Tuesday, January 24, 2023

A Procedural Twist on Dealing with Fraudulent Tax Return Preparers 

Usually when I write about misbehaving tax return preparers, I am sharing news of an investigation, an indictment, a conviction, a sentencing, or some combination of the foregoing. I have discussed these sorts of events in commentaries such as Tax Fraud Is Not Sacred, More Tax Return Preparation Gone Bad, Another Tax Return Preparation Enterprise Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, Tax Return Preparer Fraud Extends Beyond Tax Returns, When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud, More Thoughts About Avoiding Tax Return Preparers Gone Bad, Another Tax Return Preparer Fraudulent Loan Application Indictment, Yet Another Way Tax Return Preparers Can Harm Their Clients (and Employees), When Unscrupulous Tax Return Preparers Make It Easy for theblo IRS and DOJ to Find Them, Tax Return Preparers Putting Red Flags on Clients’ Returns, When Language Describing the Impact of Tax Fraud Matters, Injunctions Against Fraudulent Tax Return Preparers Help, But Taxpayers Still Need to Be Vigilant, Will the Re-Introduced Legislation Permitting Tax Return Preparer Regulation Be Enacted, and If So, Would It Make a Difference?, Can Fraudulent Tax Return Preparation Become An Addiction?, Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention, Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf, When Dishonest Tax Return Preparers Are Married, There Was Nothing Magical About This Tax Return Preparation Business, Don’t Get Burned By a Tax Return Preparer, Tax Fraud School: When It’s Not Enough to Be a Fraudulent Tax Return Preparer, It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns, Overused Fraudulent Tax Return Preparation Ploys, It’s Not Just Law Enforcement That Confronts Misbehaving Tax Return Preparers, When An Injunction Doesn’t Stop a Tax Return Preparer from Filing False Returns, Filing a Fraudulent Tax Return Is Bad, Filing More Than 3,000 Is Outrageously Bad, and When It Comes to Fraudulent Tax Returns, It's Not Always the Preparers.

This time, in U.S. v. Simmons (behind a paywall), the court faced a procedural question in connection with the federal government’s attempt to prevent tax return preparers from continuing to engage in their activities. The government sought both a preliminary injunction and a temporary restraining order (TRO) against the defendants, specifically, two preparers and their tax return preparation business. The government alleged that the defendants, who prepared more than 2,000 individual tax returns each year, had been repeatedly filing false returns on behalf of customers who did not know what the preparers were doing. IRS audits of some of the customers revealed hundreds of thousands of dollars of tax deficiencies.

On January 17 of this year, the government filed a motion for a preliminary injunction and a TRO. Though in this instance both the injunction and the TRO would order the defendants to not do something, the procedural requirements attached to each are different. That is what the court needed to analyze. The preliminary injunction would prohibit the defendants from preparing tax returns until the substantive case was decided, that is, until the court determined if the defendants were in fact engaging in the fraudulent return preparation that the government alleged. The TRO would prevent the defendants from offering and providing tax preparation services when tax season opened on January 23. Issuing an injunction requires the submission of briefs and presentation of arguments at a hearing, and that takes time. A TRO takes immediate effect and would prevent the defendants from acting as preparers while the injunction was being considered.

The court attempted to determine if the defendants would agree to a TRO while briefing and arguments on the injunction request were underway. The defendants’ attorney explained that they would consider agreeing to a TRO prohibiting them from engaging in specific activities but not to an injunction prohibiting them from being tax return preparers. The government argued that limited injunctive relief would be inadequate considering the evidence presented with respect to the defendants’ activities.

Though the defendants claimed that they had made significant efforts to “correct errors in their tax return preparation,” the government demonstrated that the defendants had not made any changes with respect to many other practices in their business. The court agreed that the government had demonstrated that the defendants had understated their customers’ tax liabilities by filing returns on which the defendants took positions they knew or should have known lacked substantial authority and that they had acted either willfully or with reckless disregard of the law. The court also pointed out that the defendants had previously been subject to enforcement penalties that put them on “full notice of the consequences” of their conduct.

Accordingly, to allow for briefing and a hearing on the request for an injunction, the court declined to decide that question, but issued a TRO prohibiting the defendants from acting as tax preparers. The TRO expires on February 3, when the decision on the injunction is expected. To appreciate the scope of the TRO, consider its scope:

The Court enters this temporary restraining order enjoining Defendants, individually and doing business as Simmons Tax, their officers, agents, servants, employees, and attorneys, and anyone in active concert or participation with them, directly or indirectly, from:

1. Preparing or assisting in the preparation or filing of federal tax returns, amended returns, and other federal tax documents and forms for anyone other than themselves;

2. Advising, counseling, or instructing anyone about the preparation of a federal tax return;

3. Owning, managing, controlling, working for, or volunteering for an entity that is in the business of preparing federal tax returns or other federal tax documents or forms for other persons;

4. Providing office space, equipment, or services for, or in any other way facilitating, the work of any person or entity that is in the business of preparing or filing federal tax returns or other federal tax documents or forms for others or representing persons before the IRS;

5. Advertising tax return preparation services through any medium, including print, online, and social media;

6. Maintaining, assigning, transferring, holding, using, or obtaining a Preparer Tax Identification Number (PTIN) or an Electronic Filing Identification Number (EFIN);

7. Representing any person in connection with any matter before the IRS;

8. Employing any person to work as a federal tax return preparer other than to prepare or file the federal tax return of one of the Defendants;

9. Referring any person to a tax preparation firm or a tax return preparer, or otherwise suggesting that a person use any particular tax preparation firm or tax return preparer;

10. Selling, providing access, or otherwise transferring to any person some or all of the proprietary assets of the Defendants generated by their tax return preparation activities, including but not limited to customer lists; and

11. Engaging in any conduct subject to penalty under 26 U.S.C. § §6694, and 6695, or that substantially interferes with the administration and enforcement of the internal revenue laws.

The lesson for misbehaving tax return preparers is that despite their right to hearings and trials to ascertain their innocence or guilt, the fact that those hearings and trials take time will cause the federal government to request that the preparers in question be shut down until those hearings and trials are conducted and final determinations are made. Though in theory this may be a harsh result if the preparer ends up being found innocent, in practice the Department of Justice and the IRS don’t bring charges against prepares until and unless they have an open-and-shut cases. Unfortunately, no matter how many misbehaving preparers are identified and closed down, others are popping up just as quickly.

Tuesday, January 10, 2023

Cutting Off the Tax Revenue Nose to Spite a Political Face 

How many people will understand what actually is happening in the House of Representatives, now that a very tiny minority of a national minority has managed to take over what it intended to be a representative legislative body? The first legislative act of the House of Representatives was the passing, by a totally partisan vote, of the Family and Small Business Taxpayer Protection Act, which, of course, does not protect families or small businesses. Who does it protect?

The Family and Small Business Taxpayer Protection Act repeals the IRS funding increase provided by the Inflation Adjustment Act enacted last year. Not surprisingly, that IRS funding increase, intended to provide resources to crack down on tax-evading oligarchs and their ilk, was immediately criticized by the supporters of tax cheaters through the use of lies. As I discussed in Fear Mongering, Tax Style, the opponents of cracking down on wealthy tax cheaters falsely claimed that the increased funding would underwrite IRS actions against people with incomes under $400,000 and small businesses, and falsely claimed that it would permit the IRS to hire 87,000 additional agents. In my commentary I explained why those claims were lies, and why they find “fertile ground in the hearts and minds of those who react quickly to emotions and fail for one reason or another to think critically and dissect the absurdity of the claims.” Supporters of the funding repeal not only presented the same false claims but added their intention to expand the Trump-era tax legislation that was marketed as financial relief for the middle class but that in fact funneled riches into the coffers of the starving oligarchs.

Worse, the Congressional Budget Office issued an analysis of the legislation that demonstrates its impact on the federal budget. According to the analysis, the funding repeal would cut federal spending by $71 billion (in reduced IRS funding) but generate a reduction of $186 billion of lost revenue. Thus, federal budget deficits would increase by $114 billion over a ten-year period. The CBO estimate of lost revenue is on the low side, considering that a dollar of IRS funding brings in five to ten times as much revenue. Coming from a political party that for years has opposed deficit increases, other than when it comes to funneling money to oligarchs, one must wonder what is the true motivation for the legislation. Perhaps it’s simply an attempt to protect campaign donors from the reach of the IRS.

Of course, the same anti-IRS crew has plans to offset the additional tax cuts for the wealthy that they intend to enact. They have put Social Security and Medicare in their sights. Anyone who pays attention to life knows that Social Security and Medicare are vital for the poor, necessary for the middle class, and of little effect on the financial position of the wealthy. So why does this minority of the minority proclaim it is working for the poor and middle class while acting for the benefit of the wealthy? The answer is simple. They mask their true intentions because if they were to reveal their true intentions the outrage would toss them out of power. Instead, they bank on the ignorance of some, they rely on the apathy of others, especially those more concerned with foisting their social views on everyone else, and they count on the support of their campaign donors.

It is unlikely that this most recent legislation, the pride and joy of the anti-tax crowd and hailed by it as the vanguard of the latest chapter in the assault on government, will become law. It is unlikely to pass the Senate and if it did, it would be vetoed by the President. That probably does not worry the advocates of rule by the minority of the minority, because they’re just warming up for January 2025. And they’re likely to succeed, until and unless enough Americans figure out who their political friends actually are. Here’s a clue. It’s not the people intending to, and trying to, tear down what protects the financial well-being of the vast majority who are not wealthy.

Thursday, January 05, 2023

Is a Statewide Beach Tag Fee in New Jersey a Good Idea? 

Reader Morris directed me to a commentary by New Jersey 101.5 talk show host Bill Spadea, suggesting a state-wide “universal” beach tag fee to replace the individual beach tag fees imposed by dozens of New Jersey beach towns.

Spadea begins by expressing his general support for user fees, noting that those who use a “product, service or location” should pay at least part of the cost of providing or caring for those products, services, or locations. He then suggests that the fees charged for “a few hours enjoying the beach and the ocean” are too high. He notes that without beach fees, the cost of maintaining the beaches would fall on local homeowners and retailers. As often is the case with user fees and sometimes with taxes, the issue isn’t whether they should exist but how much they should be.

Spadea contrasts the New Jersey situation, which is seasonal, with Florida, which has year-round beach use. In Florida, taxes on hotel rentals ensure that at least some of the cost of beach maintenance is borne by tourists, that is, non-residents who use the beaches. He notes he has not seen much maintenance on the beaches of the Outer Banks, nor has he seen lifeguards, whereas in New Jersey the beaches are cleaned daily and lifeguards are stationed every few blocks.

Spadea then shares an idea from one of his friends. His friend argues that a person should not be required to pay additional beach tag fees to visit friends on the beach for a few minutes. The solution, he suggests, is a “universal tag that would be accepted across” all New Jersey beach towns. The tag would be sold by the state, and towns that chose to participate would receive a portion of the tag revenue collected by the state. Spadea thinks that this would increase beach tourism, in turn helping local businesses that rely on seasonal revenues to keep afloat and increasing local tax revenue.

Reader Morris asked me, “Does this beach tag fee idea make sense?” My response is the classic, “It depends.”

I set aside the claim that a statewide beach tag fee would increase tourism. Most tourists who visit the New Jersey beaches stay in one town, and though they may go to other towns for dining or gambling, most use the beach closest to where they are staying. But that’s not what generates my response.

To me, the statewide beach tag fee resembles the train passes one can purchase in Europe. A traveler intending to make multiple train journeys can purchase a pass for an amount that is less than what would be paid if each journey were purchased separately. But this makes sense only if the traveler is planning to make enough train journeys to justify the cost of the pass. A traveler intending to make one train journey would be ill-advised to purchase the multiple-trip pass.

Assuming that all beach towns opt in to the plan, which may or may not happen if a statewide beach tag is adopted, cost shifting will occur. Persons who visit multiple beaches will benefit from lower overall costs, whereas those who visit one beach will pay more than they would have paid for a single-town beach tag. There are ways of alleviating this imbalance but it would require a more complicated fee structure. Returning to the European train pass comparison, it is possible to purchase different “levels” of train passes, for example a pass good for 6 days of rail travel in a 15-day period, a pass good for 10 days of rail travel in a 20-day period, and so on. Of course, the cost increases as the scope of the pass widens. Yet what I gathered from what bothered Spadea’s friend is the notion that individuals who visit multiple beaches should not pay more simply because they are making a short trip to a beach. Perhaps I am misunderstanding the proposal, but surely Spadea’s friend isn’t suggesting that a person who purchases a ticket for one train journey should not be charged an additional amount for taking a short ride on another train.

There’s much to say in favor of a statewide beach tag system. It eliminates the inconvenience of needing to purchase a beach tag each time a person visits another beach. It streamlines the administrative burden of collecting fees and distributing tags by consolidating operations. It even helps the environment by letting a person carry one, rather than multiple, tags. It could work if structured in a way that did not shift the burden from heavy users of multiple beaches to people who are occasional visitors to one beach. And that is why I respond to the question from reader Morris with “It depends.”

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