Litigation Guideline Memorandum: Injunctive relief: Return preparers, June 30, 1987

Br3:JDSekula

LITIGATION GUIDELINE MEMORANDUM

Re: Injunctive Relief Against Tax Return Preparers

Background

IRC 7407, grants to the United States the authority to obtain injunctions against income tax return preparers. The injunctive relief supplements the civil penalties under sections 6694 and 6695. The purpose of these sections is "to aid the Internal Revenue Service in detecting incorrect returns prepared by tax return preparers and to deter preparers from engaging in improper conduct." S. Rep. No. 94-938, 94th Cong., 2nd Sess. 359 (1976). The injunction is the ultimate civil step in deterrence. The overriding principle in potential injunction cases is that the "injunctive relief sought must be commensurate with the conduct which led to the seeking of the injunction." Id. As a part of this principle, it is necessary to prove some immediate need for the injunctive relief. This need can be established if it is shown that the preparer is currently engaged in improper conduct and there is a reasonable likelihood that the preparer will continue to engage in the conduct sought to be enjoined. *****


Technical Discussion

Section 7407 authorizes two separate types of injunctions, specific and general. A court may enjoin a tax return preparer from engaging in specific conduct described in section 7407(b)(1)(A)-(D). A court may also issue a general injunction if it determines that a specific injunction would not be sufficient to prevent the preparer from interfering with the proper administration of the internal revenue laws. The general injunction prohibits the person from acting as an income tax return preparer. *****

Those factors normally required in an injunction action, such as irreparable harm and inadequacy of the remedy at law are not necessary when a statute provides for injunctive relief. Securities and Exchange Commission v. Torr, 87 F2d 446 (2nd Cir. 1937). This is particularly true when an agency of the government is given the right to apply for an injunction in the public interest. Walling v. Builders' Veneer & Woodwork Co., 45 F. Supp. 805 (E.D. Wis. 1942). Therefore, these traditional requirements are not necessary when seeking an injunction under section 7407. It is sufficient that the statutory criteria are present and that the case in question is an appropriate one for injunctive relief. This last requirement and the use of "may enjoin" indicate that Congress intended to maintain the traditional notion that injunctive relief will only be granted at the discretion of the court.

If the preparer has "engaged in conduct subject to penalties under section 6694 or 6695," such conduct may subject the preparer to injunction under section 7407(b)(1)(A). *****

Injunctive relief is available not only against individual preparers but also against the employer of the preparer. However, as the legislative history indicates penalties are "not to be imputed to an employer of a tax return preparer solely by reason of the employment relationship". S. Rep. No. 94-938, 94th Cong., 2nd Sess. 355 (1976). Thus, "the employer or one or more of its chief officers also must have negligently or intentionally disregarded the rules or regulations if the employer is to be penalized." Id. at 355. To obtain an injunction against the employer of the preparer it is necessary to demonstrate that the employer was involved in the improper conduct. Thus, "if some of an employer's employee-preparers have engaged in conduct leading to a request for an injunction against the further preparation of returns, any injunction is to be sought only against those preparers and not the employer (or other employees), unless the employer (or other employees) is actively involved in the improper conduct." Id. at 359.

Venue for injunctive relief under section 7407 lies in the district in which the preparer resides or has his or her place of business or in which the taxpayer with respect to whose income tax return the action is brought resides.

Under IRC 7407(c), no injunction action can be commenced or pursued with respect to a return preparer for conduct subject to penalty under sections 6694 or 6695 if the preparer files and maintains a bond in the sum of $50,000 as surety for payment of those penalties. Thus, after an injunction suit is filed a preparer can post a $50,000 bond which will prevent the court from issuing an injunction relative to the preparer's conduct that is subject to penalty under sections 6694 and 6695. The bond can be discontinued once the penalties are assessed and paid. However, activities outside sections 6694 and 6695, such as promoting and marketing a fraudulent investment tax credit service may be enjoined even if a bond is posted. United States v. Ernest & Whinney, 735 F2d 1296 (11th Cir. 1984). Although IRC 7407 controls in situations where a person is acting as a return preparer, injunctive relief may be granted under IRC 7402(a) in situations where the person is not acting as a return preparer. A traditional equitable showing must be made to obtain an injunction under IRC 7402(a). Note, there is no need to show that a party has violated a particular Code Section in order for an injunction to issue under IRC 7402(a). Thus, tax advisory services rendered by a tax return preparer could be subject to such an injunction. See United States v. Ernest & Whinney, supra.

The duration of an injunction sought under section 7407 should be "commensurate with the conduct which led to the seeking of the injunction." S. Rep. No. 94-938, 94th Cong., 2nd Sess. 359 (1976). If a specific injunction is sought, the injunction may be open-ended because the conduct which is being enjoined is itself prohibited. Where a general injunction is sought, it is usually of limited duration since courts are reluctant to grant permanent injunctions because they deprive a preparer of his or her means of livelihood. However, a permanent general injunction may be sought in egregious cases.


ARNOLD E. KAUFMAN

Director

General Litigation Division