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6th Cir. Affirms Shutting Down Defrauding Tax Prep Company

By Mark Wilson, Esq. on November 26, 2014 | Last updated on March 21, 2019

After the company Instant Tax Service was discovered engaging in a litany of deceptive and unlawful practices, the IRS had them shut down. ITS appealed, claiming it was a franchisor and not directly involved in the preparation of returns like its franchisees, and therefore couldn't be shut down.

In this unpublished, but nevertheless interesting, opinion from the Sixth Circuit, the court said that shutting ITS down was definitely within the district court's power.

That's Quite a Pattern of Deception

ITS' abominable conduct came from the top down. It systematically "lured low-income customers" through "tax refund anticipation loans" for refunds that "were rarely awarded and sometimes not in fact available." Once it lured customers in, it tried to get customers to allow ITS to file their returns, charging exorbitant fees for returns that took about 15 minutes to prepare.

But ITS didn't just cheat taxpayers: It cheated the IRS, too. It instructed franchisees to file returns using pay stubs instead of W-2s. The IRS frowns on this practice (because it usually results in tax underpayment), but ITS did it anyway, and told the franchisees to conceal their use of pay stubs, going as far as crafting fake W-2s.

Whenever an ITS franchisee's Electronic Filer Identification Number (EFIN) was suspended or terminated (you know, for doing the kinds of things ITS was doing), ITS would encourage another franchisee to "loan" its EFIN out or fraudulently obtain "back-up" EFINs. As you might expect, EFINs aren't transferrable.

But We Don't Touch the Tax Returns Ourselves!

OK, all of that notwithstanding, ITS claims that the district court didn't have the power to shut it down, as it doesn't prepare taxes. Its franchisees do. Gotcha!

Except that the trial court found that ITS "trained and encouraged the franchisees to violate and thwart the internal revenue laws." And basically every court agrees that 26 USC 7402, the statute authorizing the trial court to enjoin ITS from engaging in anything resembling tax preparation, is broad in scope, providing "the district courts with a full arsenal of powers to compel compliance with the internal revenue laws." This includes preventing a franchisor from doing the very things a tax preparing franchisee would not to be allowed to do -- and from allowing the franchisor to take any other part in the tax preparation business, given that their business model "was to train and encourage its franchisees to flout the tax laws, using the franchisees to distance themselves from the illegality."

The only thing working in ITS' favor is that one of its subsidiaries, Tax Tree, was released from compliance with the injunction because it was a loan and refund processor, not a tax preparer. However, the Sixth Circuit remanded to determine whether there could be any other reason to stick Tax Tree under the umbrella of the injunction. Even so, ITS won't be defrauding anyone else anytime soon.

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