Like crocuses, Justice Department press releases detailing prosecutions for tax evasion seem to proliferate in early spring, usually just before the the bulk of tax returns are to be filed. This year was no different.

There was one release entitled, “Creator of Girls Gone Wild Indicted for Tax Evasion,” announcing an indictment charging Joseph Francis with tax evasion. The indictment alleges that Francis, whose companies Mantra Films Inc. and Sands Media Inc. produce and sell the Girls Gone Wild videotapes and DVDs, deducted more than $20 million in false business expenses on the companies’ 2002 and 2003 corporate income tax returns.

The second release indicates the Justice Department has asked a federal court to permanently bar Marva Bilberry of Belton, Mo., from preparing tax returns for others. The civil injunction suit alleges that Bilberry operates a business called Bilberry Bookkeeping & Tax Service that has prepared fraudulent income tax returns for customers in the Kansas City metropolitan area.

According to the government complaint, 98 percent of the Bilberry-prepared returns that the IRS has examined required adjustments -- averaging $3,167 in additional tax per customer. Bilberry allegedly prepared tax returns with inflated medical expenses, employee business expenses, charitable contribution deductions, and home business expenses.

The third press release, the most interesting, reports on the filing of civil injunction suits against five corporations that operate Jackson Hewitt tax preparation franchises, as well as 24 individuals who manage or work at the franchises. The suits allege that one of the individual defendants, Farrukh Sohail of Atlanta, Ga., wholly or partly owns each of the five corporations, which prepared and filed over 105,000 federal income tax returns last year. The five corporations operate more than 125 Jackson Hewitt retail tax preparation stores in the Chicago, Atlanta, Detroit, and Raleigh-Durham, N.C. areas.

According to the government complaint, Sohail and other defendants “created and fostered a business environment” at the Jackson Hewitt franchises “in which fraudulent tax return preparation is encouraged and flourishes.” Examples of fraud alleged in the lawsuits include filing false returns claiming refunds based on phony W-2 forms; using fabricated businesses and business expenses on returns to claim bogus deductions; claiming fuel tax credits in absurd amounts for customers clearly not entitled to any credits; and massive fraud related to claiming the federal earned income tax credit.

The government couldn’t resist pointing out that one complaint cites a Jackson Hewitt franchise customer “whose Jackson Hewitt-prepared tax return claimed he was a barber who was entitled to a fuel tax credit for buying 25,000 gallons of gasoline for off-highway business use. The complaint alleges the customer would have had to drive 1,370 miles each day, seven days a week, to consume that much fuel in one year, leaving little if any time to cut hair.”

What is different about this last press release is the fact that Jackson Hewitt, a publicly traded company, whose stock price is taking a substantial downward hit, had to do some damage control. Its quick response began as follows: “The complaints announced today by the Department of Justice are limited to one franchisee, whose entities noted in the complaints operate more than 125 locations out of more than 6,500 Jackson Hewitt locations nationwide. The Company estimates that these entities represent about two percent of its total revenue. We do not believe that this matter is likely to have a material adverse effect on our financial position.

“While we cannot comment on franchisee litigation, Jackson Hewitt takes such matters seriously.”
Jackson Hewitt then appointed a former IRS commissioner, Fred Goldberg, to conduct an internal review. Michael Lister, president and CEO of Jackson Hewitt Tax Service Inc., said, "We have launched this internal review to investigate the specific allegations against one of our franchisees. We intend to identify all of the facts related to these allegations and address them appropriately. The review will also examine practices and procedures and make any recommendations that may be needed to ensure that customers continue to have the utmost confidence in all of our franchises."

That announcement was followed up by a carefully worded, unrelated press release in which Jackson Hewitt said it “supports its financial product partners' decisions to discontinue pre-season loan products and that the Company intends to discontinue such product offerings.” Jackson Hewitt added it had provided these products primarily to drive customer retention, and in the current fiscal year didn’t receive financial product fees for the facilitation of those products. This announcement was a result of the fact that a number of banks had decided to stop making refund anticipation loan, as those loans were getting increased regulatory scrutiny.

Unlike other tax seasons, I expect continued media interest. Because a Jackson Hewitt franchisee with 125 offices was the subject of a Justice Department action, the media will be looking closely to see and report on what happens and what the report by Fred Goldberg says.

Another possible development is that, ultimately, the Justice Department and the IRS might decide that issuing press releases in early spring isn’t enough, and therefore that greater regulation of preparers is needed, or at the very least, impose greater scrutiny in the form of spot checking a number of returns prepared by particular preparers that the IRS red flags.

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