Is There Ever a Free Lunch, Even in the Tax Return Preparation Business?

Almost always, when I write about tax return preparers who have crossed the line, it involves businesses operated by one or a few individuals. Occasionally it involves a franchise of a much larger entity. I have written about the woes of tax return preparers in posts 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, When It Comes to Fraudulent Tax Returns, It's Not Always the Preparers, A Procedural Twist on Dealing with Fraudulent Tax Return Preparers, Can Tax Return Preparers Learn from the Misdeeds of Other Preparers?, and Should Tax Return Preparers Use Their Full Legal Names?

Recently, reader Morris directed my attention to a case involving the third-largest tax return preparation business, Liberty Tax. According to the Attorney General of the District of Columbia, an action was brought against Liberty Tax, alleging that it “misled and overcharged” at least 7,300 residents of the District of Columbia who obtained tax return preparation services from Liberty tax. The case rested on a Liberty Tax “cash in a flash” marketing angle. According to the Attorney General, Liberty Tax offered $50 in cash to anyone who filed their returns through Liberty Tax, and described the cash as coming with “no catch.” The Attorney General alleged that Liberty Tax charged customers who accepted the $50 an average of $200 more than what it charged customers who did not accept the $50.

The case did not go to trial because the parties settled. Under the settlement, Liberty Tax must pay $550,000 to the District of Columbia residents who accepted the $50 and then were overcharged. It must also pay $200,000 to the District of Columbia. The settlement requires Liberty Tax to stop using the “cash in a flash” program throughout the nation, and prohibits it “from creating new incentive programs that impact the prices the company charges for tax prep for those consumers who receive the incentive.” To ensure that these settlement provisions are followed, Liberty Tax must report to the Attorney General’s office “any incentive programs implemented to attract consumers, including submitting all of their marketing and training materials,” along with information that enables the office to determine whether incentive programs are affecting the fees charged to customers who accept the incentives.

Lest anyone think that this sort of “cash up front, we’ll get it back and more on the back end” arrangement was invented by, or used solely by Liberty Tax, or that it is specific to the tax return preparation business, rest assured that it is a marketing technique used for decades or longer and used across all sorts of industries and economies. If anyone enticed by this sort of promotion stops to think about it, they would realize that the cash incentive must come from somewhere. Putting aside the possibility of a business printing counterfeit money, there are four possibilities. First, the business does what Liberty Tax did, simply increase the price charged to recipients of the incentive. Second, increase the price charged to customers who don’t receive the incentive. Third, let profits decrease by the amounts paid out in incentives. Fourth, reduce salary and benefits paid to some or all employees. Perhaps there is a fifth, which is to somehow get one or more governments to subsidize the incentive, which shifts the economic burden onto those who pay taxes to those governments, those who receive other benefits from those governments, or a combination of both.

The bottom line is that oft-repeated axiom, “there is no such thing as a free lunch.” The enticement of quick cash or some other benefit, coupled with a lack of understanding of how economics works, makes it easy for marketing ploys such as the one used by Liberty tax to succeed. How can this be stopped? One approach is what happened in the District of Columbia. Government, acting under laws enacted to protect consumers, step in to stop the practice and in some instances provide a remedy. The disadvantages of this approach are that not every deceptive practice is identified, some legislatures are anti-consumer and refused to enact such laws or fund enough oversight, and the chorus of “we don’t need no regulation” from the anti-government, pro-I-have-freedom-to-do-what-I-want crowd continues to grow in volume and intensity, making it increasingly difficult to protect people from deception. Another approach is to educate people, starting from an early age, so that they indeed understand that there is no such thing as a free lunch, learn to spot these come-ons, and develop skills to make economic and financial decisions rationally rather than impulsively or emotionally. The challenges with this approach are the lack of time and resources dedicated to enlightening people and the ever-increasing trend of prohibiting schools from teaching skills and materials that enable people to learn how to think for themselves.

Should Tax Return Preparers Use Their Full Legal Names?

I have written many times about tax return preparers who have been investigated, indicted, convicted, sentenced, or subjected to an injunction or restraining order. 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, When It Comes to Fraudulent Tax Returns, It's Not Always the Preparers, A Procedural Twist on Dealing with Fraudulent Tax Return Preparers, and Can Tax Return Preparers Learn from the Misdeeds of Other Preparers?.

I don’t write every time I read an article or press release announcing the arrest, indictment, or conviction of a tax return preparer. In many instances there’s nothing particularly instructive because the preparer in question has repeated what another preparer has done. Other than differences in the number of returns and the dollar amount of lost revenue, there usually isn’t anything that grabs my attention. But a press release issued yesterday by the Department of Justice caused me to think about an aspect of tax return preparation I had not previously considered.

According to the press release, a tax return preparer pleaded guilty to inflating her clients’ tax refunds by preparing and filing “false tax returns that claimed fraudulent deductions and fictitious business profits and losses.” These filings caused a revenue loss of at least $400,000. The preparer also obtained more than $83,000 in Paycheck Protection Program loans by submitting false IRS forms with fake business income from “bogus businesses.” She also filed a false claim for unemployment insurance with the Maryland Department of Labor based in false federal income tax forms, and as a result, receiving more than $55,000.

What caught my eye was that the preparer did business as “The Tax Lady” and as “5 Starr Business Solutions.” Starr is the preparer’s surname. Should individual preparers be required to do business using their full name, or at least display their full name underneath any business name? Without such a requirement, a prospective client who is doing due diligence vetting needs to do research to learn the legal name of the preparer in order to see if that preparer operates other businesses under different names for which there are records of inappropriate or worse business practices. Most people do not know how to learn the legal name behind a business. Sometimes it’s easy. Too often it’s difficult and occasionally almost impossible.

But what of the corporate tax return preparation companies that employ hundreds or thousands of tax return preparers? Those companies are much easier to find. They are accountable for misdeeds by any of their employees. They are big enough that they cannot hide the way some individual preparers do and have done.

And what of individual tax return preparers who operate through a corporation using an invented corporate name? Again, it isn’t all that easy to identify the preparer who is behind that corporation. Should tax return preparers be prohibited from operating through an invented name?

When certain professionals, such as physicians and attorneys, operate a business that isn’t their actual name, whether or not in partnership, LLC, or corporate form, they are required to display their name or names in the appropriate place. Their names are on the firm’s or practice’s website, on emails, on letterheads, on court filings, on prescriptions, on medical reports, and on any other relevant document. If they can do that, so, too, can tax return preparers. Note that some states permit the use of fictitious names by physicians but from what I can figure out, the physicians need approval and it’s granted when a physician wants to omit a middle name, use their original name after changing their legal name due to marriage, or shortening their name if it is long and difficult to pronounce. That is a totally different issue than practicing medicine or law using an invented name that disguises the person’s identity.

People want to know who is giving them legal advice, representing them in negotiations or litigation, giving them a medical examination, or prescribing their medications. Do not people want to know who is preparing their tax return?

Not That More Proof is Needed, But Here’s Yet Another Example That Taxes Aren’t “Just Numbers”

Many people, including law students who approach enrollment in a basic federal income tax course, think and often fear that tax is nothing more than manipulating numbers. Of course, that’s not the case. Though numbers are used in tax, just as they are used in other areas of law and life, numbers are just a tiny part of what tax practitioners do. I wrote about this in Why Tax Practitioners Must Be Good With Words, and Not Just Numbers. I offered examples of tax issues in which words were in play mattered and numbers were on the sideline in posts such as Medical Expense Deductions for Embryo and Cord Blood Storage, Pets and the Section 119 Meals Exclusion, and Not That More Proof Is Needed, But Here’s Another Example That Taxes Aren’t “Just Numbers”.

Today one of my tax-related email alerts drew my attention to another example of why tax is much more than just numbers. In Philadelphia Energy Solutions Refining and Marketing, LLC v. U.S., 2022-1834 (Fed. Cir. 3 Jan. 2024), the U.S. Court of Appeals for the Federal Circuit affirmed the decision of the Claims Court that a mixture of butane and gasoline did not qualify for the alternative fuel mixture credit. That credit is designed to offset the excise tax on alternative fuels. There also is an excise tax on taxable fuels, which by definition are not alternative fuels. An example of a taxable fuel is gasoline. Examples of an alternative fuels include benzol, benzene, and liquefied petroleum gases. The petroleum industry treats butane generally as a liquefied petroleum gas.

About ten years after Congress enacted the credit, the taxpayer filed refund claims for each taxable quarter in the years 2014 through 2017, claiming that it paid excise taxes on a mixture of butane and gasoline, and that it was entitled to an alternative fuel mixture credit to offset those taxes. It argued that the mixture in question was an alternative fuel. The IRS did not respond to the taxpayer’s filing so the taxpayer sued for a refund in the Claims Court. The Claims Court denied the taxpayer’s claim, holding that butane is not an alternative fuel and that a mixture of butane with gasoline is not an alternative fuel.

The Court of Appeals pointed out that although this was the first time it had faced the question, two other Courts of Appeal had done so and had held as did the Claims Court. Somehow I did not notice those other two Court of Appeals decisions.

The Court of Appeals explained that under the statutory definition, an alternative fuel mixture is “a mixture of alternative fuel and taxable fuel (as defined in subparagraph (A), (B), or (C) of section 4083(a)(1)) which— (A) is sold by the taxpayer producing such mixture to any person for use as fuel, or (B) is used as a fuel by the taxpayer producing such mixture.” The Court explained that there was no dispute between the parties that gasoline is a taxable fuel. Under the statute, taxable fuel “means—(A) gasoline . . . .” The parties also did not dispute that under the same definition, butane is a taxable fuel, because the statute provides that the term gasoline includes “any gasoline blend stock.” The regulations under the statute state that gasoline blend stocks “means (A) Alkylate; (B) Butane; (C) Butene; . . . .” Accordingly, because both gasoline and butane are not alternative fuels, a mixture of the two is not an alternative fuel because an alternative fuel requires a mixture of a taxable fuel and an alternative fuel.

Nonetheless, the taxpayer argued that the credit should apply to the mixture because liquified petroleum gas is included in the definition of alternative fuel, and under industry understandings, butane is a liquified petroleum gas. The taxpayer argued that because the Congress did not provide a cross-reference in the credit statute to the definition of alternative fuel even though it provided a cross-reference to the definition of taxable fuel, it must have intended that the definition of alternative fuel for purposes of the credit was not the same as the definition of alternative fuel for purposes of the excise tax on alternative fuels. The taxpayer pointed out that the definition of alternative fuel in the credit statute states that alternative fuel “means—(A) liquefied petroleum gas, (B) P Series Fuels . . . .” Accordingly, argued the taxpayer, because the statute did not define liquified petroleum gas for purposes of the credit, the definition should reflect the industry understanding that it includes butane. The Court rejected the argument because even though looking at the credit statute in isolation it might appear that the taxpayer had a point, the analysis required looking at the “statutes as a whole,” which makes it clear that butane is not an alternative fuel. This conclusion was buttressed by the fact that a taxable fuel, such as butane, was by definition excluded from the definition of alternative fuel.

There are several lessons to be learned from this case. First, as pointed out at the beginning of this post, tax practice is more than dealing with numbers. Second, as I’ve pointed out many times, those who practice tax end up dealing with everything in life, not just meal exclusions, medical expense deductions, and similar transactions, but also the definition of fuels. Third, though law students think accounting majors “have the edge for grades” in the basic federal income tax course, they don’t, but perhaps when it comes to the alternative fuel credit chemistry majors would have an advantage but for the fact that no basic federal income tax course of which I’m aware covers these taxes (not only because it is a complex and specialized area but also because it involves an excise tax). Fourth, to no one’s surprise, once again we are blessed with an example of inadequate statutory drafting by the Congress, reinforced by the fact that after the years in issue in the case Congress amended the statute to provide that a mixture of gasoline and butane is not an alternative fuel.