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April 6, 2019

Return Preparer Liable for Returns She Didn’t Prepare

IRS Penalties

Houston Tax Attorney

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The IRS has been increasing its focus on tax return preparers who file false or fraudulent tax returns. Congress recently beefed up the due diligence requirements preparers have to comply with and the penalty amounts have also been increased. But these laws only apply to tax returns the preparer actually prepared. In Tolentino v. United States, No. 18-10240 (5th Cir. 2019), the tax return preparer was held liable for tax returns she did not prepare.

Facts & Procedural History

Tolentino worked as a tax return preparer in Texas. The IRS noted that the tax preparation firm she worked for had a higher than usual amount of returns that reported refunds.

The IRS criminal investigation unit had two undercover agents approach Tolentino about preparing their tax returns. Tolentino prepared false tax returns for the special agents. The returns included education tax credits that should not have been taken.

The IRS special agents then interviewed seven of the tax firms clients that used Tolentino to prepare their tax returns. All of the returns included education credits that should not have been taken.

The government indicted Tolentino and charged her with filing false tax returns. As part of the sentencing, the U.S. Probation Office prepared a presentence investigation report noting that the seven returns resulted in $37 thousand of education tax credits that should not have been taken and that $2 million of refunds were issued for all tax returns prepared by the tax firm Tolentino worked for. Many of the returns were filed using Tlentino’s PTIN.

Tolentino entered into a plea agreement; however, she objected to the amount included in the presentence investigation report in applying the Federal sentencing guidelines. At the sentencing hearing, she argued that her filing information was used by all tax return preparers at her tax firm and that she should only be liable for the returns she actually prepared. The court did not agree. The court sentenced Tolentino to six months in jail and $2 million in restitution.

Paying Restitution to the IRS

The courts are able to order defendant’s to pay restitution to the IRS. They do so in a number of different types of tax cases, such as tax return preparer cases like this one.

Typically the amount of restitution is based on the defendant’s own conduct. In this case, one would think this would be the losses the IRS sustained due to the returns Tolentino prepared herself.

The Terms of the Plea Agreement

But the plea agreement in this case did not provide for that. Tolentino entered into a plea agreement that agreed to pay “losses resulting from all of her criminal conduct involving the preparing and filing of false and fraudulent tax returns,” which would not be “limited to losses stemming from the offense of conviction alone.” She also agreed to be “jointly and severable liable for payment of all restitution,” as written in the presentence investigation report.

Thus, she agreed to be jointly liable for restitution. But the language in the plea agreement was not clear. The court noted that:

Tolentino claims that by including the language, “her criminal conduct,” she intended to be liable only for returns she herself filed. Other sections of the plea agreement, though, stated that restitution could arise from “all relevant conduct,” and she agreed to be “jointly and severable liable for payment of all restitution.” We acknowledge that the broader language is in a section of the agreement setting out the maximum penalties, while the language on which she relies is in a section setting out restitution. That factor was for the district court to take into account.

The court concluded that either interpretation is plausible. Therefore it upheld the trial court’s decision, which means that Tolentino had to repay the full $2 million–even though part of this amount was for tax returns she did not prepare.

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