Crackdown on Fraudulent Tax Return Preparers: Recent Criminal and Civil Enforcement against Fraudulent Tax Preparers Has Been Highlighted in Stepped-Up Activity by the Treasury and Justice Departments

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Total investigations initiated by the IRS'S Criminal Investigations division rose in fiscal year 2006 from the previous year, as did the division's time spent on tax-related investigations, the Treasury Inspector General for Tax Administration reported in June. TIGTA noted that the present enforcement climate represents a reaction to an erosion of the Service's enforcement activities in the late 1990s and a recognition that enforcement had drifted away from tax compliance to investigating related violations of money laundering and organized crime.

A similar recommitment within the Department of Justice's Tax Division has garnered more than 240 injunctions in the past six years against preparers of false or fraudulent tax returns and promoters of tax fraud schemes. This spring, the DOJ sought an injunction against more than 125 Jackson Hewitt franchises in four states for allegedly engaging in tax return preparation scams.


For the vast majority of tax practitioners who strive to represent clients with tax positions that reflect a good-faith effort to comply with tax law, the stricter climate also has had repercussions. Congress has strengthened penalties against tax preparers who file a return containing a position for which there is not a reasonable basis. In May, the Small Business and Work Opportunity Tax Act of 2007 amended IRC section 6694(a) to provide higher penalties for tax practitioners who prepare a return or refund claim reflecting an undisclosed unreasonable position. A reasonable position is defined as one that the practitioner reasonably believes is more likely than not to be sustained on its merits.

The new standard is considered higher than the old laws realistic possibility that a position would be sustained. Moreover, monetary penalties increased from $250 to the greater of $1,000 or half of the income derived from preparing the return, and the new law extends the penalty beyond income tax returns to those for gift, estate, excise and employment taxes. For a willful or reckless understatement of tax liability, the new law increases the penalty from $1,000 to $5,000 or haft the preparers income derived from preparing the return, whichever is greater. The new rules were supposed to go into effect immediately, but the IRS recently announced in Notice 2007-54 that it would delay the effective date of the penalties until 2008 (see "Tax Matters," page 72).

The changes had been proposed earlier in the Bush administration's 2008 budget. …


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