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Fraud alleged at tax franchise

125 Jackson Hewitt franchises closed temporarily pending internal inquiry


To the federal government, at least some tax preparers are preparing tax fraud. So last month, the U.S. Justice Department continued its effort to stop such cheating by suing to shut down 125 Jackson Hewitt franchises in Atlanta, Chicago, Detroit and Raleigh-Durham, N.C.

The government’s claim prompted Jackson Hewitt to hire former IRS Commissioner Fred Goldberg to conduct an internal review of the allegations. Then, on April 10—less than one week before the April 17 federal income tax filing deadline—the company announced it had reached an agreement with the franchisee to temporarily close the locations pending the outcome of that inquiry.

 After the U.S. government sued to shut down one of its largest franchisees because of alleged fraud, Jackson Hewitt started an internal inquiry and got the owner to agree to close the locations temporarily.

The franchises are owned at least in part by Farrukh Sohail of Atlanta. His attorney had initially indicated that he would fight the government’s efforts to close the locations, a process that could have taken months.

Sohail is one of the largest Jackson Hewitt franchisees in the country. Together, the 125 franchises prepared more than 105,000 federal income tax returns last year. According to Jackson Hewitt, Sohail’s franchises bring in about 2 percent of system-wide revenue.

The Justice Department was clear to note that the problems were the responsibility of the franchisee and not the company. Jackson Hewitt initially distanced itself from the controversy before starting its own inquiry, then convincing the franchisee to shut down.

“The company expects its franchisees, which independently own and operate their businesses, to comply with the terms of their franchise agreements,” the company said shortly after the allegations were made public. “Accordingly, they are responsible for conducting their operations with integrity, in compliance with all applicable laws and regulations.”

Jackson Hewitt has grown quickly in the last two years as the company has taken market share away from its main competitor, H&R Block. Company revenues grew more than 18 percent alone in 2006, largely from a 28-percent increase in franchise royalties. Jackson Hewitt has added 1,000 franchise locations in the last two years and has 5,379 now—it has 6,000 locations overall. By comparison, H&R Block locations actually fell by about 300 last year. But it has 15,732 offices.

In its complaint, the government charged Sohail with fostering a business environment “in which fraudulent tax return preparation is encouraged and flourishes.” The franchises were accused of filing false returns claiming refunds based on phony W-2 forms; using fabricated businesses and business expenses to claim bogus deductions; and fraud related to the federal earned income tax credit.

In one of the more egregious examples, the complaint cites a barber whose Jackson Hewitt-prepared tax return said he was entitled to a tax credit for buying 25,000 gallons of gasoline for off-highway business use. That barber would have had to drive 1,370 miles each day, seven days a week, to consume that much fuel in one year.

The government in recent years has targeted tax preparers it believes help foster tax fraud. The Internal Revenue Service indicted 135 tax preparers last year, up from 119 the year before. Eighty-nine percent were ultimately sentenced to jail or home confinement.

“When practitioners prepare a false tax return, it has a corrosive impact on the tax system,” IRS Commissioner Mark Everson said. “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.”

News of the alleged fraud didn’t have an impact on company business, likely because it came at the peak of filing season. “We were actually busier than we were last week” before the announcement, said Mary Harris, who has been operating Jackson Hewitt franchises for 15 years. She currently runs 80, mostly in Arkansas. “I can’t see that it’s hurting us at all.

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