The Justice Department announced recently that it has filed a complaint with a U.S. District Court in Norfolk, Virginia requiring Liberty Tax Service stores, to refrain from specific acts and implement better internal compliance controls regarding the detection of false tax returns. It also requires Liberty to pay for an independent monitor to oversee Liberty’s compliance with the proposed court order. Separately, the United States and Liberty filed a joint motion and proposed order that, if adopted by the court, would resolve the matter.
Liberty is one of the largest tax preparation service providers in the United States, according to its public filings.
Through its stores, Liberty filed approximately 1.3 to 1.9 million tax returns each year between 2015 and 2019, and for tax years 2012 to 2018, Liberty claimed over $28 billion in federal tax refunds on behalf of its customers.
The Justice Department has been investigating Liberty’s policies, practices and procedures in connection with Liberty’s tax return preparation activities. Liberty has cooperated to resolve this matter.
The complaint alleges that Liberty directly controls its company-owned stores and that it maintains a substantial degree of control over franchisees. According to the complaint, returns prepared by franchisees and filed electronically with the IRS flow through Liberty before they are filed.
The government claims Liberty failed to maintain adequate controls over tax returns prepared by its franchisees, and failed to take steps to prevent the filing of potentially false or fraudulent returns prepared by franchisees, despite having the capability to do so and despite notice of fraud at some of its franchisee stores.
Between 2013 and 2018 the Department of Justice filed 10 separate civil enforcement actions against Liberty Tax Service franchisees, owners, former owners or managers. The government argues that common patterns exist across top Liberty franchisees of concocting fictitious income for customers to claim Earned Income Tax Credits, fabricating expenses to reduce customers’ reported income tax liability, claiming improper or false dependents, and falsifying education expenses to claim refundable education tax credits.
In their settlement, the parties request that:
- Permanently bar Liberty from engaging or employing certain individuals including the company’s founder and former CEO, John T. Hewitt;
and require Liberty to:
- Implement enhanced compliance measures, including training programs and additional resources to monitor, detect, and report non-compliance with federal laws
- Conduct a minimum number of onsite compliance reviews of its stores
- Test its stores’ compliance with tax laws using mystery shoppers
- 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 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.