Injunctions against tax return preparers

Injunctions Against Tax Return Preparers: Injunction issued. Many of the injunction cases result in plea agreements with the Department of Justice, agreeing to one count of criminal fraud for filing a false statement. On the other hand, the DOJ tactics are often intimidating and they take advantage of defendants who cannot afford to litigate the charges. The best time to resolve the criminal/injunction issues is when the case is under investigation by the IRS criminal tax division. The IRS treats the smaller return preparers as prime targets for their investigations.

The defendant was permanently enjoined from acting as a tax return preparer. This was to preclude him from preparing for compensation any federal income tax return (or any portion thereof), including any work papers or summaries from which the return might be prepared, or from employing any persons to prepare such returns or portions of returns at his direction or control.

C. Owens, Jr., DC, 79-2 USTC ¶9742.

Similarly.

C.E. Bullard, DC Tex., 89-2 USTC ¶9620.

The defendant and his agents, who had been encouraging taxpayers not to pay taxes on their wages and salaries, were permanently enjoined from (1) preparing any federal income tax return in which the wages, salaries or business income of the taxpayer are not included in adjusted gross income; (2) marketing or distributing any document which advocates that wages, salaries or business income are not subject to federal income taxation; and (3) marketing or distributing any form which differs from the official U.S. Individual Income Tax Return.

E. May, DC, 83-1 USTC ¶9220.

An injunction may be issued against a tax adviser under Code Sec. 7402 without showing that a particular provision of the Internal Revenue Code has been violated. On remand, if the district court determines that an accounting firm, accused by the IRS of enticing clients to claim invalid tax credits, acted as a tax adviser, an injunction may be issued to prevent such conduct without tying it to a specific statute prohibiting the activity. If the district court views the firm as a tax preparer, only a partial injunction may be issued under Code Sec. 7407. Since the firm posted bond, an injunction cannot be issued against activities subject to the penalty under Code Sec. 6694: namely, advising clients to claim unjustified credits and using misleading documentation to show clients how bogus credits may be claimed. But the firm may be enjoined from promoting and marketing its services despite posting of the bond, since this activity is not encompassed by the penalty provision.

Ernst & Whinney, CA-11, 84-2 USTC ¶9618, 735 F2d 1296. Cert. denied, 105 SCt 2018.

An individual was permanently enjoined from the promotion and sale of an abusive tax shelter in the form of an estate guardian educational trust. Such individual was also enjoined from engaging in conduct as a tax return preparer that hinders or interferes with an IRS investigation and audit of persons who utilized such educational trusts in the computation of their tax liability.

B. Hutchinson, DC, 83-1 USTC ¶9322.

An injunction could be issued against an income tax preparer compelling production of a list of the names of taxpayers whose returns were prepared by him, despite the fact that the IRS could have uncovered the same information through a summons procedure. Moreover, the court concluded that willfulness was an essential element to justify the issuance of an injunction under Code Sec. 7407(b). However, the appellate court reversed and remanded the action to the trial court since the lower court judge erred by not considering whether the return preparer's refusal to turn over such information was in reliance upon the advice of his attorney, which could be a defense to willfulness under certain circumstances.

N.T. Nordbrock, CA-9, 87-2 USTC ¶9538, 828 F2d 1401.

A lower court decision, which enjoined a tax return preparer from preparing returns and imposed a penalty on him for refusing to provide a list of clients to the IRS, was reversed and remanded. The District Court erred in denying the preparer's demand for a jury trial. By proceeding with a bench trial on the issue of willfulness in refusing to provide the list, his Seventh Amendment right to a jury trial was violated. The preparer did not waive his right to a jury trial by signing a pretrial order which set his case for a bench trial.

N.T. Nordbrock, CA-9, 91-2 USTC ¶50,391.

A federal district court's imposition of a lifetime injunction prohibiting an individual from preparing tax returns for others was not in error because he continually engaged in prohibited conduct by refusing to comply with IRS requests for taxpayer information. In addition, a post-trial motion for a new trial was properly denied because subsequently obtained evidence was substantially the same as that in the return preparer's possession at the time of trial.

N.T. Nordbrock, CA-9, 94-2 USTC ¶50,532, 38 F3d 440.

An individual who referred to himself as a "personal income tax specialist" and who signed taxpayers' returns on the paid preparer's signature line was considered to be an income tax preparer within the meaning of Code Sec. 7701(a)(36). The court determined that he had consistently engaged in the type of conduct for which an injunction can be entered under Code Sec. 7407.

A.G. Venie, DC Pa., 88-1 USTC ¶9326, 691 FSupp 834.

A return preparer was enjoined from aiding, assisting or advising taxpayers to exclude sick pay from income and claim erroneous deductions in connection with their returns or tax refund claims. Despite repeated warnings from the IRS, the preparer continued to understate the income tax liabilities of his clients. Because the preparer knowingly, willfully and fraudulently understated the liabilities, conduct which interfered with the proper administration of the Internal Revenue laws, the injunction was warranted.

M.D. Rotzinger, DC Ill., 88-1 USTC ¶9303.

An individual who described himself as a tax accountant, financial consultant and notary public was considered an income tax preparer. Further, the evidence established that he had continually and repeatedly prepared fraudulent and deceptive income tax returns. A preliminary injunction was appropriate. However, since permanently enjoining him from his livelihood would be too harsh, the court set a hearing on the merits in six months.

T.C. Franchi, DC Pa., 91-1 USTC ¶50,086, 756 FSupp 889. Aff'd, CA-3 (unpublished opinion 1/20/92).

A husband and wife were permanently enjoined from acting as income tax return preparers because they repeatedly and willfully understated their clients' tax liabilities and consistently took frivolous or unrealistic positions without adequately disclosing those positions on the returns. The wife's two daughters, who had actively participated in the couple's income tax preparation business, were also enjoined from acting as income tax return preparers unless they became enrolled agents and accepted no tax preparation advice from their mother and step-father.

C. Bailey, DC Tex., 92-1 USTC ¶50,246. Aff'd, CA-5 (unpublished opinion 6/18/93).

An individual was permanently enjoined from acting as an income tax preparer because he regularly misapprehended, misconstrued and misapplied the tax code and regulations in the information he gave his customers and in the preparation of their returns. Although he did not act with fraudulent intent, he was negligent in his efforts to understand the law, and the positions he advised his clients to take were unrealistic and frivolous.

S.H. Olsen, DC Colo., 97-2 USTC ¶50,730. Aff'd, CA-10 (unpublished opinion), 98-1 USTC ¶50,152.

The government was entitled to injunctive relief prohibiting a pro se individual from preparing and filing federal income tax returns and disseminating false statements designed to mislead the public into believing that the payment of tax is voluntary. He took the unsubstantiated position that the Internal Revenue Code excludes social security taxes withheld from wages from gross income. The government successfully established that, in the absence of a preliminary injunction, it would suffer irreparable harm due to its inability to detect and track returns filed by the return preparer, who continually failed to comply with requests for client lists as required under Code Sec. 6107. Moreover, there was little likelihood of harm to the individual, the government was likely to prevail on the merits at trial and public interest favored the issuance of the injunction.

A. Abdo, Jr., DC N.C., 2001-2 USTC ¶50,591.

The government was granted a permanent injunction barring a tax return preparer from preparing and filing federal income tax returns and disseminating false statements designed to mislead the public into believing that the payment of tax is voluntary. He persisted in taking unrealistic positions based on frivolous arguments; failed to timely supply the court with his client list; misrepresented his eligibility to practice before the IRS; communicated to prospective clients that he was guaranteeing tax refunds; knowingly made false and fraudulent statements; and was responsible for numerous tax understatements. In the absence of injunctive relief, the government established that it would suffer irreparable harm. It was clear from the record that nothing short of a full injunction would stop the return preparer's unlawful behavior.

A. Abdo, Jr., DC N.C., 2003-1 USTC ¶50,107. Aff'd, per curiam, CA-4 (unpublished opinion), 2003-1 USTC ¶50,483.

Similarly.

D.P. Rosile, Sr. DC Fla., 2002-2 USTC ¶50,566.

A motion for contempt of court was granted against a tax shelter promoter who violated a court order requiring, among other things, that the individual and his partner refrain from selling abusive tax shelter schemes, refrain from advising taxpayers how to understate their tax liability, and maintain their web sites with a display of the court's order of injunction. The tax shelter promoter was held in contempt after it was established that he failed to comply with the specific requirements of the order.

M.D. Richmond, DC Ill., 2002-2 USTC ¶50,677.

A tax preparer and his financial services organization were enjoined from organizing, promoting and selling "pure" or "common-law" trusts, and from acting as federal income tax return preparers pending a final determination on the merits. The evidence established that the trusts were created to aid in the illegal avoidance of taxation. Moreover, based upon its fining that the tax preparer continually engaged in such conduct, the court was entitled to enjoin the individual and his organization from acting as tax return preparers until complete compliance with the statutory disclosure requirements had been established.

L.W. Ratfield, DC Fla., 2002-2 USTC ¶50,765.

The government was entitled to summary judgment in its suit for a permanent injunction preventing an individual from acting as a tax return preparer and from preparing returns that contained claims for fabricated tax credits. The taxpayer prepared income tax returns for compensation and, thus, was a preparer as the term is defined in Code Sec. 7701(a)(36). Moreover, he engaged in conduct subject to penalty under Code Sec. 6694 in connection with claiming false tax credits for slavery reparations, which had no realistic possibility of being sustained on the merits.

R.L. Foster, DC Va., 2002-2 USTC ¶50,785.

Three individuals and several businesses, who were in the business of promoting and selling materials to the public containing detailed instructions for the use of false or fraudulent means to evade federal income taxation, were enjoined from participating in such activities. The district court found that the information contained in such materials consisted of frivolous arguments against the federal income tax system which have been repeatedly and uniformly rejected by the courts. Injunctive relief was appropriate to prevent the continuation, repetition, and proliferation of such activities. Furthermore, the court also rejected the individuals' contention that the injunction was an impermissible prior restraint on their First Amendment rights of free speech by pointing out that commercial speech (for profit) which promotes an illegal activity or transaction was not entitled to First Amendment protection.

I. Schiff, DC Nev., 2003-2 USTC ¶50,546.

The government was entitled to a permanent injunction to prohibit a tax return preparer from misrepresenting his education and experience and for guaranteeing tax refunds. Evidence established that the individual continually and repeatedly represented to customers and to the IRS that has was an attorney, when he was not licensed to practice in any state and was not a graduate of an accredited law school. He also frequently guaranteed that his customers would receive tax refunds, although no such guarantees are permitted under the internal revenue laws.

D.J. Gleason, DC Tenn., 2004-1 USTC ¶50,183.

A federal district court did not abuse its discretion when it granted a preliminary injunction enjoining several individuals and businesses from promoting "zero-income" tax theories. Because one of the individuals had an extensive history of tax avoidance and because the individuals operated a bookstore devoted to introducing others to his tax-avoidance schemes, there was a strong likelihood that the promoters would violate Code Sec. 6700 in the future, which was sufficient grounds for a preliminary injunction. Furthermore, the injunction was not an impermissible restraint on First Amendment rights of free speech. The book at the heart of this controversy was determined to consist of commercial speech, which is not entitled to the same protections as political or expressive speech. Ordering that a copy of the injunction be placed on the promoters' websites also did not violate the First Amendment, since requiring disclosure of factual commercial information warning customers of the hazards of a product is regularly allowed.

I.A. Schiff, CA-9, 2004-2 USTC ¶50,328, 379 F3d 621.

A paid tax return preparer who helped his customers evade taxes using a frivolous theory was permanently enjoined by a District Court from preparing or assisting in the preparation of federal income tax returns for any other person.The frivolous corporate profit theory used by the preparer rested on the premise that no section of the Code establishes an income-tax liability on wages. The preparer inserted zeros on all lines of the return that require the reporting of income, thereby falsely reporting that customers had no taxable income and no tax liability. He also submitted false Forms 2848 stating that he is an attorney or full-time employee of his customers, and he failed to sign some of the returns he prepared. As an additional sanction, the preparer was permanently barred from providing any tax services to any third party or engaging in other prohibited conduct. Moreover, he was required to provide a complete list of the customers for whom he prepared returns for a given period of time, and also contact those customers to inform them of the court's findings, and the possible tax consequences that may affect them. A permanent injunction was imposed because, without the injunction, the Treasury and the public would suffer permanent harm from the preparer actions and the preparer would continue to engage in the prohibited conduct.

J.D. Hubacek, DC Nev., 2004-2 USTC ¶50,346.

Two individuals were enjoined from organizing, promoting and selling abusive tax shelters and acting as tax return preparers. The individuals promoted and participated in an abusive trust scheme known as the "Common Law Business Organization" and asserted under Code Sec. 861 that U.S. residents' domestic income is not taxable. These activities resulted in tax liabilities that were substantially understated, generated over $18 million estimated revenue loss for the government and were subject to penalties under Code Secs. 6694, 6700 and 6701. Further, they engaged in fraudulent, deceptive conduct that interfered with the administration of the tax laws and, absent an injunction, were likely to continue engaging in such activities.

J.L. Binge, DC Ohio, 2005-1 USTC ¶50,121.

A tax preparer and his financial services organization were permanently enjoined from organizing, promoting and selling "common-law" trust arrangements and from acting as tax return preparers.

L.W. Ratfield, DC Fla., 2005-1 USTC ¶50,187.

The government's request for a permanent injunction requiring various individuals to cease operating all professional employer organizations (PEOs), temporary agencies and payroll service companies that they owned, managed and/or controlled was granted. All of the individuals acknowledged that they entered into the final judgment of permanent injunction voluntarily and that the IRS was not precluded from assessing taxes or penalties against them for claimed violations of the Internal Revenue Code.

J.E. Wolf, DC Okla., 2005-1 USTC ¶50,319.

An unenrolled tax return preparer was permanently barred in a default judgment from preparing federal tax returns. As part of a "Return Preparer Project" initiated as a result of the discovery of numerous return discrepancies, the IRS made a detailed examination of 33 returns. The examination revealed that each of the returns claimed inflated or completely fabricated Schedule A deductions (primarily charitable contributions and unreimbursed employee business expenses), Schedule C business deductions, and Schedule E rental real estate expense deductions. In addition to the return preparation ban, the injunction also required the preparer to provide the IRS with a list of customers and to mail each customer a copy of the injunction.

C.B. Eden, DC Mo., 2005-1 USTC ¶50,366.

A federal tax return preparer and his firm were enjoined from preparing tax returns. He repeatedly understated customer's tax liability and did not exercise due diligence in calculating customer's EITC eligibility in violation of Code Secs. 6694 and 6695.

L.A. Baxter, DC Ala., 2005-1 USTC ¶50,423.

A tax return preparation company and two of its operators were permanently enjoined from acting as income tax return preparers. The company and its operators used sham business deductions and improper filing status, itemized deductions and dependency deductions, to increase the refund claims on thousands of returns, resulting in an estimated $33 million tax loss over three years. They did not refute the government's claim that they continually and repeatedly engaged in fraudulent and deceptive conduct that substantially interfered with the administration of the tax laws, and that they would likely continue to do so unless the permanent injunction was granted.

J.A. Fernandez, DC Fla., 2005-2 USTC ¶50,611.

The allegations in the United State's complaint to permanently enjoin an individual from providing tax preparation services satisfied the requirements for an injunction, pursuant to Code Sec. 7407, because it was 1) against a tax preparer; 2) the tax preparer violated Code Sec. 6694 by preparing federal income tax returns that understated his customers' federal tax liabilities and asserting frivolous positions that did not have a realistic possibility of being sustained on the merits; 3) and absent an injunction, the tax preparer would continue to violate Code Sec. 6694.

J.E. Rosamond, DC La., 2005-2 USTC ¶50,639.

A couple who promoted fraudulent tax services on their website and filed "zero-income" tax returns seeking refunds for customers was permanently enjoined from providing any tax preparation services. A permanent injunction was appropriate under Code Sec. 7407 because the couple repeatedly filed claims for refunds that were based on positions they knew to be frivolous and did not include tax-preparer identification numbers with the filings.

B.J. Hill, DC Ariz., 2006-1 USTC ¶50,252.

A permanent injunction that enjoined individuals from continuing to act as income tax return preparers was warranted because an injunction prohibiting them from engaging in fraudulent conduct was insufficient. The individuals had actively solicited customers with promises of large refunds, manipulated or disregarded customers' taxable income, reported fictitious expenses and deductions, filed fraudulent returns and asserted fallacious justifications when questioned by their customers. The permanent injunction reduced the risk that they would cause additional harm to customers, the government and the public.

E. Ferrand, DC La., 2006-1 USTC ¶50,287.

A permanent injunction was granted against a paid tax return preparer prohibiting her from defrauding her customers and the government by filing false tax returns, by promoting the availability of nonexistent tax deductions and by instructing her clients to delay the IRS examination process through deceit and trickery. The individual misrepresented herself as an attorney and a certified public accountant and encouraged her customers to unnecessarily delay their audits by lying to IRS personnel. The individual's conduct was enjoined because it interfered with the administration and enforcement of the internal revenue laws, caused substantial losses to the Treasury and resulted in irreparable injury to the government.

L.A.P. Moser, DC Hawaii, 2007-1 USTC ¶50,104.

An individual was permanently enjoined from acting as a tax return preparer because the government established that he continued his proscribed conduct of preparing and filing returns that understated taxpayers' liabilities and contained false positions. That conduct caused a significant tax loss and required the IRS to devote numerous revenue agents to auditing returns he prepared. The individual falsely stated that he was a certified public accountant, repeatedly failed to sign returns he prepared and engaged in other fraudulent or deceptive conduct substantially interfering with the administration of the tax laws. Given that his conduct was widespread and that he had defied a prior court order requiring him to cease preparing tax returns and to post notice of that order at his business, a permanent injunction was the appropriate remedy.

E. Sonibare, DC Minn., 2007-1 USTC ¶50,353.

Two tax return preparers and their accounting services organization were permanently enjoined from preparing federal tax returns because they continually and repeatedly engaged in conduct subject to penalty under Code Secs. 6694 and 6695. The preparers falsified numerous forms to support false and fictitious claims for refund on behalf of their customers and advanced unrealistic positions deducting from income the amount paid to their customers for wages based on their frivolous tax schemes.

A.J. Pugh, Jr., DC N.Y., 2007-2 USTC ¶50,814.

An individual was permanently enjoined from preparing tax returns, assisting in tax return preparation, giving false or fraudulent tax advice and advertising tax preparation services on his website. The individual promoted the argument that "non-employee" compensation is not income as defined by Code Sec. 61, prepared customers' federal income tax returns reporting zero taxable income, and guaranteed a 50-percent reduction in customers' taxes. Thus, the evidence indicated that the individual violated Code Sec. 6694 by preparing returns that willfully understated his customers' tax liability.

P.M. Ballard, DC Texas, 2008-1 USTC ¶50,267.

Several individuals and various entities controlled by them were permanently enjoined from promoting abusive tax shelter schemes and operating a tax return preparation business that filed false tax returns. The preparers provided inaccurate tax advice to their customers and actively encouraged, advised, and instructed their employees to prepare tax returns that understated their customers' income, inflated expenses, and included bogus refundable tax credit claims. They also engaged in false and deceptive conduct by misrepresenting the qualifications of their customers' third-party designee and failing to sign returns or identify themselves as return preparers.

D.L. Prewett, DC Fla., 2008-1 USTC ¶50,325.