Page 2 - Tax Controversy Corner: The Internal Revenue Code Injunction Statutes

Tax CoNTroversY CorNer

Code Sec. 6694 penalizes preparers who cause an under- other orders and processes, and to render such judgments
statement on their clients’ tax returns due to recom- and decrees as may be necessary or appropriate for the
mending an unreasonable position, and Code Sec. 6695 enforcement of the internal revenue laws.” Courts have
penalizes a wide range of other misconduct and viola- widely accepted the government’s position that Code Sec.
tions of the Code, such as a preparer’s failure to furnish 7402(a) is an independent authorization for a court to
required preparer identification numbers on the return, enjoin any conduct that interferes with the enforcement
provide copies of returns to clients, and to meet certain of the tax laws. 8
due diligence standards before claiming exemptions and An injunction action may be brought in the U.S. district
earned income tax credits. court where the defendant resides, has his or her principal
A typical example of a Code Sec. 7408 injunction can place of business, or engaged in conduct subject to the
be seen in the recent injunction action against a Florida penalty. The government must prove by a preponderance
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tax preparation business and its principal, Chipungu. As of the evidence that the defendant has engaged in specified
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described by the court: conduct and that injunctive relief is appropriate to prevent
recurrence of such conduct. The court may enjoin the
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One of the ways Defendants obtained tax refunds was defendant from engaging in conduct or activities subject
to “mak[e] false claims for purported unreimbursed to the penalties, but the injunction should not exceed the
employee business expenses.” Defendants would claim “scope of what is necessary to forestall [defendant] from
inflated amounts for mileage for commuting to and further misrepresentations.” 11
from work, clothes bought to wear to work, and cell The government bears the burden of proving each ele-
phones, none of which are legitimate deductions. A ment of a violation by a preponderance of the evidence.
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second method Defendant employed to obtain inflated In addition to establishing that the preparer has engaged in
tax refunds was to artificially increase or decrease such conduct, the government must show that injunctive
the customers’ incomes so that the customers would relief is appropriate to prevent the recurrence of miscon-
receive close to the maximum EITC. Defendants duct by the preparer. Some courts have held that the
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altered the income by “reporting non-existent busi- determination of whether injunctive relief is appropriate
nesses on bogus Forms Schedule C.” Depending on requires consideration of the usual equitable factors such
whether the goal was to raise or lower the customers’ as irreparable injury and the absence of an adequate rem-
incomes, Defendants would either “report substantial edy at law. Other courts have held that because Code
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business income, but little or no expenses [or] … Secs. 7407 and 7408 themselves authorize an injunction,
report substantial expenses, but little or no income.” 2 the court need not look to traditional equitable factors,
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although they have discretion to consider them. 16
Similar cases can be seen on an almost weekly basis, as The court may enter a permanent injunction and shut
the Department of Justice aggressively seeks injunctions down a tax practice altogether, if it finds that (i) the defen-
against unscrupulous return preparers. 3 dant has repeatedly or continually engaged in any of the
Second, Code Sec. 7408 authorizes the United States conduct described in the complaint; and (ii) an injunction
to bring actions to enjoin specified conduct related to merely prohibiting such conduct would not prevent the
tax shelters and reportable transactions. Under Code defendant’s interference with the proper administration of
Sec. 7408, the court can enjoin any person “from further the Internal Revenue laws. The court also may enjoin per-
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engaging in specified conduct.” “Specified conduct” is sons or businesses from engaging in specific conduct, but
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defined as any action or failure to act which is (i) subject not require them to completely shut down their practice. 18
to penalty under Code Secs. 6700 (penalty for promoting In addition, through the authority of Code Sec. 7402,
abusive tax shelters), 6701 (penalty for aiding and abetting courts can order disgorgement of fees and payments
an understatement of tax), 6707 (penalty for failure to received for improper conduct. The government only
furnish information regarding reportable transactions), or needs to produce a reasonable approximation of the defen-
6708 (penalty for advisor’s failure to comply with the list dant’s “ill-gotten gain,” in order to obtain disgorgement. 19
maintenance requirements for reportable transactions), or The courts are authorized to issue other injunctive relief
(ii) in violation of Circular 230. Code Sec. 7408 injunc- as may be necessary or appropriate for the enforcement of
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tions have been issued against tax shelter promoters and the internal revenue laws, such as requiring preparers or
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leaders of tax protestor groups, among others. promoters to turn over their customer lists. As noted by
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Finally, Code Sec. 7402 grants jurisdiction to district one court, ordering a promoter to produce the customer
courts to issue “writs and orders of injunction … and such list may be necessary for enforcement because:
58 JoUrNAl of pAsstHroUgH ENtItIEs MAY–JUNE 2019