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Return Preparer Shenanigans

Posted on May 20, 2016

An original version of this post appeared on the Forbes PT site site on May 18, 2016.

Recently the Senate Finance Committee wrestled with the issue of whether to provide the IRS with authority to regulate return preparers. Congress remained deadlocked on party lines and did nothing.  This post is not about what they did or did not do but about the problem of finding the right way to fix the current system.  I am not convinced that just giving the IRS the right to impose tests and continuing education requirements creates the correct system but we need to work toward some solution that eliminates the bad preparers in a way not currently possible.

It is old news that the IRS tried to regulate preparers based a post-Civil War era law that the DC Circuit, in the case of Loving v. United States, found did not provide a basis for such regulation.  Since losing the case in 2014, the IRS has sought to convince Congress to grant it authority to regulate preparers.  The IRS was slow to come to the point of wanted to regulate preparers but seems committed to the idea now.  Based on clinic clients for almost a decade, I would like regulation that removes bad preparers from the system and particularly from preparing returns with refundable credits.  I am not so concerned about making the preparers take ongoing training courses because I think they will learn what to do and keep up changes if they want to be effective.  I am interested in the system for rooting out bad preparers and keeping them away from my clients.  The recent case of United States v. Edmond demonstrates how much effort it takes to keep bad preparers from plying their trade.

Under the current system, the IRS cannot regulate preparers before they start preparing returns. We know from the stories and based on general knowledge that except for a handful of states that regulate preparers, essentially anyone can become a return preparer with no test, no minimum education requirement, no criminal record check or any other barrier.  The IRS can, however, work with the Department of Justice Tax Division to take bad preparers to court one at a time (sometimes more than one are lumped together from the same practice) and obtain injunctions ordering them to stop preparing or to only prepare returns in a monitored fashion.  For at least 15 years the Tax Division has taken these cases very seriously and has brought numerous suits to stop bad preparers.  These hand crafted pieces of litigation take great effort by the Tax Division attorneys and the supporting IRS employees.  The Edmond case shows even the limitations of this trench warfare against bad preparers.

Stephanie Edmond of Memphis Tennessee ran a tax preparation business under the name The Tax Factory Enterprise. The IRS filed a complaint against her on December 3, 2013, and an “Order and Judgment of Permanent Injunction” was entered on April 17, 2015 – two filing seasons later.  I do not know why it took so long in this case but getting an injunction preventing someone from working will rarely come easy.  Then the IRS filed an order to show cause why Ms. Edmond should not be held in contempt in July, 2015 and December 2015.  The Court held a hearing on January 15, 2016, and issued an injunction against Ms. Edmond and the employees of her firm, then held another hearing and then affirmed the injunction.  This is a lot of work to shut down one bad preparer and her operation.  If the IRS receives authority to regulate preparers it needs authority to shut down bad preparers without this much effort and yet any alleged bad preparer needs the opportunity to be heard

When the district court entered the first injunction in this case two filing seasons after the case was brought, it did not enjoin Ms. Edmond from preparing returns but rather from preparing bad returns. She was required to hire a monitor within 30 days of that order and send at least 3% (at least may not be the right adjective here though that is the one chosen by the Court) of the returns prepared to the monitor for the monitor to check for accuracy and to file a report with the IRS.  She chose a local CPA as the monitor three months later, sent him a total of two returns from the period from April 2015 to December 2015 and failed to pay the monitor.  Meanwhile Ms. Edmond contacted a college friend to use the electronic filing number of his tax preparation firm and shifted operations to a new entity , the Tax Firm.  Essentially all of the same employees continued to work with Ms. Edmond and none of the returns prepared by The Firm were sent to the monitor.

At the hearing earlier this year the court found that Ms. Edmond’s actions described here coupled with “filing returns with fictitious Schedule C losses and otherwise claiming improper deductions” justified the permanent injunction. She and her colleagues at the Tax Firm or the Tax Factory are now enjoined from preparing returns and ordered to disgorge all fees from the 2016 filing season, the third filing season after the Tax Division brought the injunctive action.  Maybe I am a skeptic about these things but I will be surprised if the return preparation fees are sitting around in a bank account just waiting to be disgorged.

In this season of lawn care and nourishment, I find an analogy to what has happened here to trying to pull up individual dandelions instead of putting down a fertilizer that kills them and prohibits growth. Aside from having to pull them up one by one, you invariably do not get the roots so it pops back up before long.  I do not find fault with the IRS and the Tax Division from trying to root out the bad preparers one at a time.  It is the system they must use.  I find fault with the system.  We need to find a way to cut off the bad preparers but also to make it possible for good preparers to thrive.  This requires care and feeding and protection of the good preparers because they are not offering to taxpayers the wondrous results available at tax preparation sites run by the bad ones.  Good preparers do not necessarily need special designations and training but they need support.  If Congress gets to the place where it gives the authority to regulate, it needs to look at cases like this one so it can build a system that will work   This case shows the dysfunction of the current system but does not necessarily make the point that the system the IRS was preparing to impose would create the needed functionality.

My clients need protection and the terrific volunteers at VITA and AARP sites together with the many honest and dedicated tax professionals are not always there to steer them in the right direction when the time comes to file their returns.

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