United States of America v. Brier et al

Filing 32

DECISION AND ORDER granting in part and denying in part 11 Motion for Preliminary Injunction- So Ordered by Chief Judge Mary M Lisi on 11/5/10. (Barletta, Barbara)

United States of America v. Brier et al

Doc. 32

UNITED STATES DISTRICT C O U R T F O R THE DISTRICT OF R H O D E I S L A N D

UNITED STATES OF A M E R I C A Plaintiff, v. C.A. No. 09-607-ML

MICHAEL BRIER, J E F F R E Y SROUFE, ESTHER SANTIAGO, C A R M E N MIRANDA, MARIA CAROLINE HALOG, CRISEL YN RIVERA, NINTZA BENITEZ, R E F U N D S N O W , INC., RNTS, INC. (alk/a REFUNDS N O W T A X SERVICE, INC.), FTIRS, INC., POTIRS, INC., IHIRS, INC., Defendants.

DECISION AND O R D E R In this action, the Government seeks to enjoin Defendants! from, inter alia, engaging in conduct subject to penalty under the Internal Revenue Code, preparing federal income tax returns, and providing tax related advice and/or services. The G o v e r n m e n t also requests that the Court order Defendants to give the Government a list o f clients for w h o m t h e y have prepared federal income tax returns since January 1, 2004. The Government m o v e s for injunctive r e l i e f pursuant to 26 U.S.C. §§ 7407, 7408 and 7402(a). This Court conducted a preliminary injunction hearing o v e r a four-day p e r i o d . ' At the end o f the hearing, defense counsel somewhat reluctantly agreed to consolidate the preliminary

IThe Government voluntary dismissed Defendants M a r i a Caroline Halog, Criselyn Rivera, and Nintza Benitez from this action without prejudice pursuant to Fed. R. Civ. P. 41.
2 T h e hearing dates were May 1 2 , 2 0 1 0 , ( " T r a n s c r i p t I"); June 1 4 , 2 0 1 0 , ( " T r a n s c r i p t II"); June 1 5 , 2 0 1 0 , ("Transcript III"); and June 21, 2010, ("Transcript IV").

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injunction hearing w i t h the trial on the merits. Defense counsel e x p r e s s e d his concerns about certain hearsay evidence that had been presented during the hearing. W h i l e " [a] ffi davit s and other hearsay materials are often received in preliminary injunction proceedings. The dispositive question is not their classification as hearsay but whether, weighing all the attendant factors, including the need for expedition, this type o f evidence was appropriate given the character o f the injunctive proceeding." Asseo v. Pan American Grain Co. Inc., 805 F . 2 d 2 3 , 2 6 (1st Cir. 1986). Having now had an opportunity to review the transcripts o f the hearing and the affidavits presented by the Government , the Court determines only the issue o f preliminary r e l i e f at this time.
I. The Tax Return Preparation Business

In 2001, D e f e n d a n t Michael Brier (Brier) formed a tax p r e p a r a t i o n service business called Refunds Now, Inc. (" R e f u n d s Now"). Refunds N o w operates e i g h t offices located in Rhode Island and southeastern Massachusetts. In 2001, Refunds N o w p r e p a r e d approximately 250 tax returns; in 2009 Refunds N o w prepared approximately 8,000 returns. Employees who w o r k for Refunds N o w are not required to h a v e a high school diploma, a QED, or any prior experience in preparing federal income tax returns. P r i o r to being hired, however, prospective employees undergo 18 hours o f classroom training and testing. They are interviewed by Refunds N o w management to ensure that the prospective employee can prepare a tax return and can relate well to customers. Once an individual becomes an employee o f Refunds N ow, he or she undergoes two weeks o f additional training. Refunds N o w emplo yees are compensated based on an hourly r a t e and a bonus computed at the end o f the tax filing season. An employee ' s bonus is usually b e t w e e n 3-7 percent o f the

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amount o f tax preparation fees that Refunds N o w collects for the returns t h a t the employee prepares. The fee Refunds N o w charges a client to prepare a tax return is based on the number o f schedules prepared in the return, and, in some circumstances, the time involved in preparing the return. In order to receive their fees more quickly, and to attract more customers, Refunds N o w utilizes certain " b a n k products." These bank products, generally referred to as rapid refunds, refund anticipation loans, or refund transfer loans, enable a client to receive his or her refund more quickly than " p a p e r filing," and allow the tax preparation fee to be automatically deducted from the refund amounts and be remitted directly by the b a n k to Refunds Now. These bank products, however, can only be utilized by individuals who electronically file tax returns. By electronically filing a return and requesting a rapid refund, in certain circumstances, an individual can receive an anticipated refund within 48 hours o f the return being electronically filed with the Internal Revenue Service ("IRS"). II. Defendants Michael Brier ("Brier") is the owner o f Defendants Refunds N o w , RNTS, Inc., IHIRS, Inc., POTIRS, Inc., and FTIRS, Inc. Brier testified that these corporations operate "all under one big umbrella." and "are, for all intents and purposes, one in the same." Transcript IV at 27; Transcript II at 79. Brier has been the director o f marketing for Refunds N o w since in or about 2006. Brier decided to " d i v e s t " h i m s e l f o f the "day-to-day operations" o f the tax return preparation business and focus on marketing because o f "court issues."? Transcript IV at 70. At

3The " c o u r t issues" to which Brier referred to was his conviction in Rhode Island state court in 2005. Brier pled guilty to two counts o f embezzlement and was sentenced to eight years in prison, with six years suspended and two years o f home confinement. He was also ordered to pay restitution o f $156,494.

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one time Brier trained Refund N o w employees but he is no longer involved in that aspect o f the business. Brier received his undergraduate degree from the University o f Rochester and a master's degree in business administration from the University o f Rhode Island. Brier began practicing as an accountant in 1987. Brier received his certification as a certified public accountant ("C.P.A.") in 1991. That certification, however, was suspended in 1999, after Brier entered into a consent order with the State o f Rhode Island Board o f Accountancy ("Board"). In that consent order, Brier accepted the B o a r d ' s findings o f "unlawful practice o f accounting, unlawful use and disclosure o f confidential information, and dishonesty, fraud or negligence in the practice o f accounting." P l a i n t i f f s Exhibit 16 at 7. His certification has not been reinstated. Brier has also held the designation as a certified financial planner, however that credential was revoked. In June 2003, the IRS notified Brier that he was no longer eligible to practice before the IRS. In 2005, the Rhode Island Department o f Business Regulation issued an order barring Brier from associating with a licensed broker/dealer or an investment advisor in the state o f Rhode Island. That order was based on B r i e r ' s falsification o f his application to apply for a license as a broker/dealer. In his application, Brier failed to disclose that his C.P.A. license had been suspended. Jeffrey Sroufe ("Sroufe") received his undergraduate degree and a m a s t e r ' s degree in business administration from Johnson and Wales University. Sroufe began working for Refunds Now as a seasonal employee in 2004, and became a full-time employee in January 2005. Sroufe is currently the Director o f Operations for Refunds Now and is responsible for the operation o f the computer network. Sroufe also prepared tax returns and assists in employee training and

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customer service. Esther Santiago ("Santiago") is the president o f R N T S , Inc., the company which purportedly " o w n s " Refunds Now. Santiago is responsible for preparing tax returns, managing employees, payroll preparation for clients, and customer service issues. Carmen Miranda ("Miranda") is a long-term employee o f Refunds Now. Miranda prepared tax returns and managed one o f Refunds N o w offices. Miranda is the "responsible official'" for IHIRS, Inc. III. The IRS Investigation
A. General Overview

In July 2007, the IRS assigned Agent Christine Stone ("Stone") to conduct an investigation o f Defendants. Her investigation revealed that Defendants prepared approximately 24,000 individual federal income tax returns from 2003 through 2007. As o f May 1 0 , 2 0 1 0 , the IRS has examined 350 income tax returns prepared by Refunds Now. Stone testified that o f the 350 returns that were examined, approximately 92% required some form o f adjustment. Stone explained that the examination o f approximately 309 returns resulted in increased tax liabilities. O f these 309 returns, the average additional tax due was approximately $3,800. The examination o f two returns resulted in decreased tax liabilities. The examination o f 22 returns resulted in required adjustments but these adjustments had no impact on tax liability. The percentage o f tax returns with deficiencies, i.e., where an additional tax liability was determined to be owed after examination, was approximately 90%. Stone did not select which returns would be examined. The returns were selected by the

4 A "responsible official" is an individual with authority over the tax p r e p a r e r ' s electronic filing operation at a location. IRS Publication 3112.

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Planning Special Programs department o f the IRS. The first 30 returns selected for examination were selected on a purely random basis. Although Stone stated t h a t she was not "privy" to how the remaining returns were selected, she was "sure" that the IRS w o u l d follow "trends o f adjustments" that had been indicated on the examined returns. Transcript I at 103. For example, i f the examinations o f the first thirty returns showed Schedule A issues or earned income credit issues, additional returns selected for examination would concentrate on returns with Schedule As andlor returns with an earned income credit. Stone testified that the I R S ' review o f the returns revealed misrepresentations concerning the actual preparer o f the return and "abusive items" such as "fabricated income, fabricated deductions, inflated deductions, underreported income and several abuses on credits including the education credits, [and] the earned income tax credits." Transcript I at 51. Specifically, the IRS found: ( l ) the use o f incorrect filing statuses to reduce tax liabilities and maximize the earned income tax credit; (2) the failure to apply the tests to determine w h e t h e r an individual qualified as a t a x p a y e r ' s dependent; (3) the fabrication or manipulation o f Schedule CS gross receipts for the purpose o f maximizing the earned income tax credit or minimizing net taxable income subject to self-employment taxes; (4) the fabrication or inflation o f various Schedule A6 deductions, such as charitable contributions andlor employee business expenses; and (5) the fabrication or manipulation o f income and expenses on Schedule E. 7 B a s e d on the examined returns, the Government claims that it has suffered a loss o f more t h a n $1.1 million o f tax

5Schedule C is used to report profit or loss from a sole proprietorship. 6Schedule A is used to itemize various personal expenses that are deductible. 7Schedule E is used to report supplemental income and loss including income and loss from rental estate, royalties, partnerships, S corporations, estates, or trusts.

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revenue exclusive o f interest a n d / o r penalties. B. Electronic Filing Identification N u m b e r C"EFIN") Investigation The IRS investigation included a review o f Refunds N o w EFINs. A n E F I N is the number assigned by the IRS to c o m m e r c i a l tax return preparers so t h a t they m a y file tax returns electronically. An E F I N allows the IRS to identify the location from w h i c h a return is filed. The IRS requires a tax p r e p a r a t i o n firm to have a separate EFIN for e a c h o f its office locations. All employees at a l o c a t i o n are entitled to use the EFIN assigned to t h a t location. The individual responsible for safeguarding the EFIN is called an electronic return o r i g i n a t o r ("ERO"). Without an EFIN, a commercial p r e p a r e r may not file returns electronically and m a y not offer b a n k products to its clients. As o f M a y 11, 2010, the eight office locations o f R e f u n d s N o w were associated w i t h an e s t i m a t e d 62 EFINs. Stone testified t h a t " m o s t " o f t h o s e E F I N s have been suspended. The I R S ' s investigation determined that, in or about 2 0 0 2 or 2 0 0 3 , B r i e r obtained one or two EFINs for Refunds N o w . They were later suspended by the IRS. S r o u f e t h e n obtained several EFINs for Refunds N o w . Those EFINs were suspended for filing returns t h a t were prepared by Brier, a s u s p e n d e d filer. A f t e r S r o u f e ' s EFINs were suspended, Santiago obtained several EFINs which were also suspended." N i t z a Benitez ( " B e n i t e z " ) t h e n obtained about eight EFINs, one for each R e f u n d s N o w location. After the IRS suspended t h e E F I N s Benitez obtained, the IRS identified three n e w corporations with Refunds N o w locations t h a t had longterm Refunds N o w employees as the responsible officials: FTIRS, Inc., P O T I R S , Inc. and IHIRS,

8Sroufe testified that at some p o i n t he became president o f Refunds Now in o r d e r to obtain an EFIN for Refunds Now. He testified that he did not know who asked him to become president o f Refunds Now. Sroufe also testified that after the E F I N that he obtained was suspended, Santiago became p r e s i d e n t o f Refunds Now so that she could obtain an EFIN.

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Inc. Stone testified t h a t her investigation revealed that "in later years " Miranda was identified as the " own er" o f I H I R S , Inc. and its ERO. Stone also testified t h a t she reviewed the Rhode Island Secretary o f State 's corporate database and determined that there were no corporate filings for IHIRS, Inc. or POTIRS, Inc . FTIRS , Inc., POTIRS , Inc. , and l l i I R S , Inc. obtained EFINs that were subsequently suspended. Stone testified that there were " a t least " 8-10 separate individuals associated with Refunds N o w who have had their EFINs suspended. Transcript I at 59. Stone testified that while B r i e r ' s initial EFINs were suspended because he did not file his person al tax returns , subsequent EFINs were suspended because individuals were filing returns that were identified as prepared by a suspended electronic filer, or because Refunds N o w did not file a corporate tax return, or because the IRS identified misrepresentations about the individual preparer o f returns . Stone explained that once an individual's EFIN is suspended the individual may no longer file returns electronically and another individual may not electronically file a return for the suspended filer. Stone testified to a pattern o f conduct: o n c e the IRS suspended an EFIN associated with Refunds N o w, Refunds N o w would apply for a n e w EFIN. In January 2009, IRS Agent Carol Chandler ("Chandler") visited the Broad Street office o f Refunds Now. Chandler went to the Broad Street office to m e e t with Maria Halog ("Halog") because tax returns were prepared from that office in 2008 under an EFIN assigned to Halog . When Chandler met w i t h Halog , Halog was unable to produce any documentation that showed her EFIN. Halog informed Chandler that she had prepared tax returns for Refunds N o w for six years and was currently leasing the Broad Street, Wickenden Street, and Westminster Street offices from Refunds Now. Chandler testified that Halog told her that she " kn ew nothing . . . about the leases , [and] had no idea what she was paying for the leases . . . . " Transcript I at 137.

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Chandler also visited the Wickenden Street Refunds N o w office to perform a " site check " o f returns prepared by Santiago. Transcript II at 7 . Before Chandler ' s interview with Santiago commenced, however, Brier entered the office and answered the questions that Chandler posed to Santiago concerning her EFIN. In the same m o n t h, Chandler visited the Refunds N o w office in Fall River, Massachusetts. Chandler went to the Fall River office to interview Benitez because B e n i t e z ' s EFIN was being used to electronically file returns from the Fall River office. Chandler spoke to an individual at the Fall River office who informed her that there was nobody at the Fall River or Wickenden Street , Pro vidence office with the name Nitza Benitez. During the 20 1a tax filing season, the IRS identified an entity named B e s t Taxes o f Rhode Island, Inc . (" B e s t Taxes "). Best Taxes was incorporated in or a b o u t the fall o f 2 0 0 9 with the responsible official listed as Carmen Morales , a tax return preparer for Refunds Now. Best Tax obtained EFINs , however, those EFINs were suspended by the IRS in 2010. During the 20 1a tax filing season, the IRS also identified tax returns that were prepared by Refunds N o w but were electronically filed by Absolute Tax Services in Ruckersville, Virginia. Absolute Tax Services is owned by Dennis B e c k e n d o r f ( " B e c k e n d o r f ' ) , who is married to a business associate o f Brier. The IRS has also identified returns that were prepared by Refunds N o w t h a t were electronically filed by a business entity in Shreveport, Louisiana. Stone testified that the Rhode Island Division o f Taxation contacted her because they had a " large volume " o f Rhode Island residents submitting tax returns from Virginia and Louisiana EFINs "w h ich was unusual. " Transcript I at 65. The IRS has not been able to identify a " reasonab le conclusion" why a large volume o f Rhode Island taxpayers would use a Virginia or

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Louisiana entity to electronically file their tax returns. Id. The IRS also identified two additional EFINs , associated w i t h Jedi Consulting, a Tennessee entity, that were used to file Refunds Now returns. Stone testified that Jedi Consulting was " link ed" to Sroufe." Transcript I at 64. After Best T a x e s ' EFINs were suspended, Brier used EFINs assigned to B e c k e n d o r f t o continue electronically filing tax returns prepared by Refunds N o w even though he knew that the EFINs assigned to his companies had been suspended by the IRS. Brier stated that the reason that Refunds N o w was using EFINs assigned to other individuals was because Refunds Now EFINs had been suspended. Brier admitted that , as o f the first quarter of201O, all o f Refunds Now EFINs had been suspended , yet Refunds N o w continued to electronically file returns using EFINs not assigned to Refunds Now. Brier testified that Refunds N o w changed EFINs frequently as a " m ark et in g tool " in order to " thr ow o f f the competition ." Transcript IV at 18-19 . Brier explained t h a t competing tax preparation firms are able to obtain information identifying the number o f electronically filed tax returns from a Refunds N o w office. He explained that these firms use this information to determine whether a geographic location would be a good place to o p e n a n e w office. Brier explained that by changing EFINs often, Refunds Now only presents one year o f history to its competition and protects its business dominance in a particular geographic location. After the IRS suspended the EFIN for Best Taxes , Sroufe obtained another EFIN. Sroufe first testified that he was " n ot exactly sure" how Refunds N o w electronically filed returns for the 2010 tax filing season. Transcript IV at 99. Sroufe admitted however that , as director o f

9Sto ne did not explain how she determined that Jed i Consulting was linked to Sroufe . Sroufe testified that he was not familiar with Jed i Consulting but was "not sure" i f h e was affiliated with Jedi because he was " not sure" i f Jedi was a " rea l company ." Transcr ipt IV at 97-98 .

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operations, he set up the Refunds N o w computer systems to assist in electronic filing . As part o f that process, he testified that he enters an EFIN into a computer software program. Sroufe stated that he obtained an EFIN at some point between January and April 2010. Sroufe testified that he obtained this EFIN from the ERO but he was " n o t sure who that person was. " Transcript IV at 103. He testified that the individual was a " m an" because a man ' s name was on the EFIN letter. Id. at 104. Sroufe testified that his "involvement . . . in arranging for this new EFIN" was that he "just got a copy o f the letter , t h a t ' s all I got . . . . " Id. Sroufe first testified that he was e-mailed the letter but then stated that Refunds Now received the EFIN letter via the facsimile machine and that it was "handed" to him . Id. at 106. Sroufe did not k n o w who s e n t the letter , was " n ot sure" when the letter was handed to him , and was " n ot sure" who handed the letter to him. Id. at 104-105. Sroufe , however, testified that the man who handed him the letter was a Refunds Now emplo yee. Id. at 105. C. Misrepresentation o f Tax Preparers Stone testified that a tax return that is electronically filed by a firm will include either the tax preparer's social security number or a preparer tax identification number and an employer identification number. The purpose o f these numbers is to enable the IRS to identify the commercial entity and the individual preparer o f a tax return. S t o n e ' s investigation revealed that the identity o f the Refunds Now return preparer was misrepresented on tax returns. Brier informed Stone that he did not prepare federal income tax returns for the years 2004-2006 for Refunds Now. Stone , however, determined that returns were prepared listing B r i e r ' s social security number as the paid preparer for a small number o f returns in 2003 and 2004 , and about 800 returns in 2005. Additionally, Brier prepared returns using various employer identification

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numbers and social security numbers that "do not belong to him . . . . " Stone Affidavit at

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For example, Brier used his own social security number in tax filing season 2004 and 2005, Santiago's and S r o u f e ' s social security numbers in tax filing season 2006 and 2007 and Santiago ' s and Benitez ' s social security numbers in tax filing season 2008 . Id. The IRS has not been able to determine exactly how many federal income tax returns the Defendants and/or individuals or entities under Defendants' direction and control have prepared because the identifying numbers associated with the different parties change constantly and rapidly . Stone concluded that the Refunds N o w individual who prepared the return is not always the same person whose name is listed as the preparer on the return. Stone testified that based upon her review o f tax returns and interviews o f taxpayers who had t h e i r returns prepared by Refunds Now, Brier was the actual preparer o f many returns, e v e n t h o u g h the name listed on the return as the paid preparer was not B r i e r ' s . D . Refunds Now Clients Stone testified t h a t many o f the Refunds N o w clients she interviewed indicated that Brier prepared their return in spite o f the fact that the return identified a different preparer. Some o f the taxpayers indicated that they had never met the individual listed on the return as the preparer. These taxpayers also indicated that their returns showed fabricated Schedule C income, fabricated or inflated Schedule A deductions , and fabricated education expense credits. Furthermore , according to her affidavit, Stone stated that Brier and other unidentified employees o f Refunds N o w admitted that Refunds N o w employees are trained and directed to accept information from customers t h a t is clearly questionable or false and report it on . . . returns. Employees are instructed that [Refunds Now] will lose business i f employees t u m away customers suspected o f providing inaccurate information and that they should prepare and file those . . .
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returns e v e n i f the i n f o r m a t i o n c o n t a i n e d t h e r e i n is incorrect. Stone A f f i d a v i t at
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21. 1. M a r g a r e t I n k u m and O s e i O w u s u

M a r y 10 M c C a r t e n (" M c C a r t e n " ) , a tax c o m p l i a n c e o f f i c e r for t h e I R S , t e s t i f i e d t h a t she audited the 2 0 0 4 and 2005 j o i n t tax r e t u r n s o f M a r g a r e t I n k u m ( " I n k u m" ) and O s e i O w u s u (" O w u s u") and c o n d u c t e d an i n t e r v i e w w i t h the taxpayers . I n k u m and O w u s u ' s 2 0 0 4 j o i n t federal tax r e t u r n r e p o r t e d a S c h e d u l e A charitable c o n t r i b u t i o n s d e d u c t i o n o f $4,755 and deductions for e m p l o y e e b u s i n e s s e x p e n s e s . M c C a r t e n t e s t i f i e d t h a t I n k u m and O w u s u informed her that they did not h a v e any s u p p o r t for the charitable c o n t r i b u t i o n s or t h e e m p l o y e e b u s i n e s s expense d e d u c t i o n s a n d t h a t t h e y did not k n o w h o w the p u r p o r t e d d e d u c t i o n s c a m e to be reported on the return. The 2 0 0 4 a n d 2 0 0 5 t a x r e t u r n s also i n c l u d e d a $ 1 0 , 0 0 0 e d u c a t i o n e x p e n s e credit for Owusu. M c C a r t e n t e s t i f i e d, h o w e v e r , t h a t O w u s u did n o t a t t e n d s c h o o l a n d t h a t O w u s u did not provide d o c u m e n t a t i o n t h a t s h o w e d t h e r e " w ere any sort o f e d u c a t i o n or s c h o o l i n g expenses. " T r a n s c r i p t II at 30. The tax r e t u r n p r e p a r a t i o n fee w a s d e d u c t e d f r o m the r e f u n d a m o u n t for e a c h return. I n k u m and O w u s u p r o v i d e d an a f f i d a v i t to Stone . In t h a t affidavit, I n k u m and O w u s u stated that B r i e r p r e p a r e d t h e i r tax returns and t h a t B r i e r a s k e d i f [Owusu] w e n t to school. We r e s p o n d e d yes. A $1 , 0 0 0 d o w n p a y m e n t on the N e w E n g l a n d T r a c t o r T r a i l e r S c h o o l was m a d e s o m e t i m e in 2005. We t o l d [Brier] we h a d the r e c e i p t at home. We did not i n f o r m . . . B r i e r t h a t we s p e n t $10 , 0 0 0 in tax year 2 0 0 4 and 2005 for e d u c a t i o n e x p e n s e s . We d i d not instruct h i m to c l a i m t h e s e a m o u n t s on the returns. P l a i n t i f f s E x h i b i t 4 at ~ 16. S t o n e testified t h a t I n k u m and O w u s u i n f o r m e d her t h a t they did not discuss or a u t h o r i z e B r i e r to t a k e the charitable c o n t r i b u t i o n s or the e m p l o y e e b u s i n e s s

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expense deductions. The affidavit also stated that Sroufe and Santiago were "identified" on page 2 o f the 2005 return but to the best o f I n k u m ' s and Owusu ' s knowledge they did not prepare the return. Id. at
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20. Stone testified that the charitable contribution, employee business expense,

and education expense amounts were adjusted by the IRS because the amounts were either fabricated or inflated. As a result o f the I R S ' s examination o f the returns, additional taxes o f $3 ,920 were assessed for 2004 and $2,392 for 2005. 2. Wanda Negron McCarten also interviewed Wanda Negron ("Negron") and examined her 2005, 2006, and 2007 tax returns. Criselyn Rivera, a Refunds Now employee, prepared her returns. Negron ' s tax returns reported Schedule C income from a hairdressing business . Negron informed McCarten, however, that she did not have a hairdressing business, could produce no documentation that would support any income, and did not know how the income came to be reported on her tax returns. Brier, however, produced an "income verification engagement letter" for 2006 and 2007 , purportedly signed by Negron, which stated that Negron was self-employed and her "job description" was a " h a i r dresser" and that she earned approximately $4,800 in 2006 and $6,300 in 2007. Defendant's Exhibit K & L. In an affidavit provided to Stone, however, Negron stated that she " did not sign a [Refunds Now] statement as to the accuracy o f the Sch[edule] C amounts. " P l a i n t i f f s Exhibit 5 at refund amount. N e g r o n ' s 2006 tax return also reported a federal telephone excise tax credit o f $ 1 , 3 2 1 . McCarten concluded that Negron was not eligible for the excise tax credit because Negron did not have any documentation to support the credit. Negron informed McCarten that " [s]he did not
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12. The tax return preparation fee was deducted from her

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know where the amount came from . . . . " Transcript II at 39. As a result o f the I R S ' s examination o f N e g r o n ' s returns, additional taxes o f $ I ,328, $3,340, and $3,167 were assessed for the years 2005 , 2006, and 2007 , respectively. 3. April Smith McCarten also interviewed April Smith ("Smith") and examined her 2006 tax return. Smith 's return reported Schedule C business income o f $8,600. Based on information received from Smith, McCarten adjusted S m i t h ' s Schedule C income to $6,760 . Upon completion o f the examination , the IRS determined that Smith was entitled to a refund o f $13. In an affidavit provided to Stone, Smith explained that, in addition to other employment , she worked as a model. After Smith was informed by the IRS that her tax return was being audited, she sought the assistance o f Refunds Now. According to the affidavit, when Smith spoke to a representative o f Refunds Now, the representative informed Smith that Refunds Now "w ould help [her] put the paperwork together " and that it was " not . . . a big deal. " Plaintiff's Exhibit 7 at
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16. Smith met with " Jeff ' and J e f f informed her that she did not have the proper

paperwork. Id. at 17. Smith informed J e f f that she did not have any receipts and J e f f informed her that without receipts the auditor would "eat [her] alive ." Id. at 20. " J e f f t o l d [her] that the office would help [her] make the fake receipts. " Id. Smith ' s audit experience is not an isolated incident. S t o n e ' s affidavit states that Refunds Now interfered with the IRS ' exam inations o f their customer's tax returns by advising customers not to appear for their return examination appointment and by advising and assisting customers in creating falsified documents to substantiate items reported on their returns.

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4. Diane Fielder On February, 1 5 , 2 0 1 0 , Diane Fielder ("Fielder") had her 2009 federal income tax return prepared by Refunds N o w by a man named Ishmael. Ishmael informed Fielder that she would receive her federal refund in two weeks. When Fielder did not receive her refund in that time span , she contacted Refunds N o w and met with Maria Santos ("Santos"). Santos gave Fielder a " document" that listed the refund due Fielder. Transcript I at 40 . Fielder noted that the refund amount listed on the document was double the refund amount listed on the copy o f her tax return. Santos informed Fielder not to worry and that "we got you a bigger refund ." Id. at 41. Santos did not pro vide Fielder with documentation to support the higher refund amount. Based upon the tax return prepared by Ishmael , Fielder expected to receive a federal refund o f $2,241. Instead, on April 2, 2010, Fielder received a refund check o f approximately $4,700 . After receiving the refund check, Fielder went to the IRS office in Providence and spoke to an IRS representative. The representative informed her that the copy o f the return she had been given by Refunds N o w did not agree with the return that had been filed with the IRS. The representative informed her that some o f the amounts listed on the return that was filed with the IRS were "incorrect" and that she was not "qualified" for some o f the " ex em pt ion s" listed on the return . The copy o f the return provided to her by Refunds N o w listed her total income , from unemplo yment compensation, at $23 ,296. The return filed, however, listed $17 ,600 o f unemployment compensation , $5 ,696 o f wages, and an earned income credit. Fielder, understood however, that, because she did not have any income other t h a n unemployment compensation, she was not eligible for the earned income credit. Brier testified that the problem with Fielder 's ta x return occurred because " som ebody changed something , the return had a

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computer glitch s o m e h o w because the return that was sent was not the correct return that the ta xpayer signed o f f o n . " Transcript III at 18. IV . Analysis A. 26 U .S.C. § 7407 26 U.S.C. § 7407 provides t h a t i f the Court finds , inter alia, that a tax return preparer has " engaged in any conduct subject to penalty under [26 U.S.C.] section 6694 or 6695 " or has "engaged in any other fraudulent or deceptive conduct which substantially interferes with the proper administration o f the Internal Revenue laws" and that " inj un ctiv e r e l i e f is appropriate to prevent the recurrence o f such conduct" the Court " m ay enjoin such p e r s o n from further engaging in such conduct." 26 U .S.C. § 7407(b)(l)(A); (D) ; (b)(2). F u r t h e r, i f t h e Court finds that a tax return preparer has "continually or repeatedly" engaged in the offensive conduct, and that an injunction prohibiting only proscribed conduct would not be "sufficient to prevent such person 's interference with the proper administration [ o f the Internal Revenue Code ,] the court may enjoin such a p e r s o n from acting as a tax return preparer." Id. at (b)(2). The Government asks this Court to issue an injunction pursuant to § 7407 enjoining all Defendants from acting as tax return preparers. The Government argues that where the provisions o f a statute , like § 7407 , expressly authorize injuncti ve relief, the traditional four-factor test for injunctive r e l i e f need not be met. United States v . Renfrow, 612 F . Supp . 2d 677 (E.D .N.C . 2009) (where injunction is expressly authorized by statute and statutory conditions are satisfied, traditional injunctive r e l i e f test need not be met); see also SEC v. Management Dynamics, Inc. , 515 F.2d 801 (2d Cir. 1975) . In such instances , courts focus on the statutory conditions for injunctive r e l i e f. Management Dynamics ,

17

515 F.2d at 801. Although the First Circuit has not specifically decided the issue o f whether the traditional test applies in a case where a statute expressly authorizes injunctive relief, it has observed that "where Congress has specifically authorized injunctive r e l i e f . . . it may not be necessary to satisfy the four-factor test." Coxcom, Inc. v. Chaffee , 536 F.3d 101, 112 n.14 (1st Cir. 2008). This Court considers the Government's claim for injunctive r e l i e f pursuant to the statutory factors expressly listed in
§ 7407 .

To issue an injunction pursuant to § 7407, the Court must find that: (1) the defendant is a tax return preparer; (2) the conduct complained o f falls within one o f the areas o f proscribed conduct ; and (3) that an injunction is " appropr iat e to prevent the recurrence" o f the proscribed conduct. United States v. Ernst & Whinney , 735 F.2d 1296, 1303 (11th Cir. 1984). The Government must prove each element by a preponderance o f the evidence. United States v. McIntvre , _ F. Supp. 2d _ _, 2 0 10 W L 2103226 (C.D . Cal. 2010). 1. Defendants as Tax Preparers According to the tax code, a "tax return preparer " is " a n y person who prepares for compensation, or who employs one or more persons to prepare for compensation" a federal tax return . 26 U.S.C . § 7701(a)(36)(A). The term "p erson" means , inter alia, an individual , company, or corporation. Id. at (a)(1). The Court finds that all o f the Defendants are tax return preparers . 2. Proscribed Conduct a. Fraudulent or deceptive conduct under § 7 4 0 7 ( b ) ( l ) ( D ) The Government contends that there are several instances o f proscribed conduct which

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support the issuance o f an injunction under § 7407. The Government first argues that Defendants' conduct as it relates to the securing and use o f E F I N s is "fraudulent or deceptive" and "substantially interferes with the proper administration o f the Internal Revenue laws." 26 U.S .C. § 7407(b)(l)(D). EFIN s are assigned and regulated in accordance with guidelines described in IRS Revenue Procedure 2007-40. Participants in the IRS electronic filing program must comply with the provisions o f Revenue Procedure 2007-40 and all notices and publications governing IRS electronic filing, including but not limited to, IRS Publication 1345 ("Handbook for Authorized IRS e-file Providers o f Individual Income Tax Returns ") and Publication 3112 ("IRS e-file Application and Participation"). See IRS Revenue Procedure 2007-40 . I f an individual assigned an EFIN has been suspended from the electronic filing program, the individual may not electronically file tax returns. 10 Brier and Refunds N o w ! ' have certainly engaged in fraudulent or deceptive EFIN conduct which substantially interferes with the proper administration o f the Internal Revenue laws. See generally United States v. Stone, 1:06-CV-157, 2006 WL 2265436 (W.D. Mich. Aug. 7, 2006) (preliminarily enjoining individual taxpayer a n d j i r m ) . Brier and Refunds N o w obtained approximately 62 EFINs for eight locations. B r i e r ' s testimony t h a t Refunds N o w changes EFINs frequently as a marketing tool to throw o f f the competition is not in the least bit credible. The Court finds that Brier and Refunds N o w changed EFINs frequently because the IRS repeatedly suspended the EFINs as a result o f B r i e r ' s and Refunds N o w ' s noncompliance with EFIN

IOSuspensions are usuall y for a one or two ye ar period. IRS Publication 3112. llUnless otherwise noted in the analysis, any reference to Refunds Now includes a reference to RNTS , Inc " FTlRS , Inc., POTIRS , Inc. , and IHIRS , Inc.

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regulations. Brier played EFIN roulette - applying for a new EFIN as s o o n as an EFIN was suspended. Brier and Refunds N o w continued to obtain EFINs, and file returns , after Brier knew that the EFINs Refunds N o w obtained had been suspended. Brier and Refunds N o w also used EFINs assigned to other individuals and entities to continue to file tax returns when all Refunds Now EFINs had been suspended. Sroufe has also engaged in proscribed conduct. Sroufe became president o f Refunds N o w in order to obtain EFINs for Refunds NOW. 12 Those EFINs were suspended because the IRS determined that Sroufe was using EFINs to file returns on b e h a l f o f Brier, a suspended filer. Once the EFINs were suspended , however, Sroufe admitted that he relinquished the office o f president to allow Santiago to become president and obtain new EFINs for Refunds Now. Consequently, Sroufe was aware that Refunds N o w continued to obtain EFINs after the EFINs he obtained for Refunds N o w had been suspended . Furthermore, Sroufe was also involved in obtaining another EFIN for Refunds N o w in early 2010. Sroufe ' s testimony concerning this matter , as well as most o f his testimony on other issues, was purposefully evasive. The Court finds that Sroufe engaged in fraudulent and deceptive EFIN conduct w h i c h substantially interfered with the proper administration o f the Internal Revenue laws. The Government also alleges that Santiago and Miranda participated in fraudulent and deceptive EFIN conduct. The Court finds that there was scant evidence presented concerning the securing and use o f E F I N s as to these two individuals. The Government has not met its burden with respect to Santiago and Miranda.

12Sroufe testified that he became president o f Refunds Now to obtain " an" EFIN . Transcript IV at 96. Stone testified that Sroufe , however , obtained several EFINs . The Court credits Stone 's testimony .

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b. Conduct S u b j e c t to Penalty U n d e r 26 U .S .C. § 6695(c) - F a i l i n g to F u r n i s h Identifying Number The G o v e r n m e n t n e x t argues t h a t Defendants engaged in c o n d u c t subject to penalty under § 6695(c). 26 U.S.C. § 6695(c) penalizes a tax return preparer who fails to furnish an identifying number on a tax return unless that failure is due to reasonable cause and not due to willful neglect. See 26 U . S . c . §§ 6695(c); 6 l 0 9 ( a ) ( 4 ) ; United States v. B u d d h u, Civil A c t i o n No. 3:08cv-0074(CFD), 2009 WL 1346607 (D. Conn. May 1 2 , 2 0 0 9 ) . Stone testified t h a t the identify o f the Refunds N o w p r e p a r e r was misrepresented on tax returns. Stone identified returns that were prepared by Brier t h a t listed various employer identification n u m b e r s or social security numbers th at did not belong to Brier. B r i e r did not list his identifying n u m b e r on returns that he prepared ; rather , he listed the identifying numbers o f other Refunds N o w employees. Brier ' s failure to list his own identification n u m b e r is therefore not due to a reasonable cause. The C o u r t finds t h a t his failure to use his o w n identification n u m b e r was intentional and t h a t his p u r p o s e was to mislead the IRS as to the p r e p a r e r o f the return . Additionally, while Brier i n f o r m e d Stone that he did not prepare returns from 2004-2006 , Stone identified approximately 800 returns during those years listing B r i e r ' s social security number as the p r e p a r e r n u m b e r on the returns. Either Brier was untruthful w h e n he spoke to Stone or another unidentified Refunds N o w employee or employees listed B r i e r ' s social security number on approximately 800 returns t h a t Brier did not prepare. B r i e r ' s c o n d u c t subjects him and Refunds N o w to penalty u n d e r 26 U . S . c . § 6695(c). The G o v e r n m e n t ' s evidence o f a § 6695(c) violation centered a r o u n d Brier and Refunds Now. The G o v e r n m e n t failed to p r e s e n t sufficient specific evidence c o n c e r n i n g S r o u f e ' s , Santiago ' s and M i r a n d a ' s alleged failure to furnish their identifying n u m b e r s . Consequently , the 21

Government has failed to m e e t its b u r d e n w i t h respect to Sroufe, Santiago, and M i r a n d a on a § 6695(c) violation. c. C o n d u c t S u b j e c t to Penalty U n d e r 26 U.S.C. § 6694Ca)13 The G o v e r n m e n t n e x t argues t h a t B r i e r engaged in c o n d u c t t h a t is s u b j e c t to penalty u n d e r § 6694(a). A t a x r e t u r n p r e p a r e r is subject to p e n a l t y u n d e r § 6 6 9 4 ( a ) where: (1) the r e t u r n contains an u n d e r s t a t e m e n t o f liability; (2) t h a t u n d e r s t a t e m e n t is due to a p o s i t i o n for w h i c h t h e r e was n o t a realistic p o s s i b i l i t y o f b e i n g s u s t a i n e d on its merits; a n d (3) the p r e p a r e r k n e w or reasonably s h o u l d h a v e k n o w n t h a t the p o s i t i o n was e i t h e r frivolous or was not disclosed p u r s u a n t to [26 U.S.C.] § 6 6 6 2 (d)(2)(B)(ii). United States v. P u g h , _ F. Supp. 2d _ _, 2010 WL 2 2 6 6 0 6 9 at *13 (E.D.N.Y. J u n e 1 , 2 0 1 0 )

(internal quotation m a r k s and c i t a t i o n omitted). The G o v e r n m e n t a r g u e s t h a t B r i e r violated § 6694(a) because Brier, as the o w n e r o f R e f u n d s N o w a n d the o t h e r c o r p o r a t e Defendants, (1) prepared, or a l l o w e d e m p l o y e e s u n d e r his direction a n d control to p r e p a r e , i n c o m e tax returns, (2) t h a t included u n d e r s t a t e m e n t s o f t a x liabilities w h i c h h a d no r e a l i s t i c p o s s i b i l i t y o f being sustained on the m e r i t s and, (3) t h a t he did n o t disclose and t h a t he k n e w , or s h o u l d have known, were frivolous.
I t is c l e a r t h a t at l e a s t three h u n d r e d tax returns p r e p a r e d by B r i e r a n d R e f u n d s N o w

contained an u n d e r s t a t e m e n t o f t a x liabilities. By example, B r i e r p r e p a r e d the I n k u m / O w u s u return w h i c h c l a i m e d an inflated e d u c a t i o n expense credit a n d S c h e d u l e A charitable contributions and b u s i n e s s e x p e n s e deductions w i t h o u t p r o p e r support. N e g r o n ' s return, prepared by a R e f u n d s N o w employee, contained fabricated Schedule C i n c o m e and a fabricated

13 26 U . S . c . § 6694 was amended in 2007 and 2008. Those amendments however only apply to returns prepared, at the earliest, after May 2 5 , 2 0 0 7 . See generally United States v. Pugh, _ . F. Supp. 2d at _ , 2 0 1 0 WL 2266069 at *13 n.14 (E.D.N.Y. June 1 , 2 0 1 0 ) . Since both parties refer to the version o f the statute that was in effect for returns prepared prior to May 2 5 , 2 0 0 7 , the Court follows their lead. 22

telephone excise tax credit. S m i t h 's return included unsupported Schedule C income which , upon notice o f an audit, a Refunds N o w employee offered to support w i t h " f a k e receipts." Fielder 's return was an outright fraud on the IRS as it included fabricated wages and a fraudulent earned income credit. " Stone testified that the 350 returns reviewed by the IRS contained, among other things , fabricated income , deductions, education expense tax credits, and e a r n e d income tax credits which resulted in an aggregate understatement o f tax liability o f more t h a n $1 ,100,000. Brier, and his employees, reported deductions, credits, and income for w h i c h t h e y had no support. There is certainly no realistic possibility o f sustaining a position for a deduction , credit, or income when the a m o u n t is fraudulent. See generally Stone, 2006 WL 2 2 6 5 4 3 6 (granting preliminary injunction u n d e r § 7407 and enjoining tax preparer and firm based upon an audit and several affidavits from clients noting fabricated deductions and income). Stone interviewed other Refunds N o w clients who also indicated that their returns contained fabricated or inflated Schedule C income , Schedule A deductions, and education expense credits. Even the most inexperienced tax return preparer knows or should k n o w that fabricated o r inflated deductions, income, or tax credits are frivolous. United States v. Fernandez, N o . C I V 6 0 4 C V 1 7 7 2 0 R L 3 1 J G G , 2005 WL 1332278 at *3 (M.D. Fla. May 4 , 2 0 0 5 ) ("Claiming entirely fabricated, or at the very least overstated deductions is a frivolous position") ; United States v. Venie, 691 F. Supp. 834, 839 (M.D. Pa. 1988) ( " I n holding h i m s e l f out as a tax return preparer, [defendant] is presumed to be familiar with the Internal Revenue Code as well as regulations and the case law regarding the

14Srier 's explanation that the inaccurate Fielder return filed w ith the IRS was the result o f a " comput er glitch " is not credible .

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Code"). The Court finds t h a t Brier and Refunds N o w have repeatedly engaged in conduct subject to penalty u n d e r § 6694(a). See United States v. Paul, No. C04-0916L, 2004 WL 3250168 (W.D. Wash. Sept 1 7 , 2 0 0 4 ) (granting preliminary injunction u n d e r §§ 7407 and 7408 where defendant was responsible for $1,300,000 in understated tax liability as a result o f preparing returns w i t h fabricated charitable contributions and employee business expenses without knowledge o f taxpayers); United States v. Deangelo, No. S A C V 03251GLT, 2003 WL 23696247 (C.D. Cal. July 3 0 , 2 0 0 3 ) (granting preliminary injunction u n d e r §§ 7402 and 7407 based on defendants consistently overstating charitable contributions and employee business expenses). d. Conduct Subject to Penalty Under 26 U.S.C. § 6694(b) The Government next argues that Brier engaged in conduct t h a t is subject to penalty under § 6694(b). Section 6694(b) penalizes a tax return preparer " w h o willfully attempts to understate a t a x p a y e r ' s liability or who understates a t a x p a y e r ' s tax liability due to a reckless or intentional disregard o f rules and regulations." Buddhu, 2009 WL 1346607 at *3; Pugh, _ _ F. Supp. 2d _ _, 2010 WL 2266069 at * 13. A willful understatement o f tax liability includes situations where a tax preparer "intentionally overstates items o f deductions." United States v. Ferrand, No. 0 5 - 0 0 6 9 , 2 0 0 6 WL 598212 at *4 (W.D. La. February 7 , 2 0 0 6 ) (internal quotation marks and citation omitted), report and recommendation adopted, 2006 WL 1401924 (W.D. La. April 1 1 , 2 0 0 6 ) . Brier certainly "overstated deductions, or, worse, created t h e m out o f thin air; and blatantly disregarded the Code and regulations." Ferrand, 2006 WL 598212 at *4. B r i e r ' s level o f education and experience also suggests that his conduct was k n o w i n g and willful. See Paul, 2004 WL 3250168 at *3. Brier and Refunds N o w participated in conduct subject to penalty

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under § 6694(b). 3. Is an i n j u n c t i o n appropriate to p r e v e n t the recurrence o f the p r o s c r i b e d conduct? Courts l o o k to a n u m b e r o f factors to determine w h e t h e r an i n j u n c t i o n is appropriate to prevent the recurrence o f p r o s c r i b e d conduct. Courts evaluate the l i k e l i h o o d o f future violations and consider (1) the gravity o f the h a r m caused by the offense; (2) the e x t e n t o f the d e f e n d a n t ' s participation; (3) the d e f e n d a n t ' s degree o f scienter; (4) the i s o l a t e d or recurrent nature o f the infraction; (5) the d e f e n d a n t ' s recognition (or non-recognition) o f his own culpability; and (6) the likelihood t h a t d e f e n d a n t ' s o c c u p a t i o n w o u l d place him in a p o s i t i o n w h e r e future violations could be anticipated. United States v. Gleason, 432 F . 3 d 6 7 8 , 6 8 3 (6th Cir. 2005) (internal q u o t a t i o n marks and citation omitted) (analyzing recurrence u n d e r § 7408); U n i t e d States v. Schiff, 379 F . 3 d 621 (9th Cir. 2004) (analyzing recurrence u n d e r § 7408); Pugh, _ F. Supp. 2d _ _, 2 0 1 0 WL 2266069

at *23 (same); U n i t e d States v. Broccolo, No. 06-CV-2812 ( K M K ) , 2 0 0 6 WL 3690648 (S.D.N.Y. Dec. 1 3 , 2 0 0 6 ) (applying similar factors in c o n t e x t o f p r e l i m i n a r y injunction u n d e r § 7407); United States v. Reddy, 500 F. Supp. 2d 877, 882 (N.D. Ill. 2 0 0 7 ) (same). These factors strongly support the issuance o f an injunction against Brier and Refunds N o w . B r i e r ' s participation in the t a x p r e p a r a t i o n services was c e n t r a l - he o w n e d all t h e companies that performed tax p r e p a r a t i o n services and prepared a large n u m b e r o f returns himself. Brier also orchestrated the R e f u n d s N o w EFIN charade. B a s e d on a r e v i e w o f B r i e r ' s p a s t performance, his continued participation in a tax return preparation service all but assures t h a t widespread violations will continue. The IRS audited 350 Refunds N o w tax returns p r e p a r e d from 20032007. Approximately 90% o f those returns resulted in an increased tax liability o w e d to the Government. The e x a m i n e d returns reflect a total understated tax liability o f m o r e t h a n

25

$1,100,000. Refunds N o w prepared approximately 24,000 tax returns for the period 2003-2007. The record reflects that in 2009, Refunds Now prepared approximately 8,000 returns. "Given the volume o f returns generated and the potentially large amount o f understated tax liability, the Court believes that, absent an injunction, [Brier's and Refunds N o w ' s ] deleterious behavior is all but certain to [re-]occur." Stone, 2006 WL 2265436 at *3. The record evidence also supports the issuance o f an injunction against Sroufe with respect to his EFIN conduct. Sroufe was a knowing participant in B r i e r ' s EFIN charade. Sroufe's deceptive conduct is likely to continue absent an injunction. An injunction pursuant to § 7407 need not merely prohibit specified types o f misconduct or specific violations o f the IRS Code. An injunction may be broader and prohibit an income tax return preparer from acting as an income tax return preparer i f the Court finds that the preparer has continually or repeatedly engaged in prohibited conduct which violates § 7407 and a more limited injunction would not be sufficient to prevent interference with the Internal Revenue Code. 26 U S . c . § 7407(b)(2). The persuasive evidence o f B r i e r ' s repeated illegal, deceptive and fraudulent conduct is more than sufficient to conclude that anything short o f broad injunctive relief will not prevent future misconduct by Brier and Refunds Now. B. 26 U S . c . § 7408 The Government argues that all Defendants should be enjoined under § 7408 because they have engaged in conduct subject to penalty under 26 U . S . c . § 6701. A court is authorized to issue an injunction under § 7408 i f ( l ) an individual engages in conduct subject to penalty under 26 U S . c . § 6701, and (2) injunctive relief is appropriate to prevent recurrence o f such conduct.

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United States v. McIntyre , _

F . Supp. _ _, 2010 WL 2103226 (C .D. Cal. May 24 ,2010).15

Section 6701 prohibits aiding and abetting the understatement o f tax liability . Id. at *6. Under § 6701, a person ( l ) " w h o aids or assists in, procures , or advises with respect to , the preparation or presentation o f any portion o f 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 ( i f so used) would result in an understatement o f the liability for tax o f another person" may be penalized. Id. (internal quotation marks and citation omitted). B r i e r ' s conduct satisfies this standard. Brier and Refunds Now clearly advised , aided , and assisted clients in preparing and filing fraudulent tax returns in order to secure fraudulent refunds. Brier knew these returns would be used in connection with a material matter arising under the Internal Re venue Code and that these fraudulent returns and forms would result in the understatement o f tax liability . Brier and Refunds N o w have certainly participated in conduct subject to penalty under § 6701. The Court has already concluded that injunctive r e l i e f is appropriate to prevent the recurrence o f certain proscribed conduct pursuant to § 7407. The Court reaches the same conclusion under § 7408. 16 Once again , The G o v e r n m e n t ' s evidence centered around Brier and Refunds Now. The Government failed to present sufficient specific evidence concerning Sroufe ' s , Santiago's and Miranda's preparation o f specific tax returns. Consequently, the Government has failed to meet

15B ec ause § 7408 expre ssly authorizes the Court to issue an injunction , the C o u r t again dispenses with the traditional injunctive r e l i e f anal ysis . See 26 U.S.C . § 7408 .
16 As noted , h o w e v e r, § 7408 does not authorize the c o u r t to issue a b r o a d injunction against all tax return preparation .

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its burden under § 7408 with respect to Sroufe, Santiago and Miranda. C. 26 U.S.C. § 7402(a) The Government argues that all Defendants should be enjoined pursuant to § 7402(a). Section 7402(a) gives this Court the jurisdiction to issue injunctions in civil actions "as may be necessary or appropriate for the enforcement o f the internal revenue laws ." 26 U.S.C. § 7402(a) . Section "7402(a) encompasses a broad range o f powers necessary to compel compliance with the tax laws." Ernst & Whinney, 735 F.2d at 1300; Pugh, _ F. Supp. 2d _ , 2 0 1 0 WL 2266069 at

*24 (§ 7402(a) is a "catch-all" provision and has been used to enjoin interference with tax enforcement even when interference does not violate any tax statute; its remedies are in addition to and not exclusive o f any and all other remedies) . Section 7402(a) was enacted by Congress to "p rovide the district courts with a full arsenal o f powers to compel compliance with the internal revenue laws." Brody v. United States, 243 F.2d 378 , 3 8 4 ( I s t Cir. 1957) (emphasis added). A court may enjoin a defendant from acting as a federal tax preparer under § 7402(a). Pugh , _ Supp. 2d _ 1992). To obtain an injunction under § 7402(a), the Government m u s t s h o w that an injunction is necessary or appropriate to enforce the internal revenue laws. United States v. Madzima, No. 3 :08-CV-1043-B , 2009 WL 2596599 (N .D. Tex . August 21, 2 0 0 9 ) . In considering injunctive relief under § 7402(a) , some courts consider the traditional equitable factors , Ernst & Whinney , 735 F.2d at 1301; Broccolo, 2006 WL 3690648 at *6; United States v. Haggert, Civ. No. 95-236B, 1996 WL 196757 (D. Me. Feb. 12, 1996), while others do not , United States v. Dykeman Family Corp ., No. 09 -CV -867 , 2009 W L 3735535 (E.D. Wis. Nov. 6, 2 0 0 9 ) (injunction under § , 2 0 1 0 WL 2266069 at *24; United States v. Bailey, 789 F. Supp . 788 (N.D. Tex . F.

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7420 ma y issue without resort to traditional equitable prerequisites) ; U n i t e d States v . Thompson, 395 F. Supp. 2d 941 (E. D. Cal. 2005) (same). This Court analyzes § 7402(a) injunctive r e l i e f against the backdrop o f the traditional equitable factors: ( I ) the likelihood o f success on the merits; (2) irreparable h a r m ; (3) balance o f the relative hardships ; and , (4) the effect on the public interest. Gonzalez-Fuentes v. Molina, 607 F.3d 864 ( I s t Cir. 2010) , petition for cert. filed, _ _ U.S.L.W. _ _, (U.S. Oct. 4, 2010) (No. 10-6873). The Government has shown a likelihood o f success on the merits. The record reflects that Brier has been at the helm o f a fraudulent tax preparation service for a number o f years. Santiago and Sroufe were important players in Brier 's fraudulent tax preparation service. Santiago and Sroufe were both participants in Brier ' s EFIN charade. Santiago , the president o f Refunds N o w, also prepared tax returns, supervised employees, and assisted in customer service issues. Sroufe , a p a s t president o f Refunds N o w, prepared returns , assisted in employee training and customer service , and was responsible for the operation o f Refunds N o w computer network. The evidence shows a pattern o f disregard for the Internal Revenue Code. The Government has established that Brier, Refunds Now, Sroufe, and Santiago are violating and/or interfering with the administration o f the internal revenue code by either preparing and filing tax returns , or aiding a tax preparation firm in the preparation and filing o f tax returns , containing fabricated and inflated income, deductions and tax credits. The Government has also demonstrated that both Brier and Sroufe have participated in fraudulent and deceptive EFIN conduct. Furthermore , the Government has also shown that Brier and Refunds N o w have engaged in conduct subject to penalty under §§ 6694 and 6695. A n injunction is therefore

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necessary to enforce the internal revenue laws. The Government and the public will suffer irreparable harm in the absence o f an injunction. The Government has been harmed by a substantial loss o f tax revenue and the expense o f pursuing the investigation against Defendants. Furthermore, Defendants ' clients, who relied upon Defendants " exp ert ise" and advice , have been harmed as they will be forced to pay back tax deficiencies and possibly interest and penalties . Pugh , _ WL 2266069 at *26. The balance o f harm weighs in favor o f the Government. Brier , Refunds Now , Sroufe and Santiago do not enjoy[ ] a right to profit from illeg al conduct , and the harm to them is substantially outweighed by the harm that has been and will continue to be suffered by the Government and [Defendants'] customers as a result o f the fraudulent tax returns with which [Brier, Refunds Now, Sroufe and Santiago] have b e e n . . . involved. Id. at *2 7 The public interest will also be served by a preliminary injunction. Brier , Refunds Now , Sroufe, and Santiago ' s activities undermine public confidence in the fairness o f the federal tax system and advise , encourage and cause violations o f the internal revenue laws. The public has a compelling interest in prohibiting [deceptive and illegal conduct] that aid some in avoiding lawful income taxes . . . and a [temporary] injunction will prevent taxpayers from having inaccurate , frivolous or fraudulent returns filed in their name that would subject them to liability for overdue taxes, penalties , and interest. Id. (internal quotation marks and citation omitted). As noted above, § 7402(a) gives this Court the power to enjoin a tax preparer from preparing tax returns. Pugh , _ F. Supp . 2d - , 2 0 1 0 WL 2266069 at *24. 2345 . The Court F . Supp . 2d at _ _ , 2010

concludes that Brier , Refunds Now, Sroufe and Santiago should be preliminarily enjoined from 30

preparing tax returns based on the v o l u m e o f returns prepared by R e f u n d s N o w and the potentially large a m o u n t o f understated ta x liability. 17 V. Conclusion Based on the foregoing factual findings and legal conclusions , the C o u r t makes the following o r d e r s :
(1) Defendants Michael Brier, Jeffrey Sroufe, E s t h e r Santiago, a n d Refunds N o w Inc.,

individually, and d o i n g business u n d e r the names RNTS, Inc., FTIRS, Inc. , POTIRS, Inc., and IHIRS, Inc., or u n d e r any other n a m e or using any other entity, and t h e i r representatives, agents, servants , employees , attorneys , and all persons in active concert or p a r t i c i p a t i o n w i t h them, are preliminarily enjoined and prohibited, during the pendency o f this action: (a) from directl y or indirectly acting as federal income tax r e t u r n preparers and are hereby prohibited from preparing , filing or assisting in the preparing and filing o f federal income tax returns , amended returns , or o t h e r related forms and documents on b e h a l f o f any person other than themselves ; and (b) from engaging in any c o n d u c t subject to any penalty u n d e r t h e Internal Revenue Code or any other c o n d u c t t h a t interferes w i t h the administration and e n f o r c e m e n t o f the internal revenue laws. (2) Defendants Michael Brier, Jeffrey Sroufe , and Refunds N o w, Inc ., individually and doing business u n d e r the n a m e s RNTS, Inc. , FTIRS , Inc., POTIRS , Inc. , and IHIRS , Inc., or under any other n a m e or using any other entity, and their representatives , agents , servants, emplo yees , attorneys , and all p e r s o n s in active concert or participation w i t h t h e m, are

17T he

Government presented meager evidence with respect to Miranda.

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preliminarily e n j o i n e d and prohibited, during the pendency o f this a c t i o n from applying for or using, either individually or t h r o u g h any other individual or entity, an Electronic Filing Identification N u m b e r . (3) Defendants Michael B r i e r and Refunds N o w , Inc., individually, and doing business under the names R N T S , Inc., FTIRS, Inc., POTIRS, Inc., and IHIRS, Inc., or u n d e r any other name or using any o t h e r entity, and t h e i r representatives, agents, servants, employees, attorneys, and all persons in active c o n c e r t or participation w i t h them, are p r e l i m i n a r i l y e n j o i n e d and prohibited, during the p e n d e n c y o f this action from engaging in c o n d u c t subject to penalty under 26 U.S.C. §§ 6694 and 6695, including failing to furnish an identifying n u m b e r on a tax return and understating tax liabilities. (4) Defendants Michael Brier, Jeffrey Sroufe, E s t h e r Santiago, a n d Refunds N o w , Inc., individually, and d o i n g b u s i n e s s u n d e r the names RNTS, Inc., FTIRS, Inc., POTIRS, Inc., and IHIRS, Inc., or u n d e r any o t h e r n a m e or using any other entity, are o r d e r e d to p r o v i d e counsel for the United States, on or before D e c e m b e r 1 5 , 2 0 1 0 , a list o f names, addresses, e-mail addresses, telephone numbers, and social security numbers o f all clients for w h o m t h e y p r e p a r e d or helped prepare any tax-related documents, including claims for refunds or tax returns, since January 1, 2004.

SO ORDERED.

MaryM. L 1 C h i e f U n i t e d States D i s t r i c t J u d g e N o v e m b e r ~, 2010. 32

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