Justice Department Highlights Ongoing Efforts to Protect the Public and the Fisc from Fraudulent Tax Return Preparers and Tax Scheme Promoters
During this tax-filing season, the Justice Department announced today the results of its ongoing efforts to combat fraudulent tax return preparers and promoters of tax fraud schemes. The department’s Tax Division has an active program to stop fraudulent return preparers and promoters from violating federal tax laws, particularly where the fraudulent activity can harm individual customers or drain the U.S. Treasury.
According to available Internal Revenue Service (IRS) statistics, taxpayers filed approximately 145 million individual income tax returns in 2014, with more than 84 million individuals using a paid tax return preparer. The division’s civil enforcement efforts have been directed against both large-scale return preparation franchises and smaller, independent return preparers and promoters. Last year, the Tax Division obtained permanent injunctions against more than 40 preparers, promoters and businesses operating all over the United States.
“In 2014, the Tax Division continued its pursuit of tax return preparers and promoters who violate the tax laws through abusive schemes and scams, and take advantage of their customers,” said Acting Assistant Attorney General Caroline D. Ciraolo of the Tax Division. “The division’s attorneys and staff, along with our colleagues in the IRS, are committed to identifying, enjoining, and where appropriate, prosecuting those individuals who engage in such conduct.”
As in past years, the IRS has again designated return preparer fraud as one of the “Dirty Dozen” tax scams to avoid during return filing season. The Tax Division took action in 2014 against preparers to curb some of the most common types of return preparation fraud:
Your refund should never be deposited directly into a preparer’s bank account.
In United States v. Nevers (E.D. La), the court barred a return preparer from preparing returns after she deposited refunds into her own account and took a cut before remitting the balance to customers, among other things.
Do not use a preparer who is willing to electronically file your return using your last pay stub instead of your W-2.
In United States v. Instant Tax Service, et al. (S.D. Ohio) the Court of Appeals for the Sixth Circuit affirmed the favorable district court judgment that shut down ITS Financial LLC, because of its pay stub filing and other predatory and fraudulent practices. Before being shut down, the Instant Tax Service franchise claimed it was the fourth largest tax-return-preparer franchisor in the United States. In affirming the district court’s relief, the Sixth Circuit noted “that Congress provided a broad grant of authority” to stop predatory and other harmful tax preparation practices.
Do not use a preparer who fabricates business expenses or deductions, or who claims bogus credits you may not be entitled to claim (i.e. Earned Income Tax Credit (EITC), child care, education credits).
The Tax Division secured injunctions in many cases, including United States v. Almanza (E.D. Pa.) in which the preparer claimed bogus additional child tax credit on returns and United States v. Branson (S.D. Miss.) in which the preparer claimed false EITCs and education credits. In Branson, more than 99 percent of the 2,400 returns prepared sought a refund, and 97 percent of the returns audited understated the customer’s tax liability by an average of $5,000.
Some other fraudulent schemes and practices that have been stopped through injunction orders entered by federal courts throughout the country include:
• preparing phony tax-return forms with fabricated businesses and income;
• claiming false education and homebuyer credits;
• claiming false and inflated deductions;
• claiming false filing status and false dependents;
• filing tax returns without customer consent or authorization;
• preparing bogus W-2 Forms based on information from employee paystubs;
• falsifying return information to claim inflated EITCs;
• preparing tax returns but failing to sign them as required; and
• defrauding customers by charging exorbitant fees.
Federal courts across the country — in Florida; Pittsburgh; Philadelphia; Memphis, Tennessee; Fresno, California; Waco and San Antonio, Texas; Montgomery, Alabama; New Orleans; Mississippi, and Georgia — have similarly stopped abusive tax return preparers from continuing their harmful conduct.
In September 2014, the division filed eight injunction suits in Florida to bar Walner G. Gachette, the founder of Orlando-based tax preparation company LBS Tax Services, seven LBS Tax Services franchisees and three LBS Tax Services managers from owning, operating or franchising a tax return preparation business and preparing tax returns for others. These cases also seek disgorgement from the defendants of the tax-preparation fees they charged their customers. According to the complaints, in 2013, LBS Tax Services operated at least 239 stores (192 owned by the named defendants) in Alabama, Georgia, Florida, Mississippi, North Carolina, South Carolina, Tennessee and Texas. In February 2015, a federal court in Orlando permanently barred two managers from preparing tax returns for others and from owning or operating a tax return preparation business.
In addition to combating fraudulent return preparation, the division also filed suits in 2014 to enjoin promoters of fraudulent tax schemes, including Kenneth Elliott and Sea Nine Associates Inc., who promoted a purportedly legal welfare benefit plan. According to the division’s complaint, Elliott promoted plans that illegally permitted customers to claim substantial tax deductions for their plan contributions, then later access the full cash value of their plan contributions by taking out loans against the life insurance policies purchased with plan contributions, costing the U.S. Treasury in the process. The division obtained injunctions against Elliott and Sea Nine from promoting and selling the welfare benefit scheme.
In July 2014, the division filed suit in Chicago against Victor Crown and his various business entities to enjoin them from promoting false withholding and net-operating-loss tax schemes. According to the complaint, Crown prepares federal income tax returns and other documents that claim false amounts of income tax withheld from his customers’ earnings, and that they are entitled to claim bogus net-operating-losses because his customers sought, but did not receive, full award amounts for a separate class-action suit. Crown’s claims lack merit, according to the suit, because an employee is not entitled to claim an income tax withholding credit for more than the amount of income taxes actually withheld from their wages, and because nothing in the Internal Revenue Code permits a taxpayer to deduct the amount of a denied claim as a net operating loss.
In the past decade, the Tax Division has obtained injunctions against hundreds of tax-return preparers and tax-fraud promoters. Information about these cases is available on the division’s website.
As noted, in addition to the civil enforcement through injunctions that stop their illegal actions, many return preparers and promoters also face prosecution. Examples of those investigations can be found for fiscal years 2014 and 2015.
The IRS advises taxpayers who may select a tax professional to prepare their return to be careful in their selection. The IRS offers some basic tips and guidelines to assist taxpayers in choosing a reputable tax professional and is also offering taxpayers a number of instructional YouTube videos to help them prepare their own taxes for the upcoming filing season. Several options, including free assistance with preparation and electronic filing for the elderly and individuals making $50,000 or less, are available to help taxpayers prepare for the current tax season and receive their refunds as easily as possible.