John and Susie rent a unit at an apartment complex owned by MitchBrown, who has

Question

John and Susie rent a unit at an apartment complex owned by MitchBrown, who has been Susie’s friend since they attendedbusiness school together. One day Mitch told Susie about thethousands of tax dollars that he has saved in the apartmentcomplex. Susie was pleased that Mitch had reduced his taxburden because she believes that the government rarely uses itsresources wisely. Inadvertently, though, Mitch let the factslip that the apartment complex “qualifies” for thecredit only because he overstates the percentage of low-incometenants living in the facility. Mitch admitted that byclaiming that John and Susie are low-income tenants (even thoughthey aren’t), the percentage of low-income tenants is justenough for Mitch to “qualify” for the credit. Mitch said that because John and Susie were his friends, he waspassing along some of his tax savings to them in the form of lowerrent.

John and Susie know that if they report Mitch to the IRS, he willnot only lose the economic benefits of the credit, but will alsohave legal troubles. Further, if Mitch were to be sentencedto prison for the tax fraud, his children would probably becomewards of the state. In addition, John and Susie would have topay higher rent. What course of action would you recommend toJohn and Susie?

Explanation / Answer

At the moment John and Susie learned about Mitch's scheme, theyshould return the discounted rent. They should also break theirlease and find an apartment elsewhere. The lease is void since thelandlord is participating in an illegal activity. If John and Susie knowingly participate in the scheme, they alsocould be guilty of tax fraud. Lastly, I would not report this to the IRS. It's the IRS's job tofind tax cheats.

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