Page 1 - Tax Controversy Corner: The Internal Revenue Code Injunction Statutes

Tax Controversy Corner

MEgAN l. BrACKNEY is a Partner at
Kostelanetz & Fink, LLP in New York,
New York. The Internal Revenue Code Injunction
Statutes

By Megan L. Brackney*

nder the injunction statutes in the Internal Revenue Code, the U.S.
government has broad discretion to seek—and the federal courts to
U order—the injunction of the preparation of false or fraudulent returns, as
well as the aiding and abetting of false tax returns, and the promotion of abusive
tax shelters. This power includes enjoining persons and businesses from engaging
in specific conduct, and other equitable remedies, such as requiring preparers and
promoters to turn over their clients’ identities, notify their clients of the injunc-
tion, and disgorgement of fees. The injunction statutes provide a powerful civil
enforcement tool for the Department of Justice and the IRS. In many ways, the
injunction action is a much worse consequence for a tax promoter or preparer
than civil penalties because the action is part of the public record (unlike the
results of a preparer or promoter audit, which would be subject to taxpayer con-
fidentiality under Code Sec. 6103), and the court may shut down the preparer’s
practice altogether. This column discusses the injunction statutes and two recent
cases filed against alleged tax shelter promoters.

the Injunction statutes

First, Code Sec. 7404 empowers the United States to institute a civil action in
the federal district courts to enjoin tax return preparers from engaging in certain
kinds of misconduct or to enjoin a preparer from preparing returns at all. The
specific misconduct that may be the basis for injunctive relief is delineated in
Code Sec. 7407(b):

(a) engaging in conduct subject to penalty under Sections 6694 and 6695 or
subject to any criminal penalty;

(b) misrepresenting eligibility to practice before the Service or other qualifica-
tions as a tax return preparer;

(c) guaranteeing payment of a refund, or allocation of any tax credit; or

(d) engaging in other fraudulent or deceptive conduct which substantially
interferes with the proper administration of the Internal Revenue laws.

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