Beaumont Preparer Allegedly Charges Unauthorized “Fees,” Includes Fabricated or Improperly Inflated Claims on Returns

September 21, 2021 - The United States has filed a complaint in the U.S. District Court for the Eastern District of Texas seeking to bar a Beaumont, Texas, tax return preparer from owning or operating a tax return preparation business and preparing federal income tax returns for others.

The civil complaint filed against Michelle Denise Johnston alleges that, since at least 2011, she has operated a tax preparation business in Beaumont under the name “Allen and Johnston Tax Service.” According to the complaint, Johnston prepared and filed tax returns that understated her customers’ federal income tax liabilities by (1) wholly fabricating businesses and related business expenses; (2) improperly inflating such expenses for existing businesses; and (3) fabricating or improperly inflating itemized deductions for casualty losses and mortgage interest deductions.

The complaint further alleges that Johnston has engaged in a “refund-skimming” scheme that “double dips” her tax preparation fees. According to the complaint, customers directly paid Johnston preparation fees ranging from $200 to $500, based on preparation of a “tentative income tax return” that showed a modest refund. The complaint alleges that Johnston then took the tentative return and inflated and/or fabricated deductions, credits and losses to create a larger tax refund. According to the complaint, Johnston filed the fabricated return with the IRS, which deposited the inflated refund with a third-party vendor. The complaint alleges that Johnston then caused the vendor to pay her customer the amount shown on the tentative return and deducted a second preparation fee from the remaining funds. According to the complaint, the scheme occurred unbeknownst to her customers because Johnston only provided them with either an incomplete copy of the return or with a copy of the return that was different from that filed with the IRS.

According to the complaint, Johnston prepared over 3,100 tax returns in aggregate for tax years 2018 through 2020. As a result, the complaint alleges, Johnston has cost the United States significant losses of tax revenue. The complaint further alleges that Johnston harmed her customers, who may be liable for repayment of refunds claimed in their names, plus penalties and interest.

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

Return preparer fraud is one of the IRS’ Dirty Dozen Tax Scams, and taxpayers seeking a return preparer should remain vigilant. (More information can also be found here.) The IRS has information on its website for choosing a tax preparer, has launched a free directory of federal tax preparers and offers information on how to avoid “ghost” tax preparers, whose refusal to sign a return should be a red flag to taxpayers. The IRS also has a list of important reminders for taxpayers who are about to file their 2020 tax returns, including how to prepare for a smooth filing process.

In the past decade, the Tax Division has obtained injunctions against hundreds of unscrupulous tax preparers. Information about these cases is available on the Justice Department’s website. An alphabetical listing of persons enjoined from preparing returns and promoting tax schemes can be found on this page. If you believe that one of the enjoined persons or businesses may be violating an injunction, please contact the Tax Division with details.

Source: DOJ Release