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.