U.S. accuses tax firm franchises of fraud

The federal government has sued the operators of more than 125 Jackson Hewitt Tax Service Inc. tax preparation offices, accusing them of cheating the U.S. Treasury out of more than $70 million through a “pervasive and massive series of tax-fraud schemes.”

The complaints target five franchises that operate offices in the Atlanta, Chicago, Detroit and Raleigh-Durham, N.C., areas, as well as 24 individuals.

Parsippany, N.J.-based Jackson Hewitt is the second-largest U.S. tax preparer, with 5,802 franchised and 724 company-owned offices as of Jan. 31. It did not immediately return calls seeking comment.

Jackson Hewitt shares fell $5.87, or 18.1%, to $26.53.

Investigators accused the defendants of encouraging bogus tax returns through such means as claiming fake deductions and fuel tax credits, seeking refunds based on phony earnings statements and abusing the federal earned income tax credit.

In some cases, managers and employees took kickbacks from customers for helping them file fraudulent tax returns, the government said. The franchises prepared more than 105,000 federal income tax returns last year, the government said.

Mark Everson, commissioner of the Internal Revenue Service, called the case “the largest enforcement action of its kind.”

The government is seeking to permanently bar the defendants from the tax preparation business, among other remedies.

“Preparing federal income tax returns based on falsehoods and fabrications is a serious violation of the law,” Assistant Atty. Gen. Eileen J. O’Connor said in a statement.

The government said defendant Farrukh Sohail owns all or part of the five franchises, and comes from the Atlanta area.

A message left at a number listed for Sohail in Marietta, Ga., was not immediately returned. Numbers listed for Sohail’s company Smart Tax of Georgia Inc. were disconnected.

This is at least the fourth time that investigators have targeted Jackson Hewitt since July, the government said.

In the most recent case, Jackson Hewitt agreed in January to pay $5 million to settle claims that it steered low-income customers in California to high-cost loans to tide them over while they awaited refunds.

Jackson Hewitt rival H&R; Block Inc. has also struggled with regulatory matters.