This tax season, Penny Lea Jones won’t be preparing tax returns if the feds have their way. U.S. District Judge Edward J. Lodge has issued a preliminary injunction barring Jones from preparing federal income tax returns for taxpayers while a lawsuit against her proceeds. The lawsuit is one of seven such actions filed by the Justice Department in October 2009 against tax preparers promoting what’s known as a “redemption scheme.”

I’ll be honest: I’d never heard of the scheme before. The ever-fabulous Kay Bell pointed out that it’s been on the IRS’ radar for a bit now. I guess I need to brush up on my tax scams.

Here’s how the redemption scheme works: tax “professionals” (and I use the term loosely) file a series of false tax forms in an effort to garner large fraudulent tax refunds. Promoters of the scheme tell customers that the federal government maintains “secret” accounts of money for its citizens. Taxpayers are advised that they can gain access to the funds – and discharge their debts – by issuing forms 1099-OID to their creditors. It’s like magic! And maybe that’s why I haven’t heard of this scheme. Who believes this?

Apparently, a bunch of people. Jones managed to convince enough taxpayers that the scheme existed to file 333 income tax returns in 2008 and 2009 claiming more than $93 million in fraudulent refunds. Of those, just $4.3 million in refunds were issued.

The redemption scheme is much bigger than Jones – or the pending seven lawsuits against similar defendants. According to the IRS, the scheme overall is so big that participants have requested a total of $3.3 trillion in fraudulent refunds. To put that into perspective, it’s about 6 times the entire 2010 Budget for the Department of Defense or 20 times the entire budget of the state of Texas.

Fortunately, the IRS catches most of the fraud before they issue any refunds. But still it persists. In the last 10 years, the Justice Department’s Tax Division has obtained more than 435 injunctions against various promoters of the scheme.

The injunction against Jones is effective immediately (you can read it here, downloadable as a pdf). In addition to being barred from preparing returns, she has to advise her customers of the injunction and provide the feds with a list that identifies by name, social security number, address, email address, and telephone number, all of those folks for whom she prepared federal tax returns.

The IRS and the Justice Department have vowed to continue to crack down on these schemes. I can’t stress enough: if it sounds too good to be true (much like fat free doughnuts), it probably is.

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Kelly Erb is a tax attorney, tax writer and podcaster.

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