O'Connor, 11th Circuit Panel Side With Tax Preparer Against IRS

John Pacenti

Daily Business Review

Those few short years when the Internal Revenue Service tried to revamp its public image as a kinder, gentler agency is pretty much in the past. Just ask UBS and HSBC.

But banks aren't the only ones being targeted by the IRS. Tax preparers also are under increasing scrutiny.

Nobody knows this better than Abelardo Ernest Cruz, who found the IRS aiming to shut down his Miami tax preparation service for good.

Yet Cruz won a big battle last month that will give his industry some muscle if the federal tax agency comes looking to levy the "business death penalty" for preparer services that run afoul of the agency.

The 11th U.S. Circuit Court of Appeals, with retired U.S. Supreme Court Justice Sandra Day O'Connor writing for a three-judge panel, upheld a district court order that the IRS was not entitled to shut down Cruz's tax preparation company, Nations Business Center, nor its affiliates, including Nations Tax Services.

The appeal was a matter of pride, Cruz's attorney said. The Justice Department sued in civil court on behalf of the IRS, seeking an injunction to shut down the company. U.S. District Judge William Zloch denied the motion, finding the company had submitted bad returns for customers but was mending its ways.

Zloch found the "death penalty" would be extreme and instead barred the company from engaging in deceptive practices and mandated IRS monitoring for compliance.

"Up until then, the IRS had won every case it ever brought in which it sought an injunction or the 'death penalty,' " said Miami attorney David Garvin, who represented Cruz. "Up until now, the ball was rolling downhill like an avalanche."

The IRS investigation was launched because Cruz's clients were receiving refunds and claiming earned-income tax credits at rates far exceeding the national average, the 11th Circuit said. An audit found "numerous and repeated understatements of tax liability."

But Cruz changed preparing procedures and continuing education policies after learning of the IRS investigation.

"The district court appropriately concluded from this evidence that the defendants had significantly reformed their deceptive practices," O'Connor wrote.

Garvin won a nine-day bench trial. But, he said, "The IRS felt it had been thrown a bone, so it appealed."

The government argued Zloch abused his discretion by failing to completely enjoin the defendants from acting as tax preparers and failing to require the company to notify customers of the injunction.

But the appellate court upheld Zloch in a July 16 opinion.

"We find that the district court was within its discretion in finding that such a broad injunction was not warranted," O'Connor wrote.

"There is nothing illogical," she continued, "in finding that educational programs could curb negligent misconduct while relying on the added sanctions of the district court's limited injunction to curb any excess of intentional misconduct."

She did send one aspect of the case back to Zloch because he gave no reason for rejecting the IRS request to compel Cruz to notify customers of the court's injunction. O'Connor suggested there were "substantial" reasons for notification.

Judges Ed Carnes and R. Lanier Anderson concurred.

HAPPY PREPARERS

The opinion produced joy in tax preparation circles, said Carlos Samlut, owner of Coral Gables accounting firm Samlut & Co.

"CPAs and return preparers did not have any cases on their side until Nations Tax Services," he said. "Now, tax preparers can defend themselves based upon the principal of legal precedent. Up until this time, no defense worked."

It's just not civil fines and the business death penalty that tax preparers can face. Some have faced criminal prosecution. IRS civil division spokesman Dan Boone in Nashville said the agency is dedicated to bringing more regulation to the tax preparation industry.

Currently, no training is necessary in Florida to put up a shingle and advertise such services. But starting in September, anyone who is paid to prepare federal tax returns must register and receive a tax identification number. Next year, they will have to pass a competency test.

"The IRS decided there was a definite need for more regulation of the tax preparer industry," Boone said. "Part of this is to provide better opportunity for the tax preparers to make sure they are well-trained and competent ... and to allow the IRS a better opportunity to regulate them."

'IT BECAME PERSONAL'

Garvin, who also scored a big victory against the IRS as co-defense counsel in race car driver Helio Castroneves' tax acquittal, said he warned the IRS before going after Nations Business Center. He said the Justice Department wanted to negotiate but said the IRS was calling the shots.

"I told the IRS, 'You do not want to bring this case. You are going to make bad law for yourself. You are going to undo all the work you have done,'" Garvin said.

"They did not listen, and to some extent, I think it became personal."