Sunday, December 4, 2011

Making A List And Checking It Twice

U.S. v. BRIER, Cite as 106 AFTR 2d 2010-5459, 11/05/2010
U.S. v. VAZQUEZ, Cite as 106 AFTR 2d 2010-6970, 11/08/2010

This was originally published on PAOO on November 21st, 2010.

There has been quite quite a bit in the tax blogosphere about the new registration requirements for tax preparers. I have not been weighing in on it. There is some grumbling about CPA's being exempt from the explicit continuing professional education requirements. Frankly, I think that enrolled agents don't get enough respect, so I really don't mind a few brick brats thrown our way. In our defense though I will say we have a 40 hour CPE requirement. My firm provides this to all staff whether they are licensed or not. Much to my chagrin, we are now specialized so tax people will have most of their CPE in tax (I agree with Robert Heinlein that specialization is for insects. On the other hand there wasn't as much to GAAP back in the good old days). I just paid my $64.50 and am awaiting my PTIN. I'm wild and crazy and reckless and figure that anybody who gets a hold of my client's returns is going to want to steal their identity rather than mine, so I never bothered with it before.

I'm talking about this now, because a fairly juicy case has come out. I'm sure some people will argue that it proves we need the new regulations and others will argue that it proves the IRS already has the tools it need. As with many of the things I choose to blog on, I mainly think it is a good story. I doubt there is much crossover between my blog readership and Mr. Brier's customers, but one never knows. They need to be on the alert and perhaps this post will serve as a heads up to some of them.

I don't think I'll ever get over my working stiff attitudes. It doesn't make much sense to over withhold and get yourself a big refund check. It really didn't make any sense at all back in the good old days when money earned interest (I'm sorry anything less than 4% does not deserve to be called interest). Nonetheless, I miss those days. Being a partner in a partnership, I have to make estimated payments and go on extension. I always wrap my first quarter estimate into my extension payment meaning my refund is always applied. The joy of awaiting that envelope in the mail is a thing of the past. Totally irrational financial planning, but it still had a certain satisfaction. One of my disciplines back then was to always put any check other than regular pay in savings. Which is why the attraction of refund anticipation loans totally escapes me.

Nonetheless they became a big business. Refund anticipation loans are a natural outgrowth of certain types of tax preparation businesses, once you get past the underlying financial irrationality. Somebody has, in effect, made a series of small non-interest bearing loans to the federal government. They then pay a usurious rate to get paid back a couple of weeks sooner. I think there is a sub-branch of microeconomics that studies phenomena like this. I'm sure it's not called stupinomics, but that would be a good name for it. Getting seriously into the refund anticipation loan business compounds a problem faced by preparers who are not working in the high end of the business. This problem can be illustrated by a little story.

One Easter I had just gotten off the phone with a client who needed to put together six figures to pay his extension payment. Next I went over my mother's return with her. She was very upset that she owed $150. Explaining to her that she would owe a lot more if she had been 50 and had a salary equal to the state pension and social security that she had received was fruitless. Probably when she was 50 she had gotten a refund. A balance due was a new experience for her. I solved my problem with this "client" quite elegantly. The following year I asked her if it would be OK if I put her return on extension. In her capacity as my mother, she had always had an exaggerated sense of how difficult my life was so she was fine with that. Along with the extension, which I being a CPA,could sign myself, I sent my own check for $300. So when I prepared the extended return there was a refund. I thought the strategy was pretty clever, but don't think you could make a business plan around it. Which brings us to Mr. Brier and Refunds Now Inc.

Mr. Brier started Refunds Now in 2001 preparing approximately 250 returns that year. In 2009 the count was in the vicinity of 8,000. He was hands on in preparing returns early in the business, but has shifted to marketing for the last several years. He seems to have found his niche, given the impressive growth. The court describes some difficulty he had finding himself as a financial professional:

Brier received his undergraduate degree from the University of Rochester and a master's degree in business administration from the University of Rhode Island. Brier began practicing as an accountant in 1987. Brier received his certification as a certified public accountant (“C.P.A.”) in 1991. That certification, however, was suspended in 1999, after Brier entered into a consent order with the State of Rhode Island Board of Accountancy (“Board”). In that consent order, Brier accepted the Board's findings of “unlawful practice of accounting, unlawful use and disclosure of confidential information, and dishonesty, fraud or negligence in the practice of accounting.” His certification has not been reinstated. Brier has also held the designation as a certified financial planner, however that credential was revoked. In June 2003, the IRS notified Brier that he was no longer eligible to practice before the IRS. In 2005, the Rhode Island Department of Business Regulation issued an order barring Brier from associating with a licensed broker/dealer or an investment advisor in the state of Rhode Island. That order was based on Brier's falsification of his application to apply for a license as a broker/dealer. In his application, Brier failed to disclose that his C.P.A. license had been suspended.

You screw up with one board and they're all out to get you. So it goes.

In 2007 the IRS began examining returns prepared by Refunds Now. At trial Agent Christine Stone testified that they found 309 returns where additional tax was due and 2 where the tax was overstated. This was from a sample of 350. You have to have a little perspective here. I imagine that if most returns I have signed were intensively audited, there would be some sort of adjustment if nothing else because of some sort of substantiation problem. We used to have a joke that if you got a no change on an audit that it meant you hadn't been aggressive enough, but the environment has changed. Returns that I sign tend to have a lot of moving parts to them and enough complexity that there will always be something debatable. Knock on wood,I've had mostly no changes the last few years. The "errors" on the Refund Now returns were of a different nature:

(1) the use of incorrect filing statuses to reduce tax liabilities and maximize the earned income tax credit;
(2) the failure to apply the tests to determine whether an individual qualified as a taxpayer's dependent;
(3) the fabrication or manipulation of Schedule C gross receipts for the purpose of maximizing the earned income tax credit or minimizing net taxable income subject to self-employment taxes;
(4) the fabrication or inflation of various Schedule A deductions, such as charitable contributions and/or employee business expenses; and
(5) the fabrication or manipulation of income and expenses on Schedule E.

On examining returns the IRS encountered people who had no idea how items such as charitable contributions ended up on their returns. They also found that returns prepared by Refunds Now were filed under the electronic ID's of other firms, because Refunds Now number had been suspended. There was a pattern of rapidly changing ID numbers. Mr. Brier indicated that this was to keep his competition from getting statistics on his various offices. The IRS and the court seem to have inferred other motives.

The bottom line of this decision is a preliminary injunction against Mr. Brier and several of his minions from preparing returns. More ominous for their clients is the following:

Defendants Michael Brier, Jeffrey Sroufe, Esther Santiago, and Refunds Now, Inc., individually, and doing business under the names RNTS, Inc., FTIRS, Inc., POTIRS, Inc., and IHIRS, Inc., or under any other name or using any other entity, are ordered to provide counsel for the United States, on or before December 15, 2010, a list of names, addresses, e-mail addresses, telephone numbers, and social security numbers of all clients for whom they prepared or helped prepare any tax-related documents, including claims for refunds or tax returns, since January 1, 2004.

They are not done with Mr. Brier. It will be interesting to see how this develops. There is a lot less detail to the case of Marie Vazquez who's operation may have been more modest than Mr. Brier's. She is agreeing that it would be better if she pursued a trade other than tax preparer and will be notifying her former clients of that conclusion. She will also be providing the IRS with a list.

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