The Justice Department has sued five Jackson Hewitt tax preparation franchises who operate more than 125 retail tax preparation sotes in the Chicago, Atlanta, Detroit and Raleigh-Durham, N.C., areas., claiming they prepared fraudulent tax returns for their clients.
The suit also names 24 individuals who manage or work at the franchises.
The suits allege that one of the individual defendants, Farrukh Sohail of Atlanta, Ga., owns an interest in each of the five corporations, which prepared and filed over 105,000 federal income tax returns last year.
According to the government complaint, Sohail and other defendants "created and fostered a business environment" at the Jackson Hewitt franchises "in which fraudulent tax return preparation is encouraged and flourishes."
Examples of fraud alleged in the lawsuits include filing false returns claiming refunds based on phony W-2 forms; using fabricated businesses and business expenses on returns to claim bogus deductions; claiming fuel tax credits in absurd amounts for customers clearly not entitled to any credits; and massive fraud related to claiming the federal earned income tax credit.
One complaint cites a Jackson Hewitt franchise customer whose Jackson Hewitt-prepared tax return claimed he was a barber who was entitled to a fuel tax credit for buying 25,000 gallons of gasoline for off-highway business use. The complaint alleges the customer would have had to drive 1,370 miles each day, seven days a week, to consume that much fuel in one year, leaving little if any time to cut hair.
Last December, the Justice Department sued a Miami tax preparer alleging similar fraudulent claims of the fuel tax credit. In July 2006, a federal court in Miami enjoined a large Jackson Hewitt franchise from asserting frivolous positions on tax returns.
The suits further allege that some of the Jackson Hewitt franchises' managers and employees received kickbacks from customers for helping the customers file fraudulent tax returns. The suits further allege more than $70 million in combined losses to the U.S. Treasury, and seek court orders barring the franchises and other defendants from preparing tax returns for others.
"Preparing federal income tax returns based on falsehoods and fabrications is a serious violation of the law," said Eileen J. O'Connor, Assistant Attorney General for the Justice Department's Tax Division. "The Justice Department and Internal Revenue Service are working vigorously to put a stop to these activities."
"When practitioners prepare a false tax return, it has a corrosive impact on the tax system," said IRS Commissioner Mark W. Everson. "I am deeply disturbed by the allegation that a major franchisee of the nation's second-largest tax preparation firm is intentionally preparing improper tax returns with inflated refunds."
"I'm particularly concerned that many taxpayers of modest means could actually end up owing the government thousands of dollars if they claimed an improper refund," Everson said.
Since 2001, the Justice Department's Tax Division has obtained more than 230 injunctions to stop the promotion of tax fraud schemes and the preparation of fraudulent returns.
The current round of litigation is at least the fourth time that investigators have targeted Jackson Hewitt since July. In the most recent case, Jackson Hewitt agreed in January to pay $5 million to settle claims it steered low-income people in California to high-cost loans to tide them over while they awaited refunds.
In January, Jackson Hewitt agreed to pay $5 million, including $4 million in consumer restitution, to settle a lawsuit filed by California Attorney General Bill Lockyer.
The suit alleged that the nation's second-largest tax preparation firm violated state and federal laws in marketing high-cost refund anticipation loans (RALs) mainly to low-income customers.
