United States of America v. Baxter et al

Filing 47

OPINION; An appropriate judgment will be entered in accordance with this opinion. Signed by Judge Myron H. Thompson on 6/3/05. (sl, )

United States of America v. Baxter et al

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IN THE DISTRICT COURT OF THE UNITED STATES FOR THE MIDDLE DISTRICT OF ALABAMA, SOUTHERN DIVISION

UNITED STATES OF AMERICA, Plaintiff, v. LARRY A. BAXTER and BAXTER & ASSOCIATES OFFICE OF ACCOUNTANCY, P.C., Defendants.

) ) ) ) ) ) ) ) ) ) ) )

CIVIL ACTION NO. 1:05cv70-T (WO)

OPINION

The plaintiff, United States of America, has brought this lawsuit against the defendants, Larry Baxter and Baxter & Associates Office of Accountancy, P.C., claiming that the defendants knowingly prepared false income tax returns for their customers in violation of 26 U.S.C.A. §§ 6694, 6695, and 6701. The government seeks an injunction that would bar the defendants from, among other things, acting as federalincome-tax-return preparers. The court's jurisdiction is

proper under 28 U.S.C.A. §§ 1340 and 1345 and 26 U.S.C.A. §§ 7402, 7407, and 7408.

Dockets.Justia.com

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I. FINDINGS OF FACT Larry Baxter is the sole shareholder and president of Baxter & Associates Office of Accountancy, P.C., located in Dothan, Alabama. Baxter's primary business is to prepare Before having their

federal and state income tax returns.

tax returns prepared, Baxter's clients would complete intake sheets that inquired or about relevant and personal other details,

dependency

exemption

data,

information

pertinent to the preparation of returns. Because Baxter was not enrolled to file returns

electronically, he paid another person $25.00 per return for each return transmitted electronically under that person's name and identification number. Based upon the evidence presented during a non-jury trial on May 18 and 19, 2005, the court concludes that, over the course of several years, Baxter knowingly and

intentionally prepared numerous inaccurate federal income tax returns. In order to fabricate higher tax refunds, he

inflated Schedule C business expenses in order to offset his customers' W-2 income; he falsely 2 reported Schedule A

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deductions (including unreimbursed employee expenses and charitable contributions for customers); and he inaccurately calculated his clients' eligibility for the Earned Income Tax Credit (EITC). Baxter had an incentive to generate

higher refunds for his clients because he took a percentage of his clients' refunds. directly into Baxter's These refunds were often deposited bank account, and, after having

deducted his fees, he would then transfer a portion of the refund to the client. The testimony of one of Baxter's former clients was not atypical. This customer provided Baxter with her social

security number and W-2 forms, and Baxter prepared her 1997 and 1998 State of Alabama and federal tax returns. Although

the client worked at a restaurant, Baxter falsely reported o n her 1997 Schedule C that she had earned $ 1,850 from "contract sales" and had incurred $ 12,369 expenses. false in business

The customer later confronted Baxter about the on her return, and Baxter accused her of

items

slander.

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An o t h er customer testified that, in addition to an inaccurate Schedule C, Baxter falsely reported $ 4,150 in charitable deductions on a Schedule A. When the customer

alerted Baxter to the mistakes, Baxter responded that he had made the necessary corrections. In other instances, Baxter falsely and without his customer s ' permission increased their reported income in order to create larger tax refunds after the EITC had been taken into account. One way in which Baxter falsely

reported clients' business profits was by minimizing the busi n e ss returns. expenses that were reported on his clients'

For example,

one client was falsely reported to

have made $ 10,000 as a cosmetologist in 2003, without incurring any expenses. Another taxpayer was falsely
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reported to have made, expense-free, $ 10,500 from child daycare in 2002. In other instances, Baxter simply

fabricated professions and incomes for clients. It would appear counterintuitive that falsely reporting increased income would result in a greater refund; such is, however, true with the EITC, which was enacted "to provide 4

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relief for low-income families hurt by rising energy prices." 475 U.S. 851,

food and

Sorenson v. Secretary of Treasury of U.S., 864, 106 S.Ct. 1600, 1609 (1986). The

following chart, based on the 2002 tax year, provides an example of how fictitious business profits could be used to increase a tax refund when the EITC is claimed: Tax Return Item Scenario Business Reported Schedule $8,000 $3,500 #1: False Income on C Scenario #2: No False Business Income Reported on Schedule C $0 $3,500 ($6,900) ($3,000) ($6,000) ($12,400) $0 $0 $0 ($1,410) $1,410

Business Profit Wages

Standard Deduction ($6,900) Personal Exemption ($3,000) Exemption Taxable Income Tax Due Self-Employment Tax Tax Owed EITC Refund ($6,000) ($5,900) $0 $1,130 $1,130 ($4,010) $2,880

As the above examples suggest, Baxter used a variety of means to obtain money from the government by providing false 5

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information; however, he also took advantage of his clients, many of whom never reviewed their completed tax returns prior to filings. Because the government refunds were often

provided directly to Baxter, it was Baxter who provided the taxpayers with their refunds, after first deducting whatever fees he believed that his work warranted. Many customers

were aware of only the refund they had received from Baxter and could not state the amount of the total refund received from the government; and Baxter had charged accounting fees that were far greater than those of his local competition. Baxter, therefore, cheated not only the government, but also his low-income clients, many of whom are now being pursued by the IRS for back taxes and penalties. Needless

to say, it is ironic (and sadly so) that Baxter would use the EITC to cheat the very category of low-income and

vulnerable earners whom the EITC was designed to protect.

II. CONCLUSIONS OF LAW Several revenue statutes condemn Baxter's actions and authorize the relief requested by the United States. 6 26

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U.S.C.A. § 7408 authorizes a district court "to enjoin any person from further engaging in ... conduct ... subject to penalty under section ... 6701." § 6701 penalizes income tax anyone return who to In turn, 26 U.S.C.A. prepares tax someone

knowingly

else's

understate

liability.

Section 6701 provides in part that: "Any person-- (1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document, (2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and (3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person...." 26 U.S.C.A. § 6701(a)(1-3). In addition, 26 U.S.C.A. § 7407(b)(1) authorizes the court to enjoin a tax preparer from engaging in conduct subject to penalty under 26 U.S.C.A. § 6694 or 26 U.S.C.A.

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§ 6695(g).

Section 6694 penalizes the understatement of tax

liability by an income-tax-return preparer, and § 6695(g) penalizes return preparers who fail to exercise due

diligence in determining eligibility for EITC. Finally, 26 U.S.C.A. § 7407(b)(2) provides that if an income-tax-return preparer has continually or repeatedly engaged in the conduct described in § 7407(b)(1) and that an injunction prohibiting such conduct would be insufficient, then a court may enjoin such a person from acting as an income-tax-return preparer. There definition prepar e s is of for no a doubt covered that tax or Baxter meets the following person one or who more

preparer: who

"any

compensation,

employs

persons to prepare for compensation, any return of tax imposed ... or any claim for refund of tax imposed...." U.S.C.A. § 7701(a)(36)(A). 26

There is also no doubt that his

repeated and false reporting on Schedules A and C and his manipulation of the EITC violated 26 U.S.C.A. §§ 6695(g), 6701. 6694,

Baxter repeatedly understated the liability

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of his clients and fabricated figures in order to take advantage of the EITC. Moreover, the fact that Baxter's illegal filings were intended to cheat (that is, steal from) the government and his clients and the fact that the false filings dated back to 1997 and continued over several years, despite customer complaints, warrant the application of § 7407(b)(2), Indeed,

enjoining Baxter from acting as a tax preparer.

Baxter constitutes nothing less than a menace to society, in that, in many instances, he willfully used his position of

trust to take advantage of the most vulnerable and needy. See, e.g., Abdo v. United States I.R.S., 234 F.Supp.2d 553, 567 (M.D. N.C. 2002) (permanently enjoining, under 26

U . S .C.A. § 7407(b)(2), a tax preparer who had continually asserted "frivolous and unrealistic positions on numerous tax returns" and who had "caused substantial financial harm to his clients, the United States, and the taxpaying

public"); United States v. Savoie, 594 F.Supp. 678 (W.D. La. 1984) (enjoining defendant from serving as tax preparer when he had continually engaged in conduct that violated 26 9

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U.S.C.A. § 7407(b)(1) over the course of approximately two years).

III. CONCLUSION An appropriate judgment will be entered in accordance with this opinion. DONE, this the 3rd day of June, 2005.

/s/ Myron H. Thompson UNITED STATES DISTRICT JUDGE