The IRS attack on a St. Louis CPA firm ended in a settlement yesterday that falls far short of what the IRS initially sought.
In February 2008 the feds sued Zerjav & Company P.C. to permanently ban its principals from the tax business as a result of a spectacular series of alleged violations:
The complaint alleges that Tiger Zerjav’s co-workers have called him “the magician” because numbers on tax returns co-workers prepare are “magically” different after he reviews and edits them.
According to the complaint, the defendants’ bogus deductions reduced many customers’ reported income so dramatically that the clients claimed to be qualified for the Earned Income Tax Credit. That credit was intended to help the working poor.
Among the defendants’ alleged improprieties cited in the complaint were tax deductions claimed for such non-deductible personal expenses as children’s day camp, residential landscaping costs, cable television bills, house cleaning expenses, baby-sitting expenses and fitness center dues.
Defendants allegedly prepared a federal income tax return for one client’s corporation that fraudulently deducted $25,000 for the client’s personal purchase of a sport utility vehicle. According to the complaint, the client, a former National Hockey League player, had bought the SUV and owned it personally. Under federal tax law he was not permitted to deduct the cost of the vehicle, so defendants fraudulently treated the vehicle as being owned by his corporation and had the corporation deduct it.
But the settlement signed yesterday falls far short of a permanent ban:
The order entered by Judge Richard E. Webber of the U.S. District Court for the Eastern District of Missouri bars Frank "Tiger" Zerjav Jr. from preparing tax returns and providing tax advice for three years, and permanently bars his father, Frank Zerjav Sr., from engaging in specified conduct.
The court order, to which the defendants consented, requires one of the Zerjavs' businesses, The Advisory Group Inc., to be shut down by April 1, 2010. The Zerjavs' other business, Zerjav & Co., is permanently barred from specified conduct.
Among the specified conduct enjoined is:
* claiming business deductions for non-deductible personal expenses;
* improperly deducting restaurant meals, child care expenses and education expenses;
* changing customers' accounting records without informing the customers of the changes;
* reporting compensation that is not reasonable or related to work performed; and
* claiming deductions for wages paid to children unless services are actually rendered and the wages are reasonable.
The court also imposed a five-year monitoring period during which a neutral monitor, who must be a licensed CPA or attorney, will annually at the defendants' expense inspect and review a sample of tax returns prepared by defendants to ensure that the court's order has not been violated.
In other words, they are barred from doing stuff preparers aren't allowed to do anyway. While Tiger Zerjav can't "prepare" returns, the court order shows he's certainly not out of the business:
Tiger Zerjav shall be permitted to conduct administrative, managerial, marketing and business-development services on behalf of Zerjav & Company, L.C. and Zerjav & Company, P.C. during the three-year tax-preparation and tax-advice injunction period referenced above.
Considering the initial charges, it's hard to see how this is less than a win for the preparers. Yes, it will be a hassle to have somebody looking over your shoulder, but that's a long way from being out of business.
This leads you to two potential conclusions: either the initial allegations were unsupportable (there is no admission of wrongdoing), or the prosecution of the case by the Government was inept. Neither conclusion supports giving the IRS more ability to shut down preparers with less due process, but that's where we're headed.
Prior Tax Update Coverage:
UPDATE: Comments on this post are closed. We'll just say the Zerjav firm has passionate fans and opponents, and I don't care to oversee a flame war.
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