A federal court has barred the owner of a dozen Liberty Tax Service franchises in the Los Angeles and Las Vegas areas after discovering rampant tax fraud, while a Maryland grand jury has indicted the owner and several tax preparers at some Liberty Tax franchises in Baltimore.
The cases are only the latest in a string of problems at Liberty franchisees this season, but Liberty’s chief compliance officer said the company itself brought the cases to light years ago.
“These are both situations where we terminated the franchisee, and they both relate to situations where we actually reported the franchisee to the IRS,” said Jim Wheaton, general counsel, chief compliance officer and vice president of legal and governmental affairs at Liberty Tax.
In the first case, the U.S. District Court for the Central District of California permanently barred Stacy John Sanchez of Orange County, Calif., last week from preparing federal tax returns for others, according to the Justice Department. The civil injunction order prohibits Sanchez from acting as a federal tax return preparer and from owning, operating, or profiting from tax-return preparation businesses. Sanchez agreed to the entry of the injunction but did not admit the allegations in the civil complaint against him.
According to the complaint, Sanchez owned and operated 12 Liberty Tax Service franchise locations, primarily in the Los Angeles and Las Vegas areas. At these locations, Sanchez and his employees prepared federal income tax returns that, among other things, contained bogus Schedules C (Profit or Loss from Business), fake Form W-2 (Wage and Tax Statement) information and falsely claimed dependents, the suit alleged. These fraudulent returns improperly generated federal income tax refunds and tax credits, such as the Child Tax Credit and Earned Income Tax Credit, for Sanchez’s clients, according to the complaint.
In addition, the complaint alleged that Sanchez and his employees prepared fraudulent income tax returns using stolen names and Social Security numbers and kept the bogus refunds generated by these identity theft returns. The estimated loss to the U.S. Treasury from Sanchez and his employees’ misconduct is at least $14 million, according to the complaint.
Wheaton said he doesn’t know why it took over three years for the government to resolve the case. “I don’t think the consent order that the guy entered into made it clear, but he was terminated three years ago by us,” said Wheaton. “He sued us for wrongful termination. There were some lawsuits back and forth, but we had also reported him and a number of other people who worked for him to the IRS back in 2013.”
The Maryland indictment relates to suspensions of tax preparers announced last month by Maryland Comptroller Peter Franchot (see Maryland Suspends Liberty Tax Service Franchisees and Maryland Halts Returns from More Preparers).
Last week a Baltimore grand jury indicted nine people in connection with one of the fraud schemes, which involved enticing homeless people and others to file false income tax returns to generate preparation fees for their company. The charges stem from a scheme allegedly perpetrated by the owner and tax preparers of several Liberty Tax franchises in Baltimore, who are charged with generating fraudulent returns which specifically exploited a portion of the tax code known as the Earned Income Tax Credit.
According to a joint investigation by Comptroller Franchot’s office and the Office of Maryland Attorney General Brian Frosh, Liberty Tax preparers operating from certain Baltimore locations owned by the same individual would direct marketing efforts at homeless shelters, transitional housing and drug rehabilitation centers, with a promise of $50 if filers arrived for a return to be prepared. The tax preparers would then create a fraudulent return that maximized the credit the filer could receive.
“This owner and her associates targeted the most vulnerable—the homeless, disabled, drug addicts, and poor people already struggling for stability,” Franchot said in a statement. “They lured victims by paying them $50, then submitted false tax returns to make a profit without regard to the consequence to their clients.”
In every case, according to the indictments, the tax preparers created tax returns showing that the filers earning income as household employees in exactly the range needed to obtain the highest refund, or between $6,450 and $8,150. In each instance, preparers listed income from several sources, each under the limit that would have triggered Social Security or Medicare taxes being withheld by the employer.
In a typical case, the tax return would show that the filer was eligible for a combined $620 in federal and state credit. But most of the money, more than $400, would go to the Liberty franchise for filing fees and other charges.
That system was used more than 1,100 times during the 2015 tax season across six franchise locations owned by a single individual, Lateisha Vanessa Kone, according to the indictments. Preparers generated fees for the franchise owner and were eligible to receive bonuses based on the number of returns they filed and the amount of the fees they generated.
Because of security checks in place by the Office of the Comptroller and the Internal Revenue Service, the returns were flagged as suspicious, prompting the investigation. Liberty Tax’s parent corporation cooperated with the investigation.
“In the Maryland case this is a former franchisee that we terminated after identifying some anomalies last February,” Wheaton told Accounting Today on Friday. “Likewise, we reported both the franchisee and, I believe, about seven of the preparers, all of whom were among the people they indicted, to the IRS a year ago.”
Wheaton said the company noted anomalies on the Maryland returns last year through data analysis.
“Our ability to do data analysis on returns and identify problems has gotten better,” he said. “In the Maryland situation, early in the season last year we identified an anomaly or more than one anomaly and had somebody on the ground there reviewing returns before Maryland actually came in and had some concerns a few days later. But we were already there and had already turned off some of their filing capabilities. Our ability to analyze that stuff more recently has gotten better.”
Even though both cases came to light in prior tax seasons, Virginia Beach-based Liberty is making more of an effort to screen its franchisees and the tax returns they prepare, and is planning to beef up its training. In many states, franchisees and preparers are not required to have professional tax preparation credentials.
“We’re certainly looking into all of the training requirements and everything else that needs to happen,” said Wheaton. “The franchisees run tax schools every year in order to find tax preparers, and they do most of the training. In Maryland this year, we imposed some supplemental training requirements after some questions arose there. We’re certainly looking at the overall training obligations and at additional things we want to do.”
He pointed out that the tax extenders legislation passed by Congress last December also requires extra due diligence that should help catch fraudulent returns and require additional training for preparers next tax season.
“The PATH Act has some additional diligence requirements for things like the child credit and the education credit,” said Wheaton. “We certainly expect there to be additional requirements that the IRS will impose by the end of the year that we’re also going to be doing. In some of these areas, we’re also looking at technology solutions that would essentially allow us to have greater transparency into individual returns. Generally speaking we’re doing a lot of data analysis, but if we can be more effective by doing data analysis at the individual preparer and return level, which is what we’re working on now, that would give us even a better ability to screen for anomalies that we need to deal with.”