Liberty Tax Service, the third largest tax preparer in the U.S., has lost a lawsuit over deceptive ads that California Attorney General Jerry Brown claimed blurred the line between free tax refunds and expensive refund anticipation loans.

Jerry Brown

“Liberty Tax Service lured cash-strapped Californians into paying for high-cost loans, when they could obtain tax refunds free from the IRS just weeks later,” said Brown in a statement. “This ruling bars Liberty from deceptive advertising that blurs the line between IRS tax refunds and pricey loans.”

Liberty Tax Service's print and television ads misled customers by promising “Most Refunds in 24 Hours,” according to Brown. In reality, Liberty was selling refund anticipation loans, not a tax refund. Customers had to pay an upfront fee of about $30 plus interest, at a rate that could be as high as 395 percent annually. According to the IRS, refund anticipation loans target low-income taxpayers, especially those who receive the Earned Income Tax Credit. Approximately 70 percent of Liberty’s refund anticipation loan customers in 2006 and 2007 received this credit. A spokesperson for Liberty did not immediately respond to a request for comment.

In February 2007, Brown filed suit in San Francisco Superior Court against Liberty Tax Service as part of an effort to stop deceptive marketing associated with refund anticipation loans. He reached settlements with Jackson Hewitt in 2007 and with H&R Block in 2009 over similar claims (see Block Settles California RAL Suit for $4.85M).

The ruling last Monday holds Liberty responsible for its deceptive marketing, which included print ads that failed to include disclaimers mandated by law. Liberty’s television ads included those disclaimers, but briefly and in faint type. The court said the disclaimers were “plainly designed to be overlooked by consumers.”

The ruling bars Liberty from using false or misleading advertising to sell tax refund loans; requires the company to review and monitor the ads run by its California franchisees; requires the company to discipline franchisees that fail to receive approval of their ads from Liberty and report those franchisees to the Attorney General’s office; and requires the company to pay $1.16 million in civil penalties, $135,886 in restitution and the Attorney General's costs.

Two violations of the advertising provisions of the injunction by a single franchisee will result in a $15,000 fine, while a third violation will require the termination of the franchisee. The injunction also imposes limitations on Liberty’s ability to collect, on behalf of itself or others, money supposedly due from its customers for previous years’ tax refund loans. The judgment requires Liberty Tax Service to inform these alleged debtors of supposed debts before the consumers take any step that would commit them to having any amount of the alleged debt deducted or withheld even temporarily from their refund. This is a significant modification of Liberty’s past collection practices.