Lost Wage Assistant


The Journey of Tax Return Score (pdf/print)

The idea for scoring tax returns evolved over 20 years and was developed based on tax returns involving a: 1) horse, 2) landscaper, 3) CPA and 4) cleaning lady. Listed below is the story and importance of each:

1988 Horse Tax Return:	Randall Sorensen’s very first job in 1988 as a forensic expert was to review a $70,000 income loss being made by a Real Estate Agent. Based his experience gained as an Internal Auditor for Burlington Northern & Senior Consultant for Coopers & Lybrand he had developed an uncanny eye for catching errors. First, he began by checking the realtor’s Schedule C to verify her earnings. In reviewing her expenses he noticed a $5,000 amount for Depreciation. He then traced the item to her supporting schedule and found that in addition to writing off her Mercedes she was writing off a horse. The living asset was being deducted as a “stud horse”. However, the problem was that the stud horse was generating $0 income. This lady had simply found a means for the US Treasury to subsidize her riding horse. She was able to save income taxes, evade social security taxes by offsetting her losses against her real estate income and managed to receive a tax credit for the gasoline she was purchasing to travel to her horse. Based on questionable integrity I requested her supporting real estate expenses. She had NONE. I estimated that had she been audited by the IRS she would have owed $30,000 in back taxes and penalties. The end result: she dropped her $70,000 claim and I became aware that a GREAT deal of information exists on tax returns.


1995 Landscaper Tax Return:	Part two of the journey involved an individual with a landscaping business. He had submitted a claim for lost profits. His Schedule C’s clearly showed that his reported income dropped from $18,000 to $2,000 after his accident. Randall’s initial thought was to pay the loss in full. However in reviewing prior tax returns he found that the individual had been consistently reporting $2,000/yr except for the year immediately prior to the accident when it spiked up to $18,000. He phoned the Attorney and recommended that he verify the tax returns directly with the Internal Revenue Service. As it turned out, the individual gave the attorney a tax return showing a profit of $18,000 while the IRS received a Schedule C showing a net profit of $8,000. This was the first time I was able to verify that multiple tax returns are in circulation. The taxpayer ended up blaming his “tax accountant” for mailing him the wrong return…. yeah right! Why are people so quick to throw the bean counters under the bus. I guess it has something to do with the nifty pocket protector and short pants.


2005 CPA Tax Return:	In 2005 I was engaged to review a claim involving a tequila import export business. Mr. Smith had indicated that he lost $30,000 due to a business interruption. The individual indicated that he earned $25,000/mth in his other businesses. In my review I determined that Mr. Smith had been a high profile CPA who had his license suspended. During my analysis I scored his tax return and the diagnostic report recommended verifying his tax return. As a result, I sent a tax release form 4506 to be signed by the former CPA. Before he signed the release he admitted that his return had never been filed. Here is an example of a highly regarded professional you generally wouldn’t suspect of not filing his return.


Phantom Business Tax Fraud:	During a scoring of a tax return Sorensen identified an immigrant in Florida who listed $12,000 for her cleaning business. In his experience it’s rare to see a business with $0 expenses & exactly $1,000 per month in income. He began by requesting her business records to verify that she made exactly $12,000. There were no records and there was no business. The sole purpose of listing $12,000 in income was to qualify her for the maximum earned income credit of $4,400. Even though she had to pay Social Security taxes of $1,695 she was still left with a net tax refund of $2,700 for a business that didn’t exist. It’s very disconcerting when you witness a CPA actively perpetrating tax fraud.


Tax Gap:	Recently the AICPA conducted a survey of it’s members and asked them: Who was responsible for the estimated $300 billion dollar tax gap? • 48.7% believe small business and self-employed are responsible. What are the major components of the tax gap? • 12.3% believe the act of not filing returns is the major component


How Scoring Works:	We assign a letter grade and numerical score to Federal Individual Tax Returns by utilizing a series of algorithms from 130 million tax returns. By subtracting points based from tax deviations we’re able to provide a letter grade to tax returns. Our motto is A & B’s are good to go and D’s and U’s are important to know. In addition the tax scoring is based on calculations to the nearest 1/100th of a percentage point to assure maximum accuracy. Finally, we utilize the income and deductions based on statistics that reflect 90% of the tax return population.


Test Results:	Once we developed the basic tax scoring program it was critical that we test the program on real tax returns. In our latest test results our average tax return score was 692. In comparison, the current national average FICO score is 692.


Why Tax Return Score:	During a meeting in the summer of 2005, Dr. Jeff Stamp and Randall Sorensen first conceived the idea on how the program could work. Dr. Stamp had gained considerable tax knowledge in his high school years by preparing hundreds of returns in his mother’s H & R Block tax practice. Mr. Sorensen had gained experience early in his career preparing tax returns and had spent the last 20 years reviewing thousands of returns. During the next two years scoring tax returns evolved from an idea at the beach into an extremely valuable resource. Dr. Stamp provided the framework, technical guidance and entrepreneur expertise and Randall contributed the design, programming and testing. We believe scoring tax returns will have the opportunity to revolutionize the credit industry.