Tax Preparer Enjoined from Tax Preparation After Engaging in Fraud

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Tax Preparer Enjoined from Tax Preparation After Engaging in Fraud

A recent district court decision granted the government’s request for a broad injunction against a tax preparer and his business after finding that he engaged in fraudulent tax preparation activities.  On April 3, 2020, the United States District Court for the Southern District of New York issued an order in the case of United States v. William Doonan, 19 Civ. 9578 (S.D.N.Y. April 3, 2020), enjoining William Doonan and William Doonan and Associates, Inc., d/b/a/ William Doonan, Esq. (“WDA”) from directly or indirectly:

 

  1. Preparing or filing, or assisting in preparing or filing, any federal tax return, amended return, or other federal tax document or form for any person other than themselves;
  2. Representing any person before IRS, or advising, assisting, counseling, or instructing anyone about preparing a federal tax return;
  3. Employing any person who prepares or files, or assists in preparing or filing, any federal tax return, amended return, or other federal tax document or form for any person than themselves
  4. Maintaining, assisting, holding, using, or obtaining a Preparer Tax Identification Number or an Electronic Filing Identification Number;
  5. Having an ownership interest in an entity that is in the business of (i) preparing federal tax returns or other federal tax documents or forms for other persons or representing any person before IRS, or (ii) advising, assisting, counseling, or instructing anyone about preparing a federal tax return;
  6. Engaging in any conduct that violates 26 U.S.C. §§ 6694 or 6701; and
  7. Engaging in any conduct that substantially interferes with the proper administration and enforcement of the internal revenue laws.

The case arose after Mr. Doonan and WDA were determined to have carried on a long-standing practice of underreporting income and reporting false and unsubstantiated deductions to garner larger tax refunds for clients.  This is a common fact pattern with Schedule C fraud schemes, and bears some of the Badges of Fraud that we discussed here. In connection with these actions, Mr. Doonan pled guilty to two criminal counts and admitted that he “knowingly prepared and caused the preparation of filing federal false tax returns.”

Subsequently, the IRS initiated a civil investigation of the tax years in question and uncovered a pattern in which Mr. Doonan’s customers claimed fictitious expenses.  (This demonstrates the serious civil and, sometimes, criminal risks that taxpayers may face when they utilize such preparers.)  As a result, the IRS filed a petition asking the court to enjoin Mr. Doonan from preparing or filing tax returns for anyone else, asking for injunctive relief under 26 U.S.C. §§ 7407, 7408, and 7402(a). The district court analyzed whether the requirements for each statute were fulfilled.

Section 7407

26 U.S.C. § 7407 provides for injunctive relief when a “[tax] preparer has ‘engaged in any conduct subject to penalty under [26 U.S.C. §§ 6694 or 6695], or subject to any criminal penalty provided by [the Internal Revenue Code],’ and that injunctive relief is appropriate to prevent the recurrence of that conduct.” Section 6694 subjects tax preparers who willfully, recklessly, or whose intentional disregard cause tax liability to be understated.”

The court pointed to the defendants’ continued and repeated criminal conduct as well as Mr. Doonan’s admissions at his plea allocution. In addition, the court noted that Mr. Doonan’s role as WDA’s Chief Executive Officer and his actions in furtherance of WDA demonstrated criminal culpability on the part of WDA.

After determining an injunction was authorized by the statute, the court analyzed the Pugh factors to determine whether to grant injunctive relief. The Pugh factors are: “(1) the degree of scienter involved; (2) the isolated or recurring nature of the fraudulent activity; (3) the defendant’s appreciation of his wrongdoing; and (4) the defendant’s opportunities to commit future violations.” (citing United States v. Pugh, 727 F. Supp. 2d 271, 288 (E.D.N.Y. 2010)). The court determined that all of the Pugh factors were met, particularly in light of Mr. Doonan’s insistence at his preliminary injunction hearing that there were “two sides” to the story, indicating that he may not have fully appreciated the nature of his actions.

As a result, the court granted the preliminary injunction restraining Mr. Doonan and WDA from preparing federal tax returns.

Section 7408

26 U.S.C. § 7408 gives the court authority to grant an injunction for any conduct that is a penalty under § 6701 and a finding that injunctive relief is appropriate to prevent the recurrence of such conduct. § 6701 imposes penalties on anyone who knowingly aids or assists with the preparation or presentation of a false tax return.

Because the defendants had previously stated in their criminal plea that they knowingly prepared and submitted false IRS tax returns containing fictitious expenses to reduce the tax liability of customers, the court found injunctive relief warranted. The court, again, undertook an analysis of the Pugh factors, and, finding that they were satisfied, granted an injunction under § 7408.

Section 7402(a)

26 U.S.C. § 7402(a) “is a ‘catch-all provision, which permits district courts to issue orders of injunction and to render such judgments and decrees as may be necessary or appropriate to the enforcement of the internal revenue laws.’” (citing United States v. Aveez-Taiwo, No. 25 civ. 4225, 2017 WL 4443471, at •4 (E.D.N.Y. Sept. 30, 2017)). The court cited case law that emphasized the broadness of the statute and a history of enjoining tax enforcement interference even in the event of no criminal activity.

The court further relied on its previous findings of “Defendants’ established non-compliance with the tax preparation laws, non-recognition of wrongdoing, and Defendants’ current position as tax preparers, a preliminary injunction under § 7402(a).” (citations omitted).

Lesson Learned

Having found the requirements for all three types of injunctive relief to be satisfied, the court granted the government’s requests, enjoining the defendants from preparing or filing tax returns for any other person.

The case reinforces just how broad the government’s tax enforcement authority can be. It often seeks both criminal and civil remedies for tax violations.  Here, the filing of false tax returns resulted in criminal liability and civil liability as well, including an injunction barring the defendant from conducting any tax preparation services in the future.