Government Announces Settlement With Liberty Tax To Resolve Fraud & Refund-Related Allegations

Forbes Finance 20 hours ago
Americans File Their Returns On Tax Day 2019
MIAMI, FL - APRIL 15: Hermando La Roza holds a sign indicating that there are zero day left to ... [+] file taxes as he stands in front of a Liberty Tax office on April 15, 2019 in Miami, Florida . April 15 is the deadline in the United States for residents to file their income tax returns. (Photo by Joe Raedle/Getty Images)

The Justice Department has announced a settlement with Franchise Group Intermediate L 1 LLC, (Liberty), the national franchisor and owner of Liberty Tax Service stores. The settlement, if approved by the court, would resolve a complaint filed with a U.S. District Court in Norfolk, Virginia, by the Justice Department against Liberty.

Liberty is one of the largest tax preparation service providers in the country. According to its annual report filed with the SEC in 2019, Liberty has more than 2,800 franchise and company-owned tax return preparation offices in the United States (Liberty also markets services in Canada). Between 2015 and 2019, Liberty filed approximately 1.3 to 1.9 million tax returns each year through its stores, claiming billions in federal tax refunds on behalf of its customers.

According to the complaint, Liberty failed to maintain adequate controls over tax returns prepared by its franchisees. The company reportedly did not take steps to prevent the filing of potentially false or fraudulent returns prepared by franchisees, despite notice of fraud at some of its franchisee stores.

The government reports that between 2013 and 2018, 10 separate civil law enforcement actions were filed in U.S. District Courts throughout the United States against 12 franchisees of Liberty Tax, or their owners, former owners, or former managers. Judgments were entered in favor of the government in nine of those cases; the tenth, United States v. Doletzky et al., Case No: 8:18-cv-00780-CEH-CPT (M.D. Fla.), is pending.

Where did those franchisees go wrong? At many, the problems were tied to the Earned Income Tax Credit (EITC). Since the EITC allows some taxpayers to get a refund in excess of any tax paid into the system, it’s long been associated with fraud: the Internal Revenue Service (IRS) estimates that about a quarter of all EITC refunds are improperly issued.

(You can find out more about the EITC here.)

Liberty Tax franchise and company-owned stores filed a lot of returns for taxpayers claiming the EITC. According to the complaint, for the tax years from 2012 to 2018, approximately 41% of federal income tax returns that Liberty Tax electronically filed with the IRS included an EITC claim, more than double the rate of other returns electronically filed during that period. Those Liberty EITC refunds exceeded $12 billion. 

And remember those court actions mentioned earlier? From 2010 to 2016, employees at those stores claimed false EITC refunds by reporting income that did not exist and ignoring due diligence requirements.

In some cases, the government alleges that Liberty Tax franchisees recruited customers, including the homeless, and then prepared fraudulent federal income tax returns on their behalf. To boost income, they reported fake wages earned from household work (HSH) like housekeeping, babysitting, or gardening.

For example, in 2015, a Liberty Tax Service franchise owned and operated by Kone prepared over 1,000 tax returns that claimed HSH Income and the EITC. The fraudulent tax returns included over 350 tax returns that reported the same amount of HSH Income ($6,400) and over 300 tax returns that each reported precisely $7,200 of HSH Income. 

The government claims that Liberty Tax either knew or should have known about the EITC fraud at its franchise locations, but didn’t try to stop it. Notably, in January of 2014, the company and its CEO at the time, John T. Hewitt, received complaints that franchisees had prepared tax returns with potentially false EITC claims linked to HSH income. Nonetheless, the number of returns claiming HSH income increased. 

The government also says that when the company identified specific EITC violations, it didn’t take steps to curb the abuse. In 2016, Liberty Tax conducted an onsite compliance review of one franchisee and found errors in over 80% of the EITC files. The company gave the franchisee a failing EITC compliance grade but did not terminate him until the government initiated a civil enforcement action in 2018. 

Other improper acts include erroneous dependent claims, false claims for expenses, and fraudulent claims for refundable education credits. There were also reported violations of federal Preparer Tax Identification Number (“PTIN”) regulations, including stores which allowed employees to share PTINS so that employees without PTINs could prepare tax returns.

In 2019, Liberty admitted in its annual report that it "did not maintain effective internal control over financial reporting” and “[t]he control environment, risk assessment, control activities, information and communication, and monitoring controls were not effective.” Still, the government says that the company failed to take sufficient measures to prevent fraud and errors at its stores. In many cases, the complaint alleges that Liberty only terminated franchisees after the United States or other law enforcement agencies took action.

How bad was it? According to the complaint, for tax years from 2012 to 2016, the IRS assessed over 25,000 separate penalties against tax return preparers for tax returns prepared at Liberty franchises and company-owned stores. For tax years from 2012 to 2017, 20,000 of the 28,000 audits of Liberty customer tax returns resulted in changes to correct false or incorrect items reported on each return - a whopping 70%.

Under the settlement, Liberty would be required to take steps to identify and curb abuse going forward. Those steps include a ban on employing the company’s founder and former CEO, John T. Hewitt; Hewitt would also not be allowed to hold an interest in or serve on the board of directors of any Franchise Group of the company.

Liberty would also be required to establish enhanced compliance measures, including training programs and additional resources to monitor, detect, and report non-compliance. The company must also take steps to ensure effective quality control throughout their stores, including conducting onsite compliance reviews and using mystery shoppers. Liberty would be required to disclose any potential violations to the government. 

The high-profile complaint and settlement is an acknowledgement that return preparer fraud is a serious problem - so much so that the IRS included it in its Dirty Dozen Tax Scams for 2019. To protect yourself, use care when choosing a preparer and remember that taxpayers should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs). For hints on finding a tax preparer, click here. For more information about return preparer fraud, check out IR-2019-32.


Source link
Read also:
Forbes › Finance › 1 week ago
While the holidays can do some major damage to your household finances each year, many people look forward to receiving a tax refund that can “undo” some of that hurt. But getting a tax refund loan can do much more harm than good.
CNN › Traveling › 1 month ago
"Refund! Refund! Refund!" was the refrain among passengers gathered in the atrium of Norwegian Spirit cruise ship earlier this week after operators canceled another port of call on the voyage's two-week European itinerary.
Raw Story › 2 weeks ago
Governor Greg Abbott is a strong proponent of religious liberty. The Texas Republican in May signed a bill protecting religious liberty, announcing, “I will always fight to preserve our religious liberty as Americans, and as Texans.” Over the...
CNET › Technology › 1 month ago
Tax season is just around the corner, but you can calculate your 2020 tax refund now before 2019 is even over.
New York Post › 2 months ago
A massive settlement is expected to resolve lawsuits related to the Las Vegas massacre two years ago, according to a new report. An exact settlement amount has not yet been disclosed but MGM Resorts International has previously said in financial...
Business Insider › Lifestyle › 1 month ago
You can refund a payment on PayPal easily, so don't worry if a transaction seems to have gone wrong, as there's a painless re-do option. You can refund a payment up to 180 days after receiving it on PayPal. You can also issue partial refunds if you are...
Business Insider › Lifestyle › 1 month ago
You can refund a game purchased on Steam if you request the refund within two weeks of purchase, and have played the game for less than two hours total. When your game is refunded, it will be removed from your Steam library, and you'll receive the full...
Business Insider › Lifestyle › 3 weeks ago
If you want to get a refund on your PS4 for a PlayStation Store purchase, you can request one through the PlayStation website's chat support. The chat support bot asks a series of questions to help determine whether or not you qualify for a refund, and...
USA Today › Entertainment › 1 month ago
A spokesman for 'Chrisley Knows Best' stars Todd and Julie Chrisley said the couple signed an agreement regarding tax fraud allegations in Georgia.
Chicago Tribune › Finance › 1 month ago
Chicago-based Outcome Health has agreed to pay $70 million to resolve federal allegations that it fraudulently sold advertising inventory it did not have to clients.
Sign In

Sign in to follow sources and tags you love, and get personalized stories.

Continue with Google
OR