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A recent case in which the defendants lost for not responding to a suit filed against them by the IRS caught my eye.  Default judgments are a dime a dozen but this one involved an injunction against a return preparer.  I have recently picked up a case involving a ghost preparer which caused me to take a second look at this case seeking an injunction against the preparer.

Default judgments also represent the flip side of filing a late petition showing that timeliness matters not only in filing the suit but also in responding.  Since we have written so much recently about the importance of timely filing, focusing on the importance of timely responding also deserves a moment in the spotlight.  Don’t get excited, however, if you want to obtain a default judgment against the government.  That is not allowed and for many good reasons.

In United States v. Erica McGowan et al, No. 2:21-cv-10624 (E.D. Mich.), the IRS filed suit on March 22, 2021, seeking:

to obtain (i) an injunction barring Defendants “from engaging in the business of preparing federal tax returns and employing any person acting as a federal tax return preparer” and (ii) an order “requiring Defendants to disgorge to the United States their receipts for preparing federal tax returns making false or fraudulent claims.”

Apparently, one or more of the defendants proved difficult to locate, causing the IRS on June 17, 2021 to seek additional time to serve them.  Service occurred the same day as the motion, making the answer due date July 8, 2021 – 21 days after service.  Defendants failed to file an answer and the IRS obtained a default judgment on August 6, 2021, setting up this case to set aside that judgment.

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On September 1, 2021, defendants filed a motion to set aside the default judgment arguing, inter alia, that the failure to timely file an answer did not result from their culpable conduct.  A reason given for the failure was the mistaken belief that defendants had 60 days to file an answer.  The magistrate judge to whom this motion was assigned was unmoved by this argument because (1) the summons specifically stated the period was 21 days and (2) the defendants did not file an answer within 60 days.

The court looked at three factors in deciding whether to set aside the default judgement:

(1) whether the party seeking relief is culpable; (2) whether the party opposing relief will be prejudiced; and (3) whether the party seeking relief has a meritorious claim or defense.

In order to get to a consideration of factors (2) and (3), the moving party must demonstrate a lack of culpability.  Here, the court found that they could not as it reviewed the determination of the magistrate judge.

Defendants argued that the magistrate judge focused exclusively on their failure to show excusable neglect and did not mention the separate bases for relief of mistake or inadvertence.  The district court, agreeing with the magistrate, pointed out that defendants failed to raise these alternate grounds in its motion.  Having failed to raise them in its argument to the magistrate judge, it could not raise them on appeal.

Defendants then attacked the magistrate judge’s definition of culpability, arguing that the court must find “an intent to thwart judicial proceedings or a reckless disregard for the effect of its conduct on these proceedings.”   Sixth Circuit law, however, does not allow relief from a default judgment where the default results “from a party’s or counsel’s carelessness or ignorance of the law.”  

Defendants next argued that the court should balance the factors necessary for overcoming a default judgment and not stop upon a finding of culpability.  Here again, the district court found that the law clearly created a barrier if the moving party could not overcome the issue of culpability.

In the opinion in this case we don’t even get to learn what the defendants did that caused the IRS to seek the injunction in the first place.  That information can be found in the petition.  The defendant’s motion contains some explanation but their attempt to raise the merits of their possible defense falls to their failure to show good cause for not answering the complaint. 

Twenty one days is not a long time.  It’s even less than the short period allowed for responding to a Collection Due Process notice; however, ignoring the complaint creates a result that proves impossible for the defendants here to overcome.  They needed an excuse similar to the type of excuse we have spoken of in recent posts regarding the late filing of Tax Court petitions and they did not have it.  The case provides another example of the importance of acting on time.  Even if defendants have the greatest reasons for arguing against an injunction barring them from filing tax returns, their failure to respond within the necessary time period keeps them from raising those arguments.



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