Friday, August 19, 2016

A Good Illustration of a System Which Does Not Work, AKA, How Not To Get Rid Of A Disreputable Income Tax Preparer

William Delaney, EA
Westwood, MA
I was recently reminded of how difficult it is to put an unlicensed and disreputable tax preparer out of business when reviewing an April 4, 2016 District Court decision.  The pattern of behavior is as bad as (actually worse than) anything I’ve ever encountered.

Tax Factory Enterprise, Inc. (Tax Factory) is a Nevada corporation which operates in Tenn.  Stephanie Edmund and her husband Kevin Williams are the corporate officers.
Based on a complaint filed in 2013, the defendants were enjoined (permanent injunction) from operating a tax preparation business as of April 17, 2015 unless certain conditions were met.  The injunction prohibited the defendants from “…preparing false returns, claiming improper deductions or credits, or otherwise engaging in conduct that could result in tax penalties.”  They were also required to hire a monitor who would review at least 3% of returns subsequently prepared.  So, although they had sinned, they were told to go and sin no more, but we shall keep an eye on what you do going forward.

Robert Vance, CPA was selected as their monitor in July.  Vance required that the defendants provide sufficient financial information (cash receipts journal, bank statements, etc.) so that he could determine how much business they were doing and how many tax returns he would need to review.

Cooperation on the part of the Tax Factory was less than enthusiastic.  Between July and the end of November, Vance was provided with only two returns.  During that time period, no financial information was provided.  Vance did not become alarmed about this until December 1st, when he sent them a letter regarding their failure to comply.  One might wonder why they should comply if it takes five months of non-compliance before the monitor stirs himself to act.

Tax Factory ignored a respond by deadline of Dec. 11, 2015; they never replied.  They never provided any financial information.  Finally, they stiffed Vance by not paying some of his bills!  Normally, three strikes and you are out, but not these guys.  They are something else---read on…

The Court issued a second permanent injunction on December 31, 2015 and the defendants were enjoined from preparing income tax returns because of failure to comply with the first permanent injunction.  However, what did they do instead…

 Williams contacted a friend to help him create a new tax return preparation entity.  Williams arranged to use his friend Marcus Lane’s EFIN (which Lane had obtained for his own tax preparation company) for payment of a fee to Lane.  (Your Editor thought                                                            
that an EFIN was personal to the individual or firm holding the number, but apparently you can rent it out to someone else, or at least that’s the implication---read on.)  The application for the new tax preparation entity (the Tax Firm), using Lane’s EFIN, listed Marcus Lane as the primary contact, responsible official, and everything else under the son.  The world would think that Lane had established a new business; however, “…the Court finds credible Lane’s testimony that Williams should have been listed on the application rather than Lane.”  Your Editor must surmise (since the record is otherwise silent) that Lane was given a free pass and was duped into lending his identity and EFIN to Williams.  No one asked, apparently, what Lane thought that Williams was planning to do with the EFIN!

The Tax Firm’s location was listed as 2828 Coleman Rd., Memphis, TN.  As it happens, the Tax Factory is located at 2826 Coleman Rd.  According to subsequent testimony by defendant Stephanie Edmond, “the two addresses are completely separate.”

Now comes IRS Revenue Officer Renesha Turnage.  Would you believe it, she had some doubt about two separate addresses, and so she conducted a field trip to see for herself.  She located 2828 Coleman Road and found a sign with an arrow (use other door). Guess where the arrow is pointing! You got it---straight as an arrow to 2826 Coleman Road, the address of the Tax Factory!  So much for the separate locations.

Oh, did I fail to mention that the Tax Firm was never actually incorporated in TN or anywhere else?

Based on the fact that most of the Tax Factory employees were now employed by the Tax Firm; most of the Tax Factory clients were now having their returns prepared by the Tax Firm; and, there was common ownership, it was easy for the Court to conclude that the Tax Firm was the successor to the Tax Factory.  Actually, you and I were able to arrive at that conclusion without reference to the Court documents.

During the period of Court ordered monitoring (or lack of same, as it would happen), the defendants continued to prepare returns which “…contained inappropriate deductions or claims for credit.”  But, it becomes even more egregious, if that is possible (yes, it is---read on).

Revenue Officer Turnage (the only one involved in this exercise in frustration whose actions make any sense) testified that defendant Stephanie Edmond “…failed to file her own tax returns for the tax years 2012, 2013, and 2014.  In addition, Edmond still owes federal income taxes for tax year 2011.”  That being the case, “…Edmond is not eligible to obtain an EFIN to file tax returns on behalf of others while her own income tax returns remain unfiled or a balance is owed on her prior year returns.”

Now comes another permanent injunction on April 4, 2016 (the third one) issued as a result of violating prior injunctions.  “Defendants’ actions in filing returns with fictitious Schedule C losses and otherwise claiming improper deductions violate the permanent injunction, and they are in contempt of this Court.”  The defendants were ordered to “…disgorge all fees collected…from January 15, 2016, and forward, (and remit them) to the United States.”

If this does not illustrate the extreme difficulty associated with ridding the barrel of a bad apple when the preparer is both unlicensed and unregulated, nothing will.  United States of America v. Stephanie Edmond, et al., Case No. 2, U.S. District Court for the Western District of Tennessee, April 4, 2016.

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