The government often has a myriad of remedies available to it. There are common situations in which the government does not have a consistent and thoughtful process for organizing how and when it will pursue the various remedies.
This ad hoc method often results in outcomes that are not tailored to achieve the government’s aims given the facts and circumstances. That in turn leads to protracted disputes and use of government resources over long periods of time.
The IRS’s approach to reigning in problem tax return preparers is an example. The IRS can revoke eFile and PTIN access for the tax preparer, impose several different civil penalties, pursue criminal penalties, and seek a permanent or temporary injunction to bar the preparer from preparing tax returns. These are just a few of the remedies available to the IRS.
The IRS does not have a process to identify and classify these cases based on severity. They also do not have a process to ensure that they are seeking the most effective remedy given the facts and circumstances of each case. The IRS may seek criminal penalties without having first simply revoked the preparer’s ability to eFile tax returns. It may seek an injunction before it imposes civil penalties. It may take all of these actions without first having examined a single tax return for the preparers clients.
This brings us to the case of United States v. Turner, No. 3:13-cv-1827-DMS-NLS (S.D. Ca 2022). It involves a tax return preparer who agreed to a permanent injunction from preparing tax returns. The facts of this case and cases like it highlight why a more managed approach to handling tax return preparer cases could help avoid disputes.
Facts & Procedural History
This is a civil case in which a former tax preparer asks the court to lift its injunction barring him from preparing tax returns.
The tax preparer had agreed to the permanent injunction in 2014 as part of his plea deal. He was charged and pleaded guilty to a tax crime involving his own personal return and, in the plea agreement, he acknowledged falsifying returns for others. The case does not say whether the IRS first tried to revoke the preparer’s e-File access or PTIN.
The basis for the tax preparer’s filing to lift the permanent injunction was his change in circumstances. He argued that he was not able to find employment and, given his family obligations, lifting the injunction would allow him to earn money. As the court noted, this was not really a change in circumstance. The circumstance was apparent at the outset. I do not know the full facts of the case, but cases like this suggest that the permanent injunction may not have been an appropriate remedy in every case.
About Tax Return Preparer Penalties
Any IRS agent who works income tax cases, employment tax cases, etc. can propose tax return preparer penalties. There are several penalites that can apply, such as the Sec. 6701 promoter penalty or the Sec. 6694/6695 preparer penalties.
This can come up in a routine audit. This is not all that common. It is more common for the IRS to start with the tax return preparer and audit the tax return preparer.
The IRS SB/SE Division employs IRS agents that focus on tax return preparer penalty cases. These specialist agents work cases referred to them by other IRS employees. They also source cases using the IRS’s internal data. This group often focuses on tax preparers who have a pattern of filing inaccurate tax returns. The focus is on tax return preparers who serve smaller and less wealthy individual taxpayers.
The tax return preparer audits usually start with a detailed review of tax returns. The IRS agent may do this work before or after they have a structured interview with the tax return preparer. The eventual interview includes a request for the tax preparer’s files. It may also include interviews with the tax preparer’s clients. This often culminates in a spreadsheet listing each client return examined and a list of possible violations for each one. This is attached to the IRS’s revenue agent’s report, which is often accompanied by a penalty assessment notice. The penalties that are assessed are usually substantial–with combined penalties in excess of $100,000 being common.
Other Sanctions for Tax Return Preparers
The IRS has a number of other sanctions it can impose on tax return preparers.
In addition to tax return preparer audits and penalties, the IRS can simply take away the tax preparer’s ability to eFile tax returns. Many tax preparers rely on this to get fast refunds for clients. By taking away this eFile option, the IRS can effectively stop many tax return preparers from being able to find clients. The IRS can accomplish the same thing by not renewing the preparer’s PTIN as the PTIN is required to file tax returns.
In more egregious cases, the IRS can also pursue criminal penalties. There are several different criminal statutes that the IRS can choose from. This includes tax evasion, false statements, to aiding and abetting. It can also ask for a fine under Sec. 7206.
The IRS may also seek an injunction. The injunction usually bars the tax preparer from preparing tax returns for some period of time or permanently.
Lifting an Injunction
That brings us back to this case. A tax return preparer who has agreed to a permanent injunction as part of his plea bargain. He later filed a motion to ask the court to lift the injunction.
The Federal Rules of Civil Procedure allow the court to reverse a final judgment. Specifically, Rule 60 says that the court can “relieve a party from a final judgment, order, or proceeding where: “(5) the judgment has been satisfied, released, or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or (6) any other reason that justifies relief.” The tax preparer in this case cited the language about the injunction no longer being equitable.
The court noted that a judgment is no longer equitable when there is “a significant change in facts or law,” and the revision is “suitably tailored to the changed circumstance.”
Significant Change in Facts or Law
There have been several cases involving tax return preparers who have asked the courts to lift a previously agreed upon injunction.
The United States v. Prewett, No. 8:07-cv-1575-T-33MAP (M.D. Fla. Jan. 7, 2013) case is an example. The IRS started with the injunction. Once the injunction was in place, the IRS assessed tax return preparer penalties. The tax return preparer filed suit to challenge the penalties. The jury found in her favor. The tax return preparer sought to have the previously agreed injunction lifted given the jury’s findings. The court declined to lift the injunction even though the IRS lost the lawsuit involving preparer penalties:
if a tax-scheme promoter or return preparer could undo a consent injunction simply because the promoter or preparer later prevailed in a penalty suit involving only a portion of the conduct alleged in the initial complaint seeking the injunction, the IRS might hesitate to assess penalties that should rightfully be assessed.
That brings us back to this case. The tax return preparer cited nearly a decade of unemployment, the inability to find a job as he had to care for his ill wife, the death and loss of his wife, and then the care for his step-son. One would think that these facts are a significant change in facts and could warrant lifting the injunction. The court did not agree:
The Court acknowledges that Turner’s situation is a challenging one, but he has not demonstrated that equity requires lifting the instant injunction given the other options available to Turner to support himself and his stepson. While Turner notes complying with the injunction is now “substantially more onerous,” his family commitments make work generally more onerous, not abstaining from tax return preparation specifically. See Coldicutt, 258 F.3d at 942. As noted in the opposition, “It is not onerous to require Turner to engage in any other means of earning a living besides preparing taxes . . .” (ECF No. 28 at 9, emphasis added). Turner’s motion itself notes that “Tax return preparation offers him a means” to earn income, not that it is his only option to do so, or that the injunction limits his employment or income-earning generally. (ECF No. 26-1 at 4, emphasis added).
Thus, the tax return preparer would have to show that this was his only means of earning a living. Those who prepare tax returns could, in theory, perform many other occupations. This standard means that tax return preparers will not be able to convince the court to lift injunctions even when the facts show that the injunction is unjust.
As this case shows, the courts are hesitant to lift injunctions for tax return preparers. Since the IRS does not have a process for pursuing the myriad of remedies available to it for problem tax preparers, those under scrutiny by the IRS may be well advised to consider the IRS’s remedies and convince the IRS to pursue other remedies first.