The Justice Department has officially announced the filing of a complaint in a U.S. District Court in Norfolk, Virginia, targeting Franchise Group Intermediate L 1 LLC, known widely as Liberty Tax Service. As a major national franchisor and owner of Liberty Tax Service stores, the complaint seeks a court order to enforce enhanced internal compliance controls and address the detection of false tax returns. This legal action also proposes the appointment of an independent monitor to oversee Liberty’s adherence to the court order. Alongside the complaint, a joint motion and proposed order have been submitted by both the United States and Liberty, aiming to resolve the matter pending court approval.
Liberty Tax Service stands as one of the largest tax preparation entities in the United States, as indicated in its public filings. Between 2015 and 2019, Liberty Tax Service processed approximately 1.3 to 1.9 million tax returns annually through its network of stores. For the tax years spanning 2012 to 2018, the company reportedly claimed over $28 billion in federal tax refunds on behalf of its clientele, as detailed in the Justice Department’s complaint. The investigation into Liberty Tax Service’s policies and practices related to tax return preparation has been ongoing, as reflected in Liberty’s 2019 Annual Report filed with the SEC. Liberty Tax Service has reportedly cooperated with the Justice Department in an effort to resolve these concerns.
The core of the complaint alleges that Liberty Tax Service exercises direct control over its company-owned stores and maintains significant control over its franchisees. The government asserts that tax returns prepared by franchisees are routed through Liberty Tax Service systems before being electronically filed with the IRS. Despite this oversight capability and clear indications of fraudulent activities within some franchisee stores, the complaint argues that Liberty Tax Service failed to implement adequate controls to prevent the filing of potentially false or fraudulent returns prepared by these franchisees.
Between 2013 and 2018, the Department of Justice initiated ten separate civil enforcement actions against Liberty Tax Service franchisees, including owners, former owners, and managers. Notably, some of these individuals were recognized by Liberty Tax Service as “Elite 18” franchisees, celebrated for setting high standards within the organization. The government’s lawsuits against these franchisees revealed recurring patterns of misconduct, including the creation of fictitious income to secure Earned Income Tax Credits for customers, the fabrication of expenses to lower reported income tax liabilities, the wrongful claiming of dependents, and the falsification of education expenses to obtain refundable education tax credits.
The joint motion filed by the parties proposes several key measures to address these issues. It seeks to permanently prohibit Liberty Tax Service from engaging or employing specific individuals in the future, notably including the company’s founder and former CEO, John T. Hewitt. Furthermore, the proposed order mandates that Liberty Tax Service implement a series of enhanced compliance measures. These include comprehensive training programs and increased resources dedicated to monitoring, detecting, and reporting any non-compliance with federal laws and regulations. These measures aim to ensure effective quality control over tax return preparation throughout the entire Liberty Tax Service system.
To further bolster compliance, Liberty Tax Service would be required to conduct a minimum number of onsite compliance reviews of its stores, employ mystery shoppers to assess store compliance with tax laws, and implement an automated system to prevent the electronic transmission of tax returns with high fraud risk indicators to the IRS until accuracy is independently verified. Liberty Tax Service would also be obligated to disclose to the United States any violations uncovered through onsite reviews, mystery shopper programs, automatic return holds, and internal reviews concerning officers and employees involved in federal tax law violations.
Specific verification protocols at Liberty Tax Service stores are stipulated for tax returns claiming itemized deductions or reporting particular forms of income to claim the Earned Income Tax Credit. Additionally, the company must maintain a whistleblower program, encouraging employees, franchisees, and franchisee employees to report suspected fraudulent activity. Finally, the proposed order requires Liberty Tax Service to engage a third-party monitor, approved by the United States, to independently review the company’s compliance with the court order terms, evaluate the effectiveness of Liberty’s fraud prevention measures, and report findings to a designated government official and, if necessary, to the court.
Tax preparer fraud is recognized by the Internal Revenue Service (IRS) as one of the “Dirty Dozen Tax Scams” for 2019. The IRS provides guidance on its website to assist taxpayers in choosing a reputable tax preparer and offers a free directory of federal tax preparers. Over the past decade, the Tax Division has successfully obtained injunctions against numerous unscrupulous tax preparers. Information regarding these cases is publicly available on the Justice Department’s website, including an alphabetical listing of individuals and businesses prohibited from preparing tax returns or promoting tax schemes. Individuals who suspect that an enjoined person or business may be violating an injunction are encouraged to contact the Tax Division with detailed information.
