DOJ Cracking Down on Preparers Using its Injunction Powers and Requiring Preparer to Disgorge Illicit Profits

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The government has lots of tools at its disposal when it comes to going after the effects of crooked preparers. Last week I wrote about how the fraud of a preparer can have consequences for the taxpayer and indefinitely extend a taxpayer’s SOL on assessment.   DOJ often goes after the illicit preparer as well, sometimes using its vast civil remedies, including injunctions, as Keith discussed in Return Preparer Shenanigans.

This past month the DOJ has been busy releasing information trumpeting its efforts to get civil injunctions against prepares as well as requiring those preparers to disgorge their profits. Preparers that submit returns with phony refundable credits seem to be getting a great deal of attention.

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For example, last week the DOJ press release Federal Court Bars Florida Man from Preparing Tax Returns for Others and Enters $1 Million Disgorgement Judgment discusses how a district court in Florida entered an injunction and disgorgement order stemming from the facts as alleged below:

In September 2014, the United States filed a civil injunction complaint against Pierre-Louis alleging that he and his employees prepared fraudulent tax returns for customers.  The complaint alleged that return preparers in Pierre-Louis’s business targeted primarily low- to moderate-income customers with deceptive and misleading advertisements; prepared and filed fraudulent tax returns to increase their customers’ refunds; and profited through unconscionable, exorbitant and often undisclosed fees—all at the expense of their customers and the U.S. Treasury.  According to the complaint, Pierre-Louis and his employees prepared federal tax returns on which they falsely claimed earned income and education credits, reported improper filing statuses, concocted phony businesses, claimed bogus income and expenses related to the non-existent businesses and fabricated job-related expenses.  The complaint also named Jehoakim Victor and Lauri Rodriguez, allegedly former managers at Pierre-Louis’s tax preparation stores, as defendants.  In February 2015, the court permanently enjoined Victor and Rodriguez from preparing tax returns for others and from owning or operating a tax return preparation business.  Victor and Rodriguez agreed to entry of the injunction without admitting the allegations in the complaint.

The order itself is interesting and details just how far-reaching the government’s powers reach under those provisions, enjoining the preparer from preparing or assisting in preparing returns for others and essentially prohibiting him from having any commercial activity related to the preparation of tax returns, including getting a PTIN or EFIN.

The order also requires the preparer to turn over the identities of all people whose returns were prepared by the defendant and his related businesses, all the employees of the defendant and the related entities and also prohibits the defendant from selling any customer list. That customer list can lead to the issue I discussed last week, as it is likely that the IRS will systematically go after those individuals whose returns were prepared by this preparer.

In addition to the injunction, the order requires the defendant to cough up $1 million as a “for the disgorgement of the proceeds that Kerny Pierre-Louis received for the preparation of tax returns making or reporting false or fraudulent claims, deductions, credits, income, expenses, or other information resulting in the understatement of taxes.”

I have not focused much on the government’s use of general disgorgement powers to go after preparers. Disgorgement is an equitable remedy that has its roots in undoing enrichment rather than punishing and is meant to force the preparer to return profits from the improper activity. That disgorgement is not punitive may have significant consequences as to the deductibility of any such payments, as discussed in this McGuire Woods blog post discussing how the IRS in Field Service Advice opined that a Food and Drug Administration disgorgement order was not a non deductible fine or penalty under Section 162(f).

I have seen a number of disgorgement orders in return preparer cases recently and I suspect that they are now part and parcel of the government’s tool kit.

Some Observations

I am in DC this week attending a summit that the Commissioner has convened on the Earned Income Tax Credit. I have been interested in the EITC, and its administration, for years, starting with my time as a director of a low income taxpayer clinic.  I saw early on in my time as director claimants who used a return preparer that was either incompetent or unscrupulous, or both. Assigning blame between claimants or preparers and getting at the root cause of the source of the incorrect claim is a tricky business, and there have been very few meaningful qualitative studies that identify the extent of demand (claimant) or supply (preparer) driven noncompliance. As I have written previously, there is an interesting and complex relationship between preparers and claimants, and government efforts both before the fact (though regulation and oversight, including due diligence) and after the fact (including injunctions and preparer penalties, both civil and criminal) attempt to change the dynamics in that relationship.

In the blog and in other articles I have written about the various ways that the government has sough to change this dynamic. I am working on a longer paper that looks at compliance issues in some more detail. Most of what Congress has done in this area over the past decade has been to increase penalties and allow IRS to detect and unwind erroneous credits through the use of a more automatic reportable error that dispenses with traditional deficiency procedures(though IRS wants even more of that power). I am interested in learning from others at the summit, as this is a problem that is in need of solutions from many differing perspectives, not just increasing penalties and removing barriers to assessment.

UPDATE 7/1 After initially posting I learned that IRS last month has issued a CCA that held that certain disgorgement payments made to the Securities and Exchange Commission for violating the Foreign Corrupt Practices Act were not deductible. There is a lot of commentary on that substantive issue. For example, see Lawrence Hill from Shearman in the FCPA Report.

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Bob Kamman says:

    A Google search indicates that this summit is the best-kept secret at IRS since the list of Tea Party tax-exemption targets. Are there any EIC recipients in attendance? And let me guess – H&R Block is well represented.

    • The Appropriations Bill encouraged IRS to convene a summit on EITC and report on that summit http://thomas.loc.gov/cgi-bin/cpquery/?&sid=cp114alJsu&r_n=hr194.114&dbname=cp114&&sel=TOC_59799&

      There were about 50 or so attendees in addition to executives from IRS. One goal IRS I think wanted was to get views from differing perspectives. So there were people from industry but also from other fed agencies (HHS OMB, for example), states, VITA, NEA, other local tax prep professionals, clinics, etc. So while there were no EITC recipients at summit there were people who have worked for many years directly with EITC recipients, especially some of the VITA people. In addition, the views of some of the non tax people such as those from HHS brought in a differing understanding of some of the life circumstances of the people behind the program that IRS administers. I’ll write more about it next time I write on EITC.
      I understand IRS will also submit report on the summit by end of year.

  2. A. J. Decaria, EA says:

    This is a civil injunction matter that I’m guessing was filed under Sec. 7407. In these matters IRS has the authority to assess penalties under Secs. 6964, 6695 and 6701. These penalties are often uncollectible. Where does the authority to order disgorgement come from? Who has the enforcement authority to determine available net worth and to collect? When I was an abusive schemes group manager with IRS, I would have liked to have disgorgement in my bag of tricks.

    • There have been a number of cases involving preparers that have held that a federal district court can order disgorgement as part of district court’s broad power to compel remedies under Section 7602. I started seeing these about a year or so ago.

  3. Bob Kamman says:

    No doubt some of the summit participants are customers of the Maryland dairy farmer who finally got back the milk money that IRS seized because, based on advice from a bank teller, he was structuring his deposits to less than $10,000 cash. According to the Washington Post, there are 700 similarly situated citizens whom IRS is now notifying that they can apply to get their money back. IRS will now only seize money from suspected criminal activity.

    IRS apparently was shamed into doing this by Congressional oversight. The real victims, I suggest, include the IRS employees who were assigned this work instead of being allowed to do something worthwhile and productive.

  4. Deborah A Percell says:

    I think this is a step in the right direction to ensure that refundable EITC is provided to those who actually qualify rather than those who do not qualify based on the rules. Quite simply and for years this refundable credit is expensive to enforce by IRS with a working force that has rapidly diminished due to cuts in government spending regardless of political parties.
    After all once refunded how difficult is it to retrieve EITC based on fraud by taxpayers as well as “shysters”. For years tax professionals such as Enrolled Agents and professional CPA’s who prepare tax returns do not need this cost. And VITA well lets just say they are unpaid volunteers with no regulation. “

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