Taxpayer Successfully Sues Tax Preparation Firm

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The clinic regularly has clients appear who arrive because they received poor assistance in preparing their return.  The proper preparation of the tax return is the single most important act in the tax process.  Good preparation eliminates the need for all manner of downstream problems.  When the clinic assists someone in putting their tax affairs back in order following poor preparation of their return, we often wish that clients could recover, and the clinic could recover, damages from the preparer whose knowing or unknowing actions caused the problem.  Of course, we also wish the IRS could regulate preparers to provide some quality control on the front end rather than having to chase after bad preparers after damage occurs.

The case of Weinstock v. Harvey, No. 8:19-cv-02979 (M.D. Fla. 2020) provides a rare, at least in my experience, example of a taxpayer suing a tax preparation firm for the problems caused by the poor preparation.  The preparers do not show up to defend themselves which causes some education on the importance of pleadings in default cases.

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In 2017 Ms. Weinstock went to Harvey’s Tax Service to have her returns prepared for 2014, 2015 and 2016.  I assume from the court’s description that the 2014 and 2015 returns were being filed late.  She does arrive, however, in time to still receive the refunds, if any, for 2014 and 2015.  She reaches an agreement with Harvey’s to pay an initial fee of $750 plus 15% of any refunds she receives.  Paying for return preparation based on a percentage of the refund received sets the situation up to incentivize the preparer to find the biggest refund.  We all see the ads during tax season from various preparers who promise to find the biggest refund, but structuring payment in this way raises red flags.

Before going further in telling the story of Ms. Weinstock’s tax woes, I decided to look up Harvey’s Tax Service to see if anyone else had problems.  That search resulted in a link to the Better Business Bureau of Plant City, Florida.  The BBB site does indeed suggest problems with Harvey’s.  The most notable problem is a description of actions taken by the Department of Justice:

Government Action:

The following describes a pending government action that has been formally brought by a government agency but has not yet been resolved. We are providing a summary of the government’s allegations, which have not yet been proven.

On March 17, 2020, The United States Department of Justice in Tampa, Florida, found that Mr. Jasen Harvey and Harveys Tax Service violated preliminary and permanent injunctions that barred them from preparing, filing, or assisting in the preparation or filing of federal tax returns for others.

For that violation, the court held Mr. Harvey and Harveys Tax Service in contempt and ordered them to pay $19,550 to the United States, representing the fees Jasen Harvey and Harvey’s Tax Service received for 92 tax returns they prepared or filed in violation of the court’s injunctions. In addition, the court ordered those defendants to reimburse the government for $631.04 in travel costs the United States incurred to attend the contempt hearing held on March 13, 2020.

The United States filed a complaint against Catharine Harvey, Jasen Harvey, and Harveys Tax Service on Jan. 9, 2020. According to the complaint, the defendants prepared returns for customers seeking millions of dollars in refunds of tax purportedly withheld on fictitious income reported on fabricated Forms 1099-MISC and on bank deposits reported on fabricated Forms 1099-A. On Feb. 18, 2020, the court issued a preliminary injunction that barred the defendants from preparing returns for customers, finding that the United States offered sufficient evidence to show that defendants had a history of filing fraudulent refund claims, and were likely to continue to file fraudulent returns absent a court order to stop. The court issued a permanent ban on Feb. 24, 2020, finding the defendants “unfit” to prepare tax returns.

The court found that the United States demonstrated by clear and convincing evidence that the defendants willfully violated these court orders, which unambiguously barred the defendants from preparing returns for others. In addition to the monetary sanctions, the court ordered that it will sentence Mr. Harvey for his willful contempt at a hearing on July 9, 2020.

The BBB site suggests that Ms. Weinstock is not the only person interested in Harvey’s.  The web would lead on to believe that Harvey’s has not only been assisting people with taxes for 21 years but is still assisting them.

Ms. Weinstock filed returns showing a refund due to her of $157,472.  I don’t know what sort of business she was in for the years at issue but that’s quite a large refund.  The IRS paid the refund after taking about $20,000 of it to satisfy past due taxes on her account.  After issuing the refund, however, the IRS decided to audit the return and disallowed the entire refund.  It also hit her with a penalty of $31,507.  The opinion does not describe a deficiency process but rather a notice of tax due.  It also states that the IRS issued a Notice of Jeopardy Levy.

Jeopardy levies are quite rare.  The opinion does not give any real facts regarding the jeopardy levy.  Someone at the IRS would have made a determination regarding the likelihood that Ms. Weinstock’s money would soon be out of the reach of the IRS.  The IRS attorneys would have signed off on this determination.  Among other things using jeopardy levy allows the IRS to bypass the collection due process procedures and immediately levy on any assets held by Ms. Weinstock.  The opinion left me with the impression that through the jeopardy levy process the IRS collected $200,119 to satisfy the tax deficiency resulting from reversing the claims on the returns, the penalties imposed, interest, etc.

Ms. Weinstock then turned to recover from Harvey’s.  She alleges that her tax problems resulted from the action of Harvey’s “due to their actions and misrepresentations in preparing Weinstock’s federal tax return….”  Failing to reach a satisfactory agreement with Harvey’s, Ms. Weinstock sued in federal district court “seeking an award of compensatory damages, punitive damages, attorney’s fees, and costs.”

The next several paragraphs of the opinion detail her efforts to obtain a default judgment.  Throughout the remainder of the court process, no one appears to respond to her allegations and the district court seeks to determine what it can award to her in the absence of a response.  The discussion may be instructive to anyone seeking a default judgment in district court.  After requiring Ms. Weinstock to refile, the court determines that she can obtain a judgment against the two individual owners of Harvey’s for four items:

Legal fees incurred associated with the IRS$29,800.00
Penalties paid to the IRS$31,507.40
Interest paid to the IRS$19,937.90
Fees Paid to Defendants$12,190.00

It does not grant her a default judgment for the treble damages due to fraud that she requested.  The court analyzing her pleadings and determines that she alleged sufficient facts to establish a claim for fraud meeting the heightened requirements for such allegations required by FRCP 9(b).  With respect to the punitive damages, however, the court finds that even though her pleadings may be sufficient there must be a trial.  So, the court does not throw out her claim but refuses to rule for her on these damages in the default judgment setting.

I do not know her chances of successfully collecting the $93,000+ that she won and whether it is worth the effort to continue to pursue the larger judgment.  The case encouraged me because I have seen very few cases brought by individual taxpayers against the persons who prepared their returns.  While the Department of Justice is also pursuing Harvey’s, its ability to pursue all parties preparing bad returns is limited by resources.  In order to shut down individual preparers whose actions cause taxpayers downstream pain and suffering as they endure audits and collection action, individual clients may need to take the lead.  The default nature of this judgment provides little guidance on what would happen at a trial.  We don’t know the extent to which, the taxpayer may have known or suspected the claimed refund was too high or other potential defenses to such an action the preparer might raise.  Still, the actions of this one taxpayer could make a difference in helping to police the tax preparation industry to rid it of preparers who do not seek to prepare an accurate return.

Comments

  1. Robert Kantowitz says

    I agree that the taxpayer should recover against a preparer in this case, but two other considerations need to be remembered:

    1. The taxpayer here may have been negligent (which does not excuse the preparer). Every taxpayer should be held to a standard of care and knowledge of at least being generally aware of what the graduated rate income tax system works. If the plaintiff had the kind of income and cashflow that had caused her to overpay an amount as large as $157K, she should have sufficient sophistication to inquire and understand what fed into the claimed refund. If she was nowhere in that league, and if, as the opinion indicates, the preparer used one or more improper schemes to generate a refund, she should have known that there was no way she was entitled to a refund like that.

    2. What is going on at the IRS that they allow a bogus refund of this size? Is there any adult supervision?

  2. Norman Diamond says

    Does anyone know how to compel the IRS to proceed with a threatened audit and a threatened prosecution for alleged fraud? If the US had prosecuted me, a lawyer would find how to subpoena the withholding agent to prove that the Form 1099 was accurate, my case would have taken weeks instead of decades. I wouldn’t have needed a string of civil suits with courts refusing to take jurisdiction.

  3. The Weinstock case was referenced in a “Notice of Pendency of Other Actions” filed by DoJ for IRS in the civil proceeding last January:

    “Although the United States does not believe it is a related case, out of an abundance of caution, we take this opportunity to notify the Court of Weinstock v. Harvey, et al., Case No. 8:19-cv-2979 (M.D. Fla.), which is pending in front of Judge Covington. The defendants are Jasen and Catharine Harvey. Although the plaintiff in that case is referenced in the United States’ Complaint and motion for preliminary injunction, the lawsuit in front of Judge Covington is a private damages dispute between a customer and a return preparer. The instant case, by contrast, is a suit for injunctive relief and disgorgement brought by the United States to protect the public and the Treasury. The two cases differ both in scope and in relief sought.”

    Jasen Harvey eventually appeared at a May court hearing in the IRS case, and escaped penalties for contempt of court. The case ended in September with an injunction barring the Harveys from “directly or indirectly” continuing in the tax return preparation business.

    Jasen Harvey had filed an Answer to the IRS Complaint. He called himself a “living soul/man, appearing Pro Per, not pro se, as Real Party in Interest (RPII).” He admitted that his company had prepared 1099-A forms. I am still trying to figure out how to manufacture refunds from reports of “Acquisition or Abandonment of Secured Property.” He refers to a “Notice of the Existence of the Birth Certificate Trust,” which “proves that a ‘future-labor-interest’ deposit was made pursuant to the Emergency Banking Relief Act, etc.”

    To answer Robert Kantowitz’s questions (“What is going on at the IRS that they allow a bogus refund of this size?”) I am sad to report that my 80-year-old client passed away earlier this month from complications of Parkinson’s Disease. I may have referred to her IRS audit earlier this year, where a one-time large donation to her Catholic diocese was questioned. This was not a correspondence audit, but one in which she was asked to appear in person. We managed to avoid that, and also answered the challenge of the local IRS office auditor who wanted proof that the Catholic Church is a qualified 501(c)(3) organization. (It’s more difficult than you might think.)

    • Robert Kantowitz says

      An IRS agent who would not accept paper documentation of the contribution is just a sub-par agent. An auditor who questions whether, as a matter of law, contributions to the Catholic Church are tax-deductible is a bad apple. That is the kind of thing that the Taxpayer Advocate should address. or as to which a call from the office of your Representative in Congress should be placed to the Commissioner of Internal Revenue. Unfortunately, there are too many Linda Lerners who may have axes to grind and not enough adult supervision.

  4. Steve Kassel, EA says

    It appears that Mr. Kantowitz is unaware just how simple it is to generate large refund payments from the Internal Revenue Service. Quite frankly, it is mind boggling that there isn’t far more of it. I can guarantee that a few of us on this site, with a few hours of planning, could easily figure out and pull off a scam that could cost the Treasury tens of millions if not far more.

    • Robert Kantowitz says

      Of course I can imagine how easy it might be under certain circumstances; I was asking rhetorically why that is so. If the taxpayer had a million or more dollars of gross income and fabricated several hundred thousand dollars of false business or charitable deductions, for example, maybe the bottom line net income would look plausible enough on its face for the IRS to just process it. But the net income on the return is only half of the puzzle. If the refund arises from having made large periodic payments or had large amounts withheld in the normal course and then filing a return with a net liability $157K lower, someone should have asked how that could be, since few taxpayers as a matter of fact would overpay by that much unless they decided, only near year-end, to enter into a separate transaction designed to reduce taxes, and that sequence should be a red flag: was it a sale of assets at a loss or a legitimate acceleration of expense, or was it something else?

  5. Kenneth H. Ryesky says

    I have just come across a case in which the taxpayer was apprised that the tax service he had used was sued and was going out of business; did not file TP’s returns. On account of, inter alia, his tax problems, the taxpayer’s security clearance was denied. The facts are not clear, but I would think that under the Boyle standard, the taxpayer would have a duty to at least make timely inquiry as to whether the tax preparer filed the return (and request documentation thereof).

    If all that the taxpayer did was submit the information to the preparer and, after a reasonable time, let the matter drop without affirmatively subscribing to the return (or electronic equivalent thereof), then even under the proposed legislative tweaks to the Boyle standard the taxpayer would be remiss.

    [Matter of Anonymous, Defense Office of Hearings & Appeals, Appeals Board, ISCR Case No. 15-01411 (26 October 2016)].

    https://ogc.osd.mil/doha/industrial/2017/15-01411.h1.pdf

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