Feds seek injunction against former Libby man accused of fraud in Washington

The U.S. Justice Department filed a complaint April 2 in the District Court for the Eastern District of Washington against Donald J. Taylor, a former IRS revenue agent and registered enrolled agent, who left the IRS in 2008 to work as a paid tax return preparer in Kennewick, Washington. 

The civil complaint seeks to bar Taylor from owning or operating a tax return preparation business and preparing federal income tax returns for others. The United States also seeks an order requiring Taylor to give his ill-gotten tax preparation fees to the United States.

The complaint alleges that Taylor filed tax returns for customers that were riddled with errors, fabrications and fraudulent entries. 

Prosecutors allege Taylor’s main scheme involved taking advantage of the differences between running a business as a sole proprietorship and an S corporation. A sole proprietor is someone who owns an unincorporated business by themselves and reports any income and expenses on Schedule C Profit or Loss from Business (Sole Proprietorship) of their individual tax returns. 

S corporations are corporations no different from any other corporation under state law that are not subject to federal income tax at the corporate level. An S corporation reports income, deductions and loss on a separate corporate tax return and then issues a Schedule K-1 (Form 1065) to the shareholder, who reports items of income, deduction, loss or credit on their own tax return.

As the complaint asserts, Taylor prepared false corporate and individual income tax returns by abusing the S corporation requirements under the Internal Revenue Code to reduce customers’ overall tax liabilities. 

According to the complaint, Taylor did this (1) by fabricating businesses and related business expenses or willfully or recklessly claiming false or unsubstantiated business deductions; (2) taking deductions for employee paid expenses and employer reimbursements without an accountable plan or reimbursement policy, which is against IRS regulations and (3) unreasonably decreasing the amount of wages employee-shareholder customers receive and correspondingly increasing the amount of S corporation distributions made to them to reduce their tax liability.

By repeatedly understating customers’ tax liabilities, the complaint alleges that Taylor caused the United States harm of an estimated $42 million in lost tax revenue between 2017 and 2020.

According to the complaint, Taylor’s conduct is more serious because he continued his abusive actions despite being previously penalized twice by the IRS for recklessly or willfully understating customers’ liabilities from 2007 through 2010. 

Deputy Assistant Attorney General David A. Hubbert of the Justice Department’s Tax Division made the announcement.

Taxpayers seeking a return preparer should remain vigilant against unscrupulous tax preparers. The IRS has information on its website at https://www.irs.gov/tax-professionals/choosing-a-tax-professional for choosing a tax return preparer and has launched a free directory at https://irs.treasury.gov/rpo/rpo.jsf of federal tax preparers. The IRS also offers tips https://www.irs.gov/newsroom/selecting-a-tax-professional-as-a-small-business-taxpayer on choosing a tax professional as a small business taxpayer.