Preparer Registration Wastes Time and Money - Guest Post by Joe Kristan

Originally Published on forbes.com on August 24th,2011

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Joe Kristan writes the Tax Update Blog for Roth and Company PC.  Joe is, like me a CPA.  Also like me, he is a fan of the Wandering Tax Pro.  While I just stand in awe and wonder at Robert Flach, who spends tax season preparing returns by hand 168 hours a week and the rest of the year blogging and going to musicals, Joe, who likens Bob’s tax season to a “death march”, has the temerity to disagree with The Pro on an issue near to his heart. 

It’s nothing but lawless anarchy in the unregulated tax preparation industry.  Just look at what’s happening out there:

- A practitioner spends years  helping taxpayers improperly deduct “lifestyle expenses” — their clothes, their make up — even their pets!

- A practitioner costs the Treasury hundreds of millions of dollars setting up corporations and arranging sham transactions to hide income in a tax-exempt shell.

- Another practitioner helps taxpayers unlawfully avoid taxes using sham trusts and transparently phony legal arguments.

It’s no wonder the IRS has started its huge new program to register all unregulated tax practitioners, make them pass a competency test, and subject them to continuing education each year.

Oh, wait… these cases didn’t involve unregulated preparers.  They involved anEnrolled Agent, an Attorney, and a CPA — all tax professionals that already have to pass much stiffer entrance tests and take more continuing education that anything proposed under the new unregulated preparer rules.  Anybody expecting the new rules to run unscrupulous or inept preparers out of the business can only look at the already-regulated tax sector to learn otherwise.

Unlike my own professional organization, the American Association of Certified Public Accountants – and apparently unlike right-thinking people everywhere — I think the new preparer rules are a waste of time and money.  I also think that they will rebound against consumers and most preparers, and will benefit only the largest and most influential players in the industry.

Robert D. Flach, an unenrolled preparer from New Jersey, pointed out in this space recently:

Cheating taxpayers will still find accommodating unethical and downright crooked preparers (and vice versa).  Most of these preparers already do not sign the returns they prepare – so they will remain “underground”.  And those with no real knowledge of tax law who charge for returns produced by merely entering tax information into a software program will continue to produce “self-prepared” returns for their clientele.

And Mr. Flach was writing in support of the new rules.  He thinks they are wise in spite of their futility.  Why?

As one of my fellow tax bloggers pointed out –“Electricians are licensed. So are plumbers. Even my hairdresser has to get an official piece of paper from the State of Texas before she can cut hair for a living.”  So why not tax preparers?

The better question is, why on earth does a hairdresser need a license? It’s not as if people were dying in droves from bad haircuts over the course of human existence until the State of Texas stepped in.  While promoted as protecting consumers, licensing is best understood as a way to restrict entry to a field to protect those already in it from competition.  It’s no accident that the author of the IRS preparer regulations is the former head of tax prep behemoth H&R Block.

Kauffman Foundation economist Tim Kane points out:

If there are any serious arguments on behalf of licensing, I’m not aware. Instead, you might hear superficial arguments about how licensing protects consumer safety, but is there any empirical data to support that? Does the low rate of licensing in Indiana make it a dangerous state? Hardly. Instead, most licensing represents regulatory capture, and often leads to less – not more – transparency among the licensed professionals, not to mention pushing the unlicensed actors underground or forcing poorer citizens to do things (electricity, plumbing) themselves.

While Mr. Kane isn’t writing about tax preparation specifically, he indicates the likely consequences of the new preparer regulations: higher prices, furtive illegal preparation, and poorer taxpayers either choosing to do their own returns without help or dropping out of the system altogether.  And there is precious little data to support the assumption that this will help consumers.

New Jersey’s Mr. Flach makes three arguments in support of the IRS regulation scheme:

(1) The IRS has a legitimate need for a central registry of all those who prepare tax returns for a fee.  

He doesn’t explain why the IRS needs such a thing, or what it is supposed to do with it.  But if IRS does need such a registry, it could be arranged with a much less intrusive scheme.

(2) The new “Registered Tax Return Preparer” designation awarded to those who pass the test and take mandatory CPE credits will provide the public with an indication of who, besides an Enrolled Agent (who already has taken a more extensive competency test and has similar CPE requirements), is at least minimally competent and remains current in 1040 preparation.

We’ve already seen that compentency testing and CPE are weak insurance against incompetent and venal preparers.

Mr. Flach’s third reason is revealing:

(3) The RTRP designation would put the competent, experienced, and ethical previously “unenrolled” preparer, again like myself, on an equal footing with the CPA in the eyes of the general public. It would dispel the unfounded “urban tax myth” that CPAs are 1040 experts.

Mr. Flach wants an official designation as a prestige marker.  While he is not accepting new clients, other unenrolled preparers will have a marketing tool.  I’m registered with the IRS!  Your refund is safe with me… you don’t need that high-priced CPA!

Far better to leave it to the markets —  to individuals who know their own needs and resources better than anyone else — to sort it out.  If some college student struggles through his own 1040, reading the instructions and working through the forms, why should it be a crime if his roommates or his girlfriend then pay him to do the same for them?  Why, for that matter, should a practitioner like Mr. Flach, who has been doing tax returns for decades, have to take a test that only shows that he has as much skill as the greenest graduate of the H&R Block tax course?

Different people have different tax needs.  Many people only need somebody who has read the instructions to help them claim their refunds.  Others need much more sophisticated practitioners to help them through complicated business and tax issues.   Imposing a licensing requirement will only make it more expensive for taxpayers to find the practitioner that suits their needs, while doing nothing to improve the product.

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I support preparer registration based on my reading of case law.  The IRS can take administrative action against people with tickets like EA and CPA but in order to encourage the worst unenrolled preparers to take up another trade they have had to sue for an injunction in federal district court.   I discussed some of those cases in my post Tax Business Not For Everybody.

I’ve noticed that Joe and I often write on the same cases.  Joe also has a great blog with the mysterious title 42-78127,  It is dedicated to the crew of a B-24 Liberator that went down off Corsica in 1944.  Sgt John James Kristan, Joe’s dad, survived the crash and lived another 55 years. I’d like to do a similar thing for my dad.  Many historians will likely tell you that the failure of the Axis power to bomb Fairview, NJ was due to their lack of long range bombers.  Personally, I believe that intelligence sources had made them aware that the excellent organization of Fairview’s air raid wardens would have made their efforts for naught.

From the Boston Tax Institute

Originally published on Passive Activities and Other Oxymorons on June 14th, 2011.
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Boston Tax Alert 2011-30,2011-31, 2011-32


Lu Gauthier of The Boston Tax Institute has given me permission to republish his newsletter. The BTI newsletter is a regular feature of this blog now going up every Tuesday. Be sure to check out the BTI catalog for great CPE value.


On or about 06/01/11, final regulations were published governing practice before the Internal Revenue Service. The regulations generally are effective 60 days after publication in the Federal Register. Among other things, the regulations define practice to include preparing and filing documents such as tax returns and define disreputable conduct to include willfully failing to file tax returns on eletronic media, willfully preparing or signing a return without a valid PTIN, and willfully representing a taxpayer without being authorized to do so. The regulations also generally conform the standards under Circular 230 for preparing returns with the standards under section 6694. These topics will be discussed in detail in our 4 hour seminars entitled Preparer Penalties/Circular 230 which provide 4 CREDIT HOURS OF INSTRUCTION ON ETHICS. -------------------------------------------------------------------------------------------------------------

Our thanks to Patricia Ann Metzer, Attorney for the following email!

The Tax Code's deferred compensation provisions raise complex interpretative issues. The IRS pronouncements highlight the strong relationship between two of these provisions - 457 and 409A. Last year, the IRS came out with guidance (Rev. Rul. 2010-27) on unforeseeable emergency - one circumstance under which payments can be made to participants under eligible 457(b) plans before their severance from employment. Under the given conditions, an unforeseeable emergency is stated to include significant water damage to your home not covered by insurance, and funeral expenses for an adult child. The IRS adds that the same standards will apply to determine whether a distribution due to an unforeseeable emergency is permitted under a 409A nonqualified deferred compensation plan.

The approach is consistent with that taken by the IRS in 2007, when it said that concepts similar to those developed under 409A would apply to determine whether an arrangement providing severance benefits is not subject to 457, and when a benefit (not provided under an eligible 457 plan) is currently taxable because it is not subject to a substantial risk of forfeiture.

The upcoming seminar on 409A/Non-Qualified Deferred Compensation will deal with both 409A and the other Tax Code provisions you need to know about when it comes to deferred compensation. Items to be addressed include how mistakes in 409A drafting can be corrected on a timely basis without, in some cases, a toll charge. IRS correction procedures were most recently announced in Notice 2010-80.

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Our thanks to Maurice Gilbert, CPA, MST for the following email!

The New Hampshire Legislature on June 1st passed new legislation that radically changes the New Hampshire Reasonable Compensation deduction under the Business Profits tax and is sending the law to Governor Lynch for his signature. The new statute will apply to 2011 taxable periods creating 3 different standards: pre-2010 taxable periods, 2010 taxable periods and post-2010 taxable periods. The new statutory language and the various standards will be discussed in detail at our seminar entitled NH Reasonable Compensation and NH Combined Reporting on June 13 at the Chateau Restaurant in Andover. Please remember to add $17 to your registration fee for the required lunch.

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Tax Business Not For Everybody

Originally published on Passive Activities and Other Oxymorons on December 6, 2010.

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U.S. v. FOSTER, Cite as 106 AFTR 2d 2010-7134, 11/23/2010

I just wrote on a couple of tax preparers who have been strongly encouraged to pursue other endeavors.  Their clients will be glad to know that their returns may be subjected to a little extra scrutiny after the preparers turn over complete lists.  It was not long after that post that I found Dorothy Foster of Alabama, who seems to have specialized in fine tuning Schedule C to achieve the optimal earned income credit for her clients (If you have the right number of children and your income falls in the right range you actually get a larger refund from having more taxable income.  I think it's supposed to encourage poor people to work harder, but I have a policy of not reflecting on tax policy.  Keeping track of what the rules are is challenging enough without trying to reflect on why someone thought they were a good idea). It seems like since they get so upset when you make up deductions or omit income, that they shouldn't mind so much if you make up some income.  It doesn't work that way.  You're really supposed to try to be accurate, although it is likely that people not eligible for the earned income credit might get away with making up income.

Reading about Ms. Foster so soon after writing about Mr. Brier made me wonder how common this type of thing is.  The cases were brought under Code Section 7407 which provides:

§ 7407 Action to enjoin tax return preparers.
(a) Authority to seek injunction. 

A civil action in the name of the United States to enjoin any person who is a tax return preparer from further engaging in any conduct described in subsection (b) or from further acting as a tax return preparer may be commenced at the request of the Secretary. ..............

(A) engaged in any conduct subject to penalty under section 6694 or 6695 , or subject to any criminal penalty provided by this title,
(B) misrepresented his eligibility to practice before the Internal Revenue Service, or otherwise misrepresented his experience or education as a tax return preparer,
(C) guaranteed the payment of any tax refund or the allowance of any tax credit, or
(D) engaged in any other fraudulent or deceptive conduct which substantially interferes with the proper administration of the Internal Revenue laws,

The sections referred to concern preparing returns that understate tax due to unreasonable positions or due to willful or reckless conduct (6694) and failure to do certain basic things like providing clients copies of their returns, signing as preparer and maintaining a list (6695).  I fondly remember the latter list of obligations because they were enacted barely before the start of my career (Tax Reform Act of 1976) and formed the basis of a question on the 1980 CPA exam.

U.S. v. SOMMERSTEDT, ET AL., Cite as 106 AFTR 2d 2010-6832, 10/19/2010

Mr. Sommerstedt objected to a previous order to mail a copy of an injunction against him to his former clients.  He thought that making the list constituted a 5th amendment violation.  The Court did not agree, found him in contempt and sanctioned him $1,000 per day until he came into compliance.

U.S. v. ELMER, Cite as 106 AFTR 2d 2010-6538, 08/27/2010

I just checked the website for Associated Tax Planners and I have to say if life hands you a lemon, make lemonade.  According to the website when Chris Elmer started his career as a tax preparer 30 years ago he hoped that one day he would be able to pass the business to his sons and now that dream has become a reality (with a little nudge from the court):

IT IS HEREBY ORDERED that Defendant Chris Elmer shall, on or before December 31, 2010, formally terminate his employment and/or ownership interest in ATP. Chris Elmer shall provide the United States with (a) information relating to the circumstances and terms of the sale of his business interest in ATP, which shall be effected on or before December 31, 2010,


 Mr. Elmer himself has been enjoined from preparing returns.  His sons Ryan and Brad and son-in-law Michael Boehrer can continue the business provided they behave themselves and pass the enrolled agent exam in the next three years.

There was also a specific list of return preparation guidelines for them to follow:

((1)) prepare and/or file income tax returns for customers identifying the existence of a two-person partnership and/or the business expenses and losses of that entity, only where the partnership and/or its business expenses and losses can be substantiated in accordance with the terms of items (2)–(9) below;
((2)) report an Employer Identification Number (“EIN”) for a partnership on an individual or income tax return only after having first applied for and obtained such an EIN in accordance with the procedures for so doing established by the IRS;

((3)) report the correct Principal Business Activity code on all business tax returns prepared; 

((4)) in cases where an ATP customer is a partner in a partnership or shareholder of an S-Corporation, and where the customer has engaged ATP to file his individual income tax return for a particular year, file any corresponding partnership or S-Corporation income tax return for that year prior to, or contemporaneous with, the individual tax return;

((5)) claim business expenses, deductions, or losses only where the customer is carrying on a trade or business with a profit motive. The ATP Defendants shall also secure from customers (and retain for four years) copies of all schedules of business income and expenses used in preparing any business schedules or business income tax returns. In cases where there is a history of little or no gross income for the customer's trade or business, the ATP Defendants shall secure from the customer (and retain for four years) substantiation documenting the business's purpose, activity, expenses, deductions, and/or losses; 

((6)) report losses in the tax returns from a customer's real estate rental activities only as a passive activity subject to the Passive Activity Limitations in accordance with I.R.C. § 469. To the extent the ATP Defendants report that the customer in question is a “real estate professional” for the purpose of deducting real estate rental losses, the ATP Defendants will retain substantiation secured from the customer sufficient to establish that the customer meets the definition of “real estate professional” under I.R.C. § 469(c)(7)(B); 

((7)) claim employee business expenses in the tax returns of their customers only as miscellaneous itemized deductions subject to the Internal Revenue Code and Regulations under the Adjusted Gross Income (“AGI”) limitations; 

((8)) claim office-in-home expenses in the tax returns of their customers as business deductions only where and to the extent that the customer can clearly substantiate that the use of the customer's residence qualifies for a deduction in accordance with I.R.C. § 280(A); and
((9)) claim personal medical costs in the tax returns of their customers only in the proper manner as required by the Internal Revenue Code and Regulations (e.g. as itemized deductions);

U.S. v. CRUZ, Cite as 106 AFTR 2d 2010-5266 (611 F3d 880) , 07/16/2010

In this case the US was appealing a decision by the district court to order preparers to clean up their act rather than just put them out of business.  The district court's patience was sustained.

U.S. v. MORRIS, Cite as 106 AFTR 2d 2010-5144, 07/01/2010

Magistrate judge's recommendation to deny pro se return preparer's motion to dismiss govt.'s action to enjoin him from preparing frivolous returns that requested more than $55 million in fraudulent refunds on behalf of his clients was adopted, based in part on magistrate's reasoning regarding meritlessness of preparer's argument about lack of implementing regs for Code Sec. 7402 , Code Sec. 7407 and Code Sec. 7408 and fact that govt. stated viable claim for relief with allegations that preparer prepared returns for others that egregiously understated tax liability. And preparer's objections, including protester-type arguments and claim that magistrate lacked jurisdiction over this action without parties' consent, were also meritless.

They didn't have much patience with this person's argument that he wasn't a person.


U.S. v. CLARK, Cite as 105 AFTR 2d 2010-2990
Shirley Clark agreed with the United States that she should take up a new trade.

U.S. v. ZERJAV, SR., Cite as 105 AFTR 2d 2010-2918

In this decision one preparer was put in the penalty box for 3 years although still allowed to perform administrative duties.  All the people involved were enjoined from certain practices in preparing returns :
(1.) claim a rent deduction when a shareholder/taxpayer rents any portion of his personal home to his employer, trade, business, or other entity; 

(2.) purport to establish that shareholders/taxpayers who rent their personal home or personal vehicle are not required to report the rental payments as taxable income because the taxpayer has an accountable plan or other reimbursement policy in effect; 

(3.) do not report automobile leasing or reimbursement income for shareholders/taxpayers who lease their personal vehicle for the convenience of their employer, trade, business, or other entity; 

(4.) claim business deductions for non-deductible personal expenses on any corporate, partnership, tax exempt entity or any other entities' federal tax returns; 

(5.) deduct a wage for shareholders/employees unless such wage is reasonable as set forth in I.R.C. §§ 162(a)(1) and 312(a) and the regulations promulgated thereunder. Defendants shall also provide customers who need to determine a reasonable wage a copy of IRS Fact Sheet 2008-25, and retain in the customers' file a copy of IRS Form 2008-25 and all other documentation establishing the reasonableness of the customers' wage.
(6.) report compensation paid to a customer-created entity which is not reasonable and/or related to the work performed, including bookkeeping, management, staffing, and support services (or any derivation of these services). 

(7.) claim a 26 U.S.C. § 179 deduction unless in compliance with 26 U.S.C. § 179 and the regulations promulgated thereunder; 

(8.) claim deductions for wages paid to children unless the wages are reasonable, are for services rendered as a bona fide employee of the taxpayer's trade or business, and the customers provide detailed records of the child's work history; 

(9.) claim restaurant meals as a deductible business expense, unless the deduction meets the requirements of 26 U.S.C. § 162, and the taxpayer documents the date, time, purpose, and participants in accordance with 26 U.S.C. § 274; 

(10.) deduct amounts paid or incurred by an employer for educational assistance under 26 U.S.C. § 127, when the employer paid more than 5% of educational assistance to benefit shareholders or owners (or their spouses or dependents); 

(11.) deduct child care expenses under 26 U.S.C. § 129, where the business paid more than 25% of childcare expenses to benefit shareholders or owners (or their spouses or dependents); 

(12.) deduct equipment lease payments for businesses which have transferred, for no consideration, assets or equipment into a newly formed entity, business, or trust; and 

(13.) classify shareholder distributions as “loans to shareholders.”

U.S. v. ABLE, Cite as 105 AFTR 2d 2010-2877, 06/14/2010
U.S. v. McIntyre, ET AL., Cite as 105 AFTR 2d 2010-2693
U.S. v. MARTY, Cite as 105 AFTR 2d 2010-562

Here's the deal on these folks.  You see when you are born the government opens up a secret account in your name.  It has something to do with the Federal Reserve being owned by the Illuminati or something like that.  You can access the account by filling out a 1099-OID that reflects withholding equal to the amount of OID interest and attaching it to your return.  This secret is very well kept.   I have a degree in applied mathematics and have studied the OID rules intensively and have not been able to see the connection.  These preparers figured it out though and were preparing returns.  Of course the IRS is part of the same conspiracy so they wanted to shut these people down.  Sadly, the courts have been corrupted by the same forces.  Your secret account is still there and if you do a little searching you'll still find people who will tell you how to access it.  I noted that one of them has indicated that the IRS has found a loophole to defeat the 1099-OID method.  I've met a lot of IRS people and have not found a single one who will admit to the conspiracy.  That shows you how effective it is.


U.S. v. MUHAMMAD, ET AL., Cite as 105 AFTR 2d 2010-2691
U.S. v. MUHAMMAD, ET AL., Cite as 105 AFTR 2d 2010-2693

More permanent injunctions.

U.S. v. ANDERSON, Cite as 105 AFTR 2d 2010-2204

Dorothy Lee Anderson was electronically filing refund returns for taxpayers without their knowledge and keeping some of the refunds.  I really like almost all my clients, but frankly clients can be annoying some times.  This is a very innovative way to work a tax practice. No interruptions from actual clients.  Apparently, though, it won't work in the long run.

U.S. v. McINTYRE, ET AL., Cite as 105 AFTR 2d 2010-1568
U.S. v. MILLER, Cite as 105 AFTR 2d 2010-1905
U.S. v. BARTLETT, Cite as 105 AFTR 2d 2010-1682
Permanent injunction.


U.S. v. GIBSON, Cite as 105 AFTR 2d 2010-1572

In his sentencing memorandum filed in connection with the second criminal matter, case number 08-20390, he indicated that this civil suit was a deterrent to him again committing tax fraud in preparation of tax returns. See Dkt. No. 11 at 5, Case No. 08-20390. Mr. Gibson, after being sentenced to refrain from preparing any tax returns, was found teaching other inmates how to prepare income tax returns. Id., Dkt. No. 11-5 at 1. He was expelled from a residential drug treatment program in June of 2008 when he was found to be in possession of income tax books. Id. at 7. Mr. Gibson has characterized this conduct as [pg. 2010-1576] “somewhat criminal.” See Dkt. No. 8. While Mr. Gibson advised this Court that “he is through with tax preparation work[,]” in his sentencing memorandum, Mr. Gibson informed the Plaintiff in a March 3, 2009 letter, that he “still reserve[s] the right if [he] chooses to be a professional tax person. Legal of course.” See Ex. 1 at 2. In this same letter Mr. Gibson also indicated that “you know as well as I do, that even if a judgement [sic] was unfairly handed down to enjoin me, that once I'm released, I could actually do taxes if I was bent on doing them, despite any ruling.” Id. at 4.

Accordingly, Mr. Gibson has demonstrated that there is a likelihood that he will commit future violations of the internal revenue laws and that a permanent injunction barring him from preparing or assisting in the preparation of federal tax returns for anyone but himself, advising anyone about such preparation, owning or managing any tax preparation business, representing customers before the IRS or engaging in any other similar conduct is warranted. Mr. Gibson's Response to Plaintiff's Motion for Summary Judgment is silent as to any genuine issue of material fact precluding the entry of a permanent injunction.

I have to say getting thrown out of a drug treatment program for having income tax books really takes the cake.

U.S. v. STENLINE, Cite as 105 AFTR 2d 2010-869

While govt. was clearly entitled to some injunction when considering preparer's misconduct, district court ruled that permanent/lifetime injunction was too draconian under circumstances and instead imposed 15-year injunction.

Knowing the practicalities of the business I can't see much difference between a 15 year injunction and a permanent one, but so it goes.

All in all, I think these cases make a fairly good argument for making it a little easier for the IRS to shut down bad preparers.  I'll keep looking for a fool-proof method to access my secret account.  I'm not making any promises that I'll share it though.

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.