United States v. Doonan

Background

The Government sued William Doonan and William Doonan and Associates, Inc., doing business as William Doonan, Esq. (“WDA”), and sought a permanent injunction preventing them from, among other things, preparing federal tax returns for others. The order addressed the Government’s motion for a preliminary injunction, meaning temporary relief entered while the case remains pending.

Doonan operated WDA, a tax-preparation business. The opinion states that Doonan had prepared and submitted federal tax returns since at least 2004 and that WDA had been registered as a tax-preparation company since 2003. For tax-processing years 2012 through 2016, the defendants filed approximately 23,245 returns for other people. An Internal Revenue Service (“IRS”) review of 69 returns prepared by Doonan found that 54 showed additional tax liability, with an aggregate understated liability of approximately $163,466.

In 2016, the Government filed a criminal case against Doonan. He pleaded guilty to aiding and assisting in the preparation of fraudulent or false tax documents, in violation of 26 U.S.C. § 7206(2), and corruptly trying to obstruct and impede the administration of the internal revenue laws, in violation of 26 U.S.C. § 7212(a). During his plea, Doonan admitted that from 2009 through April 2013 he knowingly prepared or caused the preparation of false federal tax returns containing fictitious or inflated deductions and business expenses. The criminal case’s sentencing judge determined that Doonan had caused an approximately $1.8 million tax loss to the United States.

The IRS later conducted a civil investigation covering tax-processing years 2012 through 2016. According to the investigation, the defendants regularly reported fabricated unreimbursed employee expenses and false business income and expenses on customers’ returns. The opinion states that the conduct continued until at least April 2016, and that clients paid as much as $525 for an annual income tax return.

Legal standard

The Government sought relief under 26 U.S.C. §§ 7402(a), 7407, and 7408. The court explained that when a statute specifically authorizes an injunction, the court applies the statutory requirements for that relief rather than the ordinary preliminary-injunction test. Sections 7407 and 7408 contain such requirements. The court separately analyzed the Government’s request under each provision.

Analysis under § 7407

Section 7407 allows a court to stop a tax preparer’s conduct when the preparer has engaged in conduct subject to certain federal tax penalties or criminal penalties, or fraudulent or deceptive conduct that substantially interferes with administration of the tax laws, and an injunction is appropriate to prevent recurrence. If the conduct has occurred continually and repeatedly, and a narrower injunction would not be sufficient, the statute also allows a broader prohibition on acting as an income-tax preparer.

The court found that the defendants repeatedly engaged in conduct subject to criminal and civil tax penalties and that the conduct substantially interfered with administration of the internal revenue laws. It relied in part on Doonan’s guilty plea and admissions. Because Doonan acted as WDA’s chief executive officer, the court concluded that his admissions also showed that WDA engaged in the relevant conduct.

The court applied factors concerning the seriousness of the defendants’ intent, whether the conduct was isolated or recurring, whether Doonan understood his wrongdoing, and whether he had opportunities to violate the law again. The court concluded that those factors favored an injunction. The request for a preliminary injunction under § 7407 was GRANTED.

Analysis under § 7408

Section 7408 permits an injunction against conduct subject to the penalty in 26 U.S.C. § 6701 when an injunction is appropriate to prevent recurrence. Section 6701 applies to a person who assists with preparing a tax document, knows it will be used in a tax matter, and knows that it will cause another person’s tax liability to be understated.

The court found that the defendants prepared and submitted returns containing fictitious expenses that they knew would understate their customers’ federal income-tax liabilities. The court also considered the seriousness of the harm, the defendants’ participation, their intent, their apparent failure to recognize wrongdoing, and the likelihood of future violations. It concluded that the requirements for relief under § 7408 were met. The request for a preliminary injunction under § 7408 was GRANTED.

Analysis under § 7402(a)

The court described § 7402(a) as a broad provision allowing federal district courts to issue orders needed or appropriate to enforce the internal revenue laws. Based on its findings about the defendants’ established noncompliance with tax-preparation laws, their apparent failure to recognize wrongdoing, and their continued position as tax preparers, the court concluded that preliminary relief was appropriate. The request for a preliminary injunction under § 7402(a) was GRANTED.

Disposition

The court GRANTED the Government’s motion for a preliminary injunction under 26 U.S.C. §§ 7402(a), 7407, and 7408. Until further order, the defendants were preliminarily enjoined from directly or indirectly:

The Clerk of Court was directed to terminate the Government’s motion at ECF No. 18.