Tax preparation outlets targeted for alleged fraud

The Justice Department is trying to shut down 125 tax preparation outlets that it says have filed false returns containing more than $70 million in bogus deductions.

In court documents filed in Chicago, Atlanta, Detroit and Raleigh, N.C., the government targeted five businesses associated with Jackson Hewitt Tax Services, the nation's second-largest tax preparation company, behind H&R Block.

IRS Commissioner Mark Everson described the case as the "largest enforcement action of its kind." He said franchise employees are accused of improperly claiming tax credits for such things as fuel purchases and numbers of household dependents on behalf of an undisclosed number of customers.

The fraudulent returns were aimed at either inflating customer refunds or reducing their tax payments, according to court documents. In one case, a barber whose return was filed with one of the targeted franchises claimed a fuel tax credit for buying 25,000 gallons of gasoline for business use.

"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," the Justice Department alleged court papers.

Some of the franchises' managers and employees, according to the court documents, received kickbacks from customers in exchange for the preparation of falsified tax returns.

Everson said that he was "very disturbed" by the allegations, which largely involved customers of modest means. Those people were "sucked into schemes" that may leave them liable for thousands of dollars in unpaid taxes and penalties, Everson said.

Jackson Hewitt did not immediately respond to requests for comment.

Farrukh Sohail, identified in court documents as maintaining ownership interests in all five franchises, could not be reached for comment Tuesday.

Overall, the franchises filed more than 105,000 federal income tax returns last year. The actual number of fraudulent returns was not disclosed.

Court documents showed that substantial numbers contained errors or fraudulent information.

In one sample audit of 268 returns prepared by a Georgia outlet, 264 were found to be "fraudulent or erroneous," according to a review by the franchise's former regional manager, court papers said.

In some cases, tax preparers "have sold or sell Social Security numbers" to claim inflated numbers of household dependents for the purpose of driving down the customers' tax obligations, according to the court documents.

"The fraudulent use and attempted use of phony dependents on tax returns ... is pervasive," the documents say.

Within the franchise operations, the court documents outline a "drive" for customer volume and profit "at the expense of accuracy and honesty."

At one Atlanta store, "managers frequently explain to employees that (the outlet) will lose business if turns away customers suspected of providing fraudulent information," the court papers state.

"The managers therefore directed employees to not question or turn away such customers, but instead prepare and file their tax returns," the court papers say.
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