U.S. v. FOSTER, Cite as 106 AFTR 2d 2010-7134, 11/23/2010
I just wrote on a couple of tax preparers who have been strongly encouraged to pursue other endeavors. Their clients will be glad to know that their returns may be subjected to a little extra scrutiny after the preparers turn over complete lists. It was not long after that post that I found Dorothy Foster of Alabama, who seems to have specialized in fine tuning Schedule C to achieve the optimal earned income credit for her clients (If you have the right number of children and your income falls in the right range you actually get a larger refund from having more taxable income. I think it's supposed to encourage poor people to work harder, but I have a policy of not reflecting on tax policy. Keeping track of what the rules are is challenging enough without trying to reflect on why someone thought they were a good idea). It seems like since they get so upset when you make up deductions or omit income, that they shouldn't mind so much if you make up some income. It doesn't work that way. You're really supposed to try to be accurate, although it is likely that people not eligible for the earned income credit might get away with making up income.
Reading about Ms. Foster so soon after writing about Mr. Brier made me wonder how common this type of thing is. The cases were brought under Code Section 7407 which provides:
§ 7407 Action to enjoin tax return preparers.
(a) Authority to seek injunction.
A civil action in the name of the United States to enjoin any person who is a tax return preparer from further engaging in any conduct described in subsection (b) or from further acting as a tax return preparer may be commenced at the request of the Secretary. ..............
(A) engaged in any conduct subject to penalty under section 6694 or 6695 , or subject to any criminal penalty provided by this title,
(B) misrepresented his eligibility to practice before the Internal Revenue Service, or otherwise misrepresented his experience or education as a tax return preparer,
(C) guaranteed the payment of any tax refund or the allowance of any tax credit, or
(D) engaged in any other fraudulent or deceptive conduct which substantially interferes with the proper administration of the Internal Revenue laws,
The sections referred to concern preparing returns that understate tax due to unreasonable positions or due to willful or reckless conduct (6694) and failure to do certain basic things like providing clients copies of their returns, signing as preparer and maintaining a list (6695). I fondly remember the latter list of obligations because they were enacted barely before the start of my career (Tax Reform Act of 1976) and formed the basis of a question on the 1980 CPA exam.
U.S. v. SOMMERSTEDT, ET AL., Cite as 106 AFTR 2d 2010-6832, 10/19/2010
Mr. Sommerstedt objected to a previous order to mail a copy of an injunction against him to his former clients. He thought that making the list constituted a 5th amendment violation. The Court did not agree, found him in contempt and sanctioned him $1,000 per day until he came into compliance.
U.S. v. ELMER, Cite as 106 AFTR 2d 2010-6538, 08/27/2010
I just checked the website for Associated Tax Planners and I have to say if life hands you a lemon, make lemonade. According to the website when Chris Elmer started his career as a tax preparer 30 years ago he hoped that one day he would be able to pass the business to his sons and now that dream has become a reality (with a little nudge from the court):
IT IS HEREBY ORDERED that Defendant Chris Elmer shall, on or before December 31, 2010, formally terminate his employment and/or ownership interest in ATP. Chris Elmer shall provide the United States with (a) information relating to the circumstances and terms of the sale of his business interest in ATP, which shall be effected on or before December 31, 2010,
Mr. Elmer himself has been enjoined from preparing returns. His sons Ryan and Brad and son-in-law Michael Boehrer can continue the business provided they behave themselves and pass the enrolled agent exam in the next three years.
There was also a specific list of return preparation guidelines for them to follow:
((1)) prepare and/or file income tax returns for customers identifying the existence of a two-person partnership and/or the business expenses and losses of that entity, only where the partnership and/or its business expenses and losses can be substantiated in accordance with the terms of items (2)–(9) below;
((2)) report an Employer Identification Number (“EIN”) for a partnership on an individual or income tax return only after having first applied for and obtained such an EIN in accordance with the procedures for so doing established by the IRS;
((3)) report the correct Principal Business Activity code on all business tax returns prepared;
((4)) in cases where an ATP customer is a partner in a partnership or shareholder of an S-Corporation, and where the customer has engaged ATP to file his individual income tax return for a particular year, file any corresponding partnership or S-Corporation income tax return for that year prior to, or contemporaneous with, the individual tax return;
((5)) claim business expenses, deductions, or losses only where the customer is carrying on a trade or business with a profit motive. The ATP Defendants shall also secure from customers (and retain for four years) copies of all schedules of business income and expenses used in preparing any business schedules or business income tax returns. In cases where there is a history of little or no gross income for the customer's trade or business, the ATP Defendants shall secure from the customer (and retain for four years) substantiation documenting the business's purpose, activity, expenses, deductions, and/or losses;
((6)) report losses in the tax returns from a customer's real estate rental activities only as a passive activity subject to the Passive Activity Limitations in accordance with I.R.C. § 469. To the extent the ATP Defendants report that the customer in question is a “real estate professional” for the purpose of deducting real estate rental losses, the ATP Defendants will retain substantiation secured from the customer sufficient to establish that the customer meets the definition of “real estate professional” under I.R.C. § 469(c)(7)(B);
((7)) claim employee business expenses in the tax returns of their customers only as miscellaneous itemized deductions subject to the Internal Revenue Code and Regulations under the Adjusted Gross Income (“AGI”) limitations;
((8)) claim office-in-home expenses in the tax returns of their customers as business deductions only where and to the extent that the customer can clearly substantiate that the use of the customer's residence qualifies for a deduction in accordance with I.R.C. § 280(A); and
((9)) claim personal medical costs in the tax returns of their customers only in the proper manner as required by the Internal Revenue Code and Regulations (e.g. as itemized deductions);
U.S. v. CRUZ, Cite as 106 AFTR 2d 2010-5266 (611 F3d 880) , 07/16/2010
In this case the US was appealing a decision by the district court to order preparers to clean up their act rather than just put them out of business. The district court's patience was sustained.
U.S. v. MORRIS, Cite as 106 AFTR 2d 2010-5144, 07/01/2010
Magistrate judge's recommendation to deny pro se return preparer's motion to dismiss govt.'s action to enjoin him from preparing frivolous returns that requested more than $55 million in fraudulent refunds on behalf of his clients was adopted, based in part on magistrate's reasoning regarding meritlessness of preparer's argument about lack of implementing regs for Code Sec. 7402 , Code Sec. 7407 and Code Sec. 7408 and fact that govt. stated viable claim for relief with allegations that preparer prepared returns for others that egregiously understated tax liability. And preparer's objections, including protester-type arguments and claim that magistrate lacked jurisdiction over this action without parties' consent, were also meritless.
They didn't have much patience with this person's argument that he wasn't a person.
U.S. v. CLARK, Cite as 105 AFTR 2d 2010-2990
Shirley Clark agreed with the United States that she should take up a new trade.
U.S. v. ZERJAV, SR., Cite as 105 AFTR 2d 2010-2918
In this decision one preparer was put in the penalty box for 3 years although still allowed to perform administrative duties. All the people involved were enjoined from certain practices in preparing returns :
(1.) claim a rent deduction when a shareholder/taxpayer rents any portion of his personal home to his employer, trade, business, or other entity;
(2.) purport to establish that shareholders/taxpayers who rent their personal home or personal vehicle are not required to report the rental payments as taxable income because the taxpayer has an accountable plan or other reimbursement policy in effect;
(3.) do not report automobile leasing or reimbursement income for shareholders/taxpayers who lease their personal vehicle for the convenience of their employer, trade, business, or other entity;
(4.) claim business deductions for non-deductible personal expenses on any corporate, partnership, tax exempt entity or any other entities' federal tax returns;
(5.) deduct a wage for shareholders/employees unless such wage is reasonable as set forth in I.R.C. §§ 162(a)(1) and 312(a) and the regulations promulgated thereunder. Defendants shall also provide customers who need to determine a reasonable wage a copy of IRS Fact Sheet 2008-25, and retain in the customers' file a copy of IRS Form 2008-25 and all other documentation establishing the reasonableness of the customers' wage.
(6.) report compensation paid to a customer-created entity which is not reasonable and/or related to the work performed, including bookkeeping, management, staffing, and support services (or any derivation of these services).
(7.) claim a 26 U.S.C. § 179 deduction unless in compliance with 26 U.S.C. § 179 and the regulations promulgated thereunder;
(8.) claim deductions for wages paid to children unless the wages are reasonable, are for services rendered as a bona fide employee of the taxpayer's trade or business, and the customers provide detailed records of the child's work history;
(9.) claim restaurant meals as a deductible business expense, unless the deduction meets the requirements of 26 U.S.C. § 162, and the taxpayer documents the date, time, purpose, and participants in accordance with 26 U.S.C. § 274;
(10.) deduct amounts paid or incurred by an employer for educational assistance under 26 U.S.C. § 127, when the employer paid more than 5% of educational assistance to benefit shareholders or owners (or their spouses or dependents);
(11.) deduct child care expenses under 26 U.S.C. § 129, where the business paid more than 25% of childcare expenses to benefit shareholders or owners (or their spouses or dependents);
(12.) deduct equipment lease payments for businesses which have transferred, for no consideration, assets or equipment into a newly formed entity, business, or trust; and
(13.) classify shareholder distributions as “loans to shareholders.”
U.S. v. ABLE, Cite as 105 AFTR 2d 2010-2877, 06/14/2010
U.S. v. McIntyre, ET AL., Cite as 105 AFTR 2d 2010-2693
U.S. v. MARTY, Cite as 105 AFTR 2d 2010-562
Here's the deal on these folks. You see when you are born the government opens up a secret account in your name. It has something to do with the Federal Reserve being owned by the Illuminati or something like that. You can access the account by filling out a 1099-OID that reflects withholding equal to the amount of OID interest and attaching it to your return. This secret is very well kept. I have a degree in applied mathematics and have studied the OID rules intensively and have not been able to see the connection. These preparers figured it out though and were preparing returns. Of course the IRS is part of the same conspiracy so they wanted to shut these people down. Sadly, the courts have been corrupted by the same forces. Your secret account is still there and if you do a little searching you'll still find people who will tell you how to access it. I noted that one of them has indicated that the IRS has found a loophole to defeat the 1099-OID method. I've met a lot of IRS people and have not found a single one who will admit to the conspiracy. That shows you how effective it is.
U.S. v. MUHAMMAD, ET AL., Cite as 105 AFTR 2d 2010-2691
U.S. v. MUHAMMAD, ET AL., Cite as 105 AFTR 2d 2010-2693
More permanent injunctions.
U.S. v. ANDERSON, Cite as 105 AFTR 2d 2010-2204
Dorothy Lee Anderson was electronically filing refund returns for taxpayers without their knowledge and keeping some of the refunds. I really like almost all my clients, but frankly clients can be annoying some times. This is a very innovative way to work a tax practice. No interruptions from actual clients. Apparently, though, it won't work in the long run.
U.S. v. McINTYRE, ET AL., Cite as 105 AFTR 2d 2010-1568
U.S. v. MILLER, Cite as 105 AFTR 2d 2010-1905
U.S. v. BARTLETT, Cite as 105 AFTR 2d 2010-1682
U.S. v. GIBSON, Cite as 105 AFTR 2d 2010-1572
In his sentencing memorandum filed in connection with the second criminal matter, case number 08-20390, he indicated that this civil suit was a deterrent to him again committing tax fraud in preparation of tax returns. See Dkt. No. 11 at 5, Case No. 08-20390. Mr. Gibson, after being sentenced to refrain from preparing any tax returns, was found teaching other inmates how to prepare income tax returns. Id., Dkt. No. 11-5 at 1. He was expelled from a residential drug treatment program in June of 2008 when he was found to be in possession of income tax books. Id. at 7. Mr. Gibson has characterized this conduct as [pg. 2010-1576] “somewhat criminal.” See Dkt. No. 8. While Mr. Gibson advised this Court that “he is through with tax preparation work[,]” in his sentencing memorandum, Mr. Gibson informed the Plaintiff in a March 3, 2009 letter, that he “still reserve[s] the right if [he] chooses to be a professional tax person. Legal of course.” See Ex. 1 at 2. In this same letter Mr. Gibson also indicated that “you know as well as I do, that even if a judgement [sic] was unfairly handed down to enjoin me, that once I'm released, I could actually do taxes if I was bent on doing them, despite any ruling.” Id. at 4.
Accordingly, Mr. Gibson has demonstrated that there is a likelihood that he will commit future violations of the internal revenue laws and that a permanent injunction barring him from preparing or assisting in the preparation of federal tax returns for anyone but himself, advising anyone about such preparation, owning or managing any tax preparation business, representing customers before the IRS or engaging in any other similar conduct is warranted. Mr. Gibson's Response to Plaintiff's Motion for Summary Judgment is silent as to any genuine issue of material fact precluding the entry of a permanent injunction.
I have to say getting thrown out of a drug treatment program for having income tax books really takes the cake.
U.S. v. STENLINE, Cite as 105 AFTR 2d 2010-869
While govt. was clearly entitled to some injunction when considering preparer's misconduct, district court ruled that permanent/lifetime injunction was too draconian under circumstances and instead imposed 15-year injunction.
Knowing the practicalities of the business I can't see much difference between a 15 year injunction and a permanent one, but so it goes.
All in all, I think these cases make a fairly good argument for making it a little easier for the IRS to shut down bad preparers. I'll keep looking for a fool-proof method to access my secret account. I'm not making any promises that I'll share it though.