Wednesday, April 04, 2007

Feds to close tax prep stores

Fraud alleged at Atlanta-owned Jackson Hewitt offices.

Feds sue Atlanta franchisee of tax prep firm
Fraud alleged at Jackson Hewitt offices

The Atlanta Journal-Constitution
Published on: 04/04/07

In a get-tough message at the height of tax-filing season, the U.S. Justice Department on Tuesday sued an Atlanta franchisee of the Jackson Hewitt tax preparation firm, accusing him and others of filing false returns that cost Uncle Sam more than $70 million.

Justice officials filed lawsuits against five companies that operate more than 125 Jackson Hewitt franchises in the Atlanta, Chicago, Detroit and Raleigh-Durham, N.C., areas. The companies are wholly or partly owned by Farrukh Sohail of Atlanta, the agency said.

Sohail and other defendants "fostered and maintained a business environment" at the Jackson Hewitt franchises "in which fraudulent tax return preparation is encouraged and flourishes," the lawsuits said.

The allegations include filing false returns claiming refunds based on fake W-2 forms; using fabricated businesses and expenses to claim deductions; claiming fuel tax credits in "absurd" amounts for customers who did not deserve them; and "massive" fraud related to claiming the federal earned income tax credit.

For example, one tax return claimed a large fuel tax credit for a barber who would have had to drive 1,370 miles each day, seven days a week, to consume that much fuel in one year, Justice said.

"This is the largest enforcement action of its kind," said Internal Revenue Service Commissioner Mark Everson. The suits seek court orders barring the franchises and other defendants from preparing tax returns for others.

Ron Brunson, Sohail's Birmingham, Ala.-based attorney, told The Associated Press his client would not voluntarily stop preparing tax returns at the Jackson Hewitt franchises, but was "hoping to work things out" with the Justice Department and IRS.

Jackson Hewitt Tax Service Inc. is the nation's No. 2 tax preparer behind H&R Block. The Justice Department stressed that these lawsuits target franchise owners. "There's been no allegation of wrongdoing by Jackson Hewitt, the corporation," said Dean Boyd, a Justice Department spokesman.

Of the five companies named as defendants, one is based in the Atlanta area: Smart Tax of Georgia Inc., which does business as Jackson Hewitt Tax Service. Smart Tax has more than 40 outlets in the Atlanta area, according to The New York Times.

According to records from the Georgia Secretary of State's office, Sohail also operates Smart Financial of Georgia Inc. and Smart American Management Inc.

Each business shows an office address of 2367 Monte Villa Courts, Marietta, which property records say is Sohail's residence. It was purchased in 2005 for $968,200, according to the records.

Calls to that address seeking comment were not returned Tuesday evening.

Sohail is one of the largest owners of Jackson Hewitt Tax Service franchises in the United States, the lawsuits said. He started buying them in 1998.

His 125 stores are said to have handled 105,000 returns last year. Jackson Hewitt said it prepared 3.66 million tax returns in fiscal 2006, meaning Sohail's franchises would have prepared about 2.8 percent of the total.

The government lawsuits name 24 individuals who work or manage the franchises, including Sohail.

The suits claim that some of the franchises' managers and employees received kickbacks from customers for helping them file fraudulent returns.

"Return preparers are specifically trained and directed to accept without question, and use, customer-provided information that appears to be (or clearly is) suspicious or false," the lawsuits said.

Sheila Cort, a Jackson Hewitt spokeswoman, didn't return calls seeking comment.

It may take months to resolve the suits and close all the offices, said Seth Heald, a Justice Department lawyer working on the case.

In the fiscal year that ended April 30, Jackson Hewitt's net income rose 16 percent to $57.9 million on $275 million of revenue. It has been taking market share from rival H&R Block, which has been hurt by regulatory probes, software failures and accounting errors.

Jackson Hewitt's business model relies heavily on selling "territories" to franchisees, who use the Jackson Hewitt brand name and sell the company's financial products. The franchises pay royalties to Jackson Hewitt as well as fees for the products used and for advertising the company does to promote the brand name.

As of Jan. 31, Jackson Hewitt had 5,802 franchise offices and 724 company-owned ones. About two-thirds of revenue for the nine months ending in January came from the franchises.

The government said Tuesday's action, the third time Jackson Hewitt franchises have been targeted by federal authorities in a year, is part of a crackdown on tax cheaters in anticipation of the April 17 deadline for individuals to file returns. The government has obtained more than 230 court orders to shut down tax preparer outlets since 2001.

Staff researcher Nisa Asokan and Bloomberg News contributed to this article.



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1:59 PM  

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