U.S. v. Baxter, Civil Action No. 1:05cv70-T.
| Decision Date | 03 June 2005 |
| Docket Number | Civil Action No. 1:05cv70-T. |
| Citation | 372 F.Supp.2d 1326 |
| Court | U.S. District Court — Middle District of Alabama |
| Parties | UNITED STATES of America, Plaintiff, v. Larry A. BAXTER and Baxter & Associates Office of Accountancy, P.C., Defendants. |
Michael Richard Pahl, U.S. Department of Justice Tax Division, Washington, DC, for Plaintiff.
Keith H. Johnson, Kristopher D. Robinson, Johnson & Johnson, P.A., Jacksonville, FL, for Defendants.
Anita Dawkins, Dothan, AL, pro se.
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 federal-income-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.
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 federal and state income tax returns. Before having their tax returns prepared, Baxter's clients would complete intake sheets that inquired about relevant personal details, dependency or exemption data, and other 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 reported Schedule A 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. These refunds were often deposited directly into Baxter's 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 on her 1997 Schedule C that she had earned $ 1,850 from "contract sales" and had incurred $ 12,369 in business expenses. The customer later confronted Baxter about the false items on her return, and Baxter accused her of slander.
Another 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 customers' 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 business expenses that were reported on his clients' returns. 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 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 relief for low-income families hurt by rising food and energy prices." Sorenson v. Secretary of Treasury of U.S., 475 U.S. 851, 864, 106 S.Ct. 1600, 1609, 89 L.Ed.2d 855 (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 # 1: Scenario # 2
False Business No False Business
Income Reported Income Reported
on Schedule C on Schedule C
------------------------------------------------------------------------
Business Profit $8,000 $0
------------------------------------------------------------------------
Wages $3,500 $ 3,500
------------------------------------------------------------------------
Standard Deduction ($6,900) ($ 6,900)
------------------------------------------------------------------------
Personal Exemption ($3,000) ($ 3,000)
------------------------------------------------------------------------
Exemption ($6,000) ($ 6,000)
------------------------------------------------------------------------
Taxable Income ($5,900) ($12,400)
------------------------------------------------------------------------
Tax Due $0 $0
------------------------------------------------------------------------
Self-Employment $1,130 $0
Tax
------------------------------------------------------------------------
Tax Owed $1,130 $0
------------------------------------------------------------------------
EITC ($4,010) ($ 1,410)
------------------------------------------------------------------------
Refund $2,880 $ 1,410
------------------------------------------------------------------------
As the above examples suggest, Baxter used a variety of means to obtain money from the government by providing false 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.
Several revenue statutes condemn Baxter's actions and authorize the relief requested by the United States. 26 U.S.C.A. § 7408 authorizes a district court "to enjoin any person from further engaging in ... conduct ... subject to penalty under section ... 6701." In turn, 26 U.S.C.A. § 6701 penalizes anyone who knowingly prepares someone else's income tax return to understate tax liability. Section 6701 provides in part that:
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. § 6695(g). Section 6694 penalizes the...
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...Credit ("EITC") "was enacted to provide relief for low-income families hurt by rising food and energy prices." United States v. Baxter , 372 F.Supp.2d 1326, 1328 (M.D. Ala. 2005) (citing Sorenson v. Sec. of Treasury of U.S. , 475 U.S. 851, 864, 106 S.Ct. 1600, 1609, 89 L.Ed.2d 855 (1986) ).......
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