Justice Sandra Day O’Conner sides with a Small Business Against the IRS

Aug 19, 2010   

Recently, the Internal Revenue Service (IRS) has been on a rampage targeting banks and tax preparers, but a recent 11th Circuit decision might force the IRS to reconsider this strategy.

The IRS sought to shut down a local Miami tax preparation facility, Nations Business Center, owed by Abelardo Ernest Cruz. However, last month Cruz won a huge battle against the IRS setting forth negative precedent for the service and putting a halt to the “business death penalty.”

The 11th US Circuit Court of Appeals, with retired Supreme Court Justice Sandra Day OConner writing for the three-judge panel, upheld a district court order asserting that the IRS was not entitled to shut down Cruzs tax preparation company nor its affiliates, including Nations Tax Services. See opinion. The Justice Department, on behalf of the IRS, sued Cruzs company in the district court seeking a civil injunction to shut it down. However, US District Judge William Zloch denied the motion, finding the company had submitted bad returns for customers, but was mending its ways. Judge Zloch found the “death penalty” would be an extreme remedy and instead barred the company from engaging in deceptive practices and mandated IRS monitoring for compliance.

The 11th Circuit said the IRS launched its investigation of Cruzs company because Cruzs clients were receiving refunds and claiming earned-income tax credits at rates far beyond the national average. The 11th Circuit further stated that an audit revealed “numerous and repeated understatements of tax liability.” Cruz, however, changed preparing procedures and continuing education policies after learning of the IRS investigation, thus leading the 11th Circuit to conclude that the district court had correctly deduced that Cruzs company had significantly reformed its deceptive practices.

Before the 11th Circuit, the government argued that Judge Zloch abused his discretion by failing to enjoin the defendants from acting as tax preparers and failing to require the company to notify customers of the injunction. However, Justice OConner found that “the district court was within its discretion in finding that such a broad injunction was not warranted.” Justice OConner further stated that “[t]here is nothing illogical in finding that education programs could curb negligent misconduct while relying on the added sanctions of the district courts limited injunction to curb any excess of international misconduct.” Former Justice OConner did send one aspect of the case back to Judge Zloch because Judge Zloch gave no reason for rejecting the injunction requested by the IRS compelling Cruz to notify customers of the courts injunction.

Present and Future Regulations

In the past, tax preparers have not only faced civil fines and the business death penalty but criminal prosecution as well. Dan Boone, spokesperson for the IRS civil division, said the service is dedicated to bringing more regulation to the tax preparation industry. Training is currently not required in the State of Florida for one to establish a tax preparation facility. Yet, starting in September, anyone who is paid to prepare federal tax returns must register and receive a tax identification number. Then next year, all tax preparers must pass a competency test.

If you have any questions about the new rules and regulations tax preparers must abide by or if you are a tax preparer under audit, please contact us at contact@fidjlaw.com.