U.S. Justice Department Proposed Settlement with Liberty Tax Services

A complaint was filed in U.S. District Court alleging that Liberty Tax Services maintained a substantial degree of control over franchisees and the ability to prevent potentially false or fraudulent tax returns from being e-filed with the IRS.  Furthermore, Liberty Tax failed to set up adequate internal controls necessary to prevent the filing of false or fraudulent tax returns. The Justice Department highlighted a pattern of prior tax return preparer fraud involving Liberty Tax Services including: 

Earned Income Tax Credit Fraud (fake income); 

Fabricated Expenses (itemized deductions & business expenses);

False or Improper Dependents;

Fraudulent Claims for Education Credits;

PTIN Violations (Paid Prepares). 

From tax years 2012 thru 2016 the IRS has assessed over 25,000 separate penalties against tax return preparers for tax returns prepared at Liberty Tax franchises and company-owned tax return preparation stores.  

From the Complaint: 

• For tax years from 2012 to 2018, over 88% of the electronically filed federal income tax returns prepared at stores Liberty Tax owned directly or franchised in the United States included a claim for a tax refund. In total, those income tax returns claimed over $28 billion in federal tax refunds.  

•  A substantial portion of the tax returns prepared at Liberty Tax franchise and company-owned store locations and electronically filed with the IRS by Liberty Tax claim the EITC. For tax years from 2012 to 2018, approximately 41% of federal income tax returns that Liberty Tax electronically filed with the IRS included a EITC claim – more than double the proportion compared against all other federal income tax returns electronically filed with the IRS during that period. In total, the EITC claimed by federal tax returns electronically filed by Liberty Tax during this timeframe exceeded $12 billion. 

• Because store locations prepare tax returns using Liberty Tax software,which transmits each tax return to Liberty Tax prior to filing with the IRS, Liberty Tax has the capability to prevent electronic filing of federal tax returns that it identifies as containing potentially false or fraudulent information. 

• Liberty Tax has the capability to prevent electronic filing of federal tax returns prepared by individual tax return preparers working at store locations it owns or owned by its franchisees, if the tax return includes the correct Preparer Identification Number (“PTIN”) of the preparer as required by federal law. Therefore, Liberty Tax can bar individuals from filing tax returns through its systems that it identifies as having filed improper, false, or fraudulent federal tax returns in the past, or identifies as high risk for filing improper, false, or fraudulent federal tax returns.

The Justice Department announces proposed settlement that would:   

• Permanently bar Liberty from engaging or employing certain individuals going forward, including the company’s founder and former CEO, John T. Hewitt.

• Implement enhanced compliance measures, including training programs and additional resources to monitor, detect, and report non-compliance with federal laws and regulations, as well as to ensure effective quality control over tax return preparation throughout the Liberty Tax Service system;

• Conduct a minimum number of onsite compliance reviews of its stores, test its stores’ compliance with tax laws using mystery shoppers, and automatically prevent electronic transmission of tax returns to the IRS that report certain items with a high risk of fraud until the company independently verifies the accuracy of the tax return;

• Disclose to the United States any violations Liberty discovers from onsite reviews, mystery shoppers, and automatic holds of tax returns, as well as internal reviews Liberty previously conducted of its officers and employees who violated federal tax laws;
• Enact specific verification requirements at Liberty Tax Service stores for tax returns that claim itemized tax deductions or report certain forms of income to claim the Earned Income Tax Credit;

• Maintain a whistleblower program to encourage Liberty employees, franchisees, and franchisee employees to report suspected fraudulent activity; and

• Engage a third party, approved by the United States, to act as an independent monitor to review the company’s compliance with terms of the order, to assess the sufficiency of Liberty’s fraud prevention measures, and to report findings to a government official designated by the United States and, if necessary, to the court.

The proposed settlement can be viewed here.