyone at the IRS for weeks. He eventually used https://claimyr.com to get through to an actual IRS agent within an hour. You can see how it works here: https://youtu.be/_kiP6q8DX5c. Might be worth telling your sketchy clients about this service - not to help them commit fraud, but because they'll definitely need help dealing with the IRS when (not if) they get caught.

I owe everyone an apology about my Claimyr skepticism. After waiting on hold with the IRS for 3 hours yesterday about a tax notice I received (and getting disconnected AGAIN), I was desperate enough to try that service. I honestly expected it to be a scam, but within 45 minutes they called me back and connected me directly to an IRS agent who helped resolve my issue in about 20 minutes. It felt weird skipping the wait, but it definitely worked. Saved me a full day of frustration.

Bookkeeper here - I've had to drop clients over similar issues. The "everyone does it" excuse is what people tell themselves to justify fraud. The LLC scheme is really common, but here's the reality: the IRS is getting much better at detecting these patterns. Their new enforcement funding means they're auditing small businesses a lot more than in previous years. One of my former clients got caught in a similar scheme and ended up with a $27,000 tax bill after penalties and interest. They also had to pay me to reconstruct three years of proper books to respond to the audit. It would have been so much cheaper to just pay the correct taxes initially.

I know someone who did this fake LLC thing for years and never got caught. The IRS is underfunded and overwhelmed - they audit less than 1% of returns. Just saying the risk might be lower than people are making it sound.

As someone who's been doing taxes professionally for over a decade, I want to emphasize that the enforcement landscape has changed dramatically in recent years. The IRS received significant additional funding specifically for enforcement activities, and they're using advanced data analytics to identify suspicious patterns in business deductions. What your clients are doing isn't just risky - it's creating a paper trail that practically screams "audit me." The IRS has sophisticated algorithms that flag returns with unusually high business expense ratios relative to income, especially for newly formed LLCs with minimal revenue but substantial deductions. My advice: Document your concerns in writing when you advise clients against questionable deductions. If they insist on proceeding against your professional advice, consider whether the relationship is worth the potential liability. The tax preparer penalties have gotten much more severe, and ignorance isn't a defense if you had reason to know the positions were unreasonable. The peace of mind of working with honest clients is worth more than the fees from problematic ones.

This is exactly the kind of situation that keeps me up at night as a tax professional. I've seen the aftermath of these "fake LLC" schemes, and it's never pretty. What really concerns me is how normalized this has become. People see others getting away with it in the short term and think it's a viable strategy. But the IRS is like a slow-moving freight train - when they finally catch up, the damage is devastating. I had a client last year who thought they were being clever by creating an LLC for their "consulting business" that existed only on paper. They deducted everything from their morning coffee to their Netflix subscription as "business expenses." When they got audited, not only did they owe back taxes with penalties and interest, but the IRS also hit them with the negligence penalty because the deductions were so obviously personal. The worst part? They tried to blame me for "not warning them enough" even though I had documented multiple conversations advising against these deductions. This is why I now require clients to sign a written acknowledgment when they insist on taking questionable positions against my advice. To answer your question directly: absolutely refuse to work with clients who won't listen to professional guidance on this. Your reputation and license aren't worth the headache of dealing with fraudulent schemes.

This thread has been incredibly informative and honestly a bit scary. I run a small graphic design business and have been very careful about my deductions, but reading about these fake LLC schemes makes me realize how easy it would be to cross the line without realizing it. What really strikes me is how the IRS enforcement has evolved with technology. The idea that they're using algorithms to detect patterns in business expenses is both fascinating and terrifying. It makes sense though - if someone suddenly creates an LLC and starts writing off their entire lifestyle as business expenses, that would definitely stand out in the data. I appreciate everyone sharing their real experiences, especially the tax professionals who've seen the aftermath firsthand. The $27,000 tax bill story and the 5-year audit example really drive home that the short-term "savings" aren't worth the long-term risk. For legitimate business owners like myself, this discussion reinforces the importance of keeping detailed records and only claiming expenses that truly serve a business purpose. It's better to err on the side of caution and pay a bit more in taxes than to face the nightmare of an audit and penalties. Thank you all for the education - I'll definitely be reviewing my own practices to make sure I'm staying well within the lines.

The conversation here has been really enlightening, and I want to add some perspective from the government side. I work in tax compliance review, and I can confirm that the patterns everyone's describing about fake LLCs are absolutely on our radar. What many people don't realize is that the IRS has dramatically improved its data matching capabilities. We can now cross-reference business deductions against things like credit card transactions, bank deposits, and even social media activity. When someone claims $15,000 in business meals but their LLC shows no corresponding revenue or client activity, those discrepancies get flagged automatically. The "everyone does it" mentality is particularly dangerous because it creates a false sense of security. Yes, audit rates are still relatively low overall, but they're much higher for returns that trigger our risk assessment algorithms. A newly formed LLC with high expense-to-income ratios is basically guaranteed extra scrutiny. For the bookkeeper who started this thread: you're absolutely right to be concerned. The IRS takes a dim view of preparers who enable fraudulent schemes, even passively. Document everything, refuse questionable work, and remember that your professional reputation is worth more than any client relationship. To those running legitimate businesses: keep detailed records, understand the ordinary and necessary test, and when in doubt, consult a qualified professional. The peace of mind is worth the cost.

This entire discussion has been a real wake-up call for me. I'm relatively new to the tax preparation field, and honestly, I had no idea how sophisticated the IRS detection systems have become. The insight from Alfredo about cross-referencing business deductions with credit card transactions and social media activity is particularly eye-opening. What struck me most is how the technology has completely changed the risk calculus. What used to be a "needle in a haystack" problem for the IRS - finding fraudulent deductions among millions of paper returns - has become a targeted data analysis exercise. When you put it that way, these fake LLC schemes aren't just risky, they're practically guaranteed to get caught eventually. I'm also grateful for all the practical advice about documentation and client management. The suggestion about requiring written acknowledgments when clients insist on questionable positions against professional advice seems like essential protection. It not only covers you legally but also forces clients to really think about what they're asking you to do. For someone just starting out in this field, this conversation has reinforced that building a practice around honest, compliant clients is the only sustainable path. The short-term revenue from problematic clients isn't worth the long-term risk to your reputation and license. Thank you everyone for sharing your real-world experiences - this has been incredibly educational!