Court Rejects Injunctive Relief for Tax Prep Business Stripped of Its EFINs

(Parker Tax Publishing June 2024)

A district court denied a request from a tax preparation business for a preliminary injunction to restore its electronic filing identification numbers (EFINs) which the IRS suspended due to what it believed were fraudulent deductions taken by customers of the business. The court concluded that because the business had not demonstrated that it incurred non-compensable damages, it failed to satisfy its burden of showing the irreparable harm necessary for obtaining a preliminary injunction. Zirin Tax Company Inc. v. U.S., 2024 PTC 204 (E.D. N.Y. 2024).

Background

Zirin Tax Company, Inc. (doing business as Steven-Louis Income Tax Centers), The Holtz Group Inc., and Steven A. Holtz (collectively "Zirin") are in the tax preparation business and maintain two offices in New York. Zirin prepares and electronically files roughly 2,000 tax returns with the IRS each year. Around 1990, Zirin began using the IRS's e-filing system and has since relied on that method for submitting the majority of its customers' returns. Zirin maintains two electronic filing identification numbers (EFINs), one for each office.

Around April of 2023, Zirin customers and a Zirin employee received letters and subpoenas from the IRS. In June of 2023, Zirin's lawyers met with the IRS, who informed them of an investigation into potentially fraudulent reporting of casualty and theft losses. The IRS investigators believed that Zirin had submitted customer tax returns with fraudulent reports of casualty, theft, bad debt losses, and charity contribution deductions.

After meeting with the IRS, Zirin began to require its customers to affirm in writing that the bases for any charitable donation, bad debt, or stolen property deductions were accurate. Additionally, during the 2023 tax season, Zirin required customers to review their returns in detail and attest to the accuracy of all information. Zirin's lawyers informed the IRS investigators of these changes at a subsequent meeting in late August, to allay any potential concerns by the IRS that Zirin was encouraging its clients to take inappropriate or unsubstantiated deductions. The primary IRS investigator, Special Agent Cody Wojtanowski, subsequently testified that he did not consider Zirin's "compliance changes" when deciding whether to seek the suspension of Zirin's EFINs.

During a third meeting in December, IRS investigators informed Zirin's counsel that they anticipated referring the matter to the U.S. Department of Justice's Tax Division for potential prosecution but gave no indication that the IRS was considering revoking Zirin's EFINs. Later that month, Agent Wojtanowski consulted the agency's Refund Fraud and Investigative Support (RFIS) team in New York regarding a potential suspension of Zirin's EFINs. In February 2024, the RFIS approved a two-year suspension of Zirin's EFINs and two days later, Zirin discovered that many of their customers' tax returns had been rejected. Zirin immediately filed a motion for preliminary injunction in a district court to restore its EFINs.

In Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7 (S. Ct. 2008), the Supreme Court held that a preliminary injunction is an extraordinary remedy and is only warranted upon a clear showing by a plaintiff that he is entitled to relief. In order to establish that such a remedy is warranted, the plaintiff must show (1) irreparable harm; (2) either (i) a likelihood of success on the merits, or (ii) sufficiently serious questions going to the merits of the claims to make them fair ground for litigation, plus a balance of the hardships tipping decidedly in favor of the plaintiff; and (3) that a preliminary injunction is in the public interest. When a plaintiff seeks to stay a government action taken in the public interest pursuant to a statutory scheme, the more rigorous prong of likelihood-of-success applies, rather than the serious question prong.

Because Zirin was seeking a mandatory injunction that "alters the status quo" and commands some positive act (i.e., that the IRS reinstate the EFINs), the Second Circuit, the court to which this case is appealable, has held that, in such situations, a heightened standard is imposed. Under this heightened standard, the district court said, Zirin must show a clear or substantial likelihood of success on the merits and make a strong showing of irreparable harm.

Zirin argued that the IRS did not provide it with sufficient notice of the EFIN suspension that would allow Zirin an opportunity to be heard at a meaningful time and in a meaningful manner as required by the Fifth Amendment. Further, Zirin asserted that the revocation of its EFINs caused irreparable harm by way of financial harm. Specifically, Zirin alleged that the suspension of its EFINs posed a severe, and potentially existential, risk to its business because it is impossible to maintain a tax preparation business without the ability to e-file and thus, if the e-file suspension continued, it would have no business. The harm to its tax business, Zirin said, included the following: (1) filing returns by mail is inadequate; (2) fees for return preparation cannot be collected directly from customer returns; (3) it will have to terminate employees; and (4) its business will lose customers and profits.

Analysis

The district court denied Zirin's motion for a preliminary injunction. While the court concluded that Zirin presented strong arguments as to its likelihood of success regarding the issue of whether it had been provided with adequate notice of the suspension of its EFINs, the court held that Zirin failed to make the requisite showing of irreparable harm. The court noted that the purpose of preliminary relief is to prevent "actual and imminent" injury that cannot be undone if the plaintiff prevails on the merits. Citing the Second Circuit's decision in JTH Tax, LLC v. Agnant, 62 F.4th 658 (2d Cir. 2023), the district court found that in assessing whether a party will suffer irreparable harm, a court must consider whether but for the grant of equitable relief, there is a substantial chance that upon final resolution of the action the parties cannot be returned to the positions they previously occupied.

Citing several Second Circuit cases, the district court observed that a request for an injunction will be denied when remedies available at law, such as monetary damages, are adequate to compensate for the injury. Therefore, the court said, the plaintiff must show that the harm is such that he cannot be made whole through monetary damages. Zirin, the court noted, asserted irreparable harm by way of financial harm by alleging that the suspension of its EFINs poses a severe and potentially existential risk to its business. Whether considered together or separately, the court found that Zirin had not made a strong showing that the anticipated harms were of such a magnitude that they would threaten its existence. For instance, the court said, Zirin did not establish that its reductions in clientele, profits, and employees would manifest in such proportions as to threaten the very viability of its business and it did not offer any specifics as to how those reductions would impact overall profitability. To the contrary, the court noted, Zirin demonstrated its ability to continue its tax preparation business by submitting returns on behalf of their customers by mail, even while its EFINs were suspended. And, the court added, there is nothing to indicate that Zirin cannot collect fees for its services through other means after customers have received their full refunds. The court thus concluded that Zirin's prediction that it would not longer have a business absent preliminary injunctive relief was not supported by the record before the court.

For a discussion of when injunctive relief is appropriate, see Parker Tax ¶262,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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