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Extra4/4/2007 11:44 AM ET

Tax outlets accused of $70 million fraud

Jackson Hewitt franchises in four states have schemed to inflate refunds for taxpayers and cheat the government, federal authorities say.

By The Associated Press

The federal government is trying to shut down more than 125 Jackson Hewitt tax-preparation stores in four states for what it calls systematic "tax-fraud schemes."

The Justice Department alleged Tuesday that the franchises have bilked the government out of more than $70 million through fraudulent practices such as using phony W-2 forms, bogus deductions and fuel-tax credits, and making false claims regarding the earned-income tax credit.

Jackson Hewitt Tax Services (JTX, news, msgs) is the nation's second-largest tax preparer, after H&R Block (HRB, news, msgs). The franchises were totally or partially owned by Farrukh Sohail, the Justice Department said, and involved "a pervasive and massive series of tax-fraud schemes," according to court filings.

Sohail and other defendants "created, directed, fostered and maintained a business environment" at the Jackson Hewitt franchises "in which fraudulent tax-return preparation is encouraged and flourishes," according to court documents.

Employees were allegedly encouraged to ignore telltale signs of fraudulent information and to file claims even when it was obvious customers were using fake W-2 forms or false deductions.

A sample of returns prepared by franchises connected to Sohail found 31% contained false information such as phony earned-income tax credit claims, bogus deductions and fraudulent W-2 forms, authorities said.

'We are not the IRS'

The suits, filed in federal courts in Chicago, Atlanta, Detroit and Raleigh, N.C., also allege that managers and employees at the Jackson Hewitt franchises took kickbacks for filing fraudulent returns.

Managers at the franchises repeatedly told tax preparers that "we are not the IRS" and that it is not their responsibility to prevent customers from filing bogus returns.

Many of the stores catered to customers seeking refund anticipation loans based on phony returns, authorities said. In one instance, a Jackson Hewitt franchise customer allegedly claimed a fuel-tax credit so absurd that the tax filer would have had to drive almost 1,400 miles a day.

The suits seek court orders to shut down the franchises.

Ron Brunson, Sohail's attorney, said his client would not voluntarily stop preparing tax returns at the Jackson Hewitt franchises but was "hoping to work things out" with the Justice Department and IRS.

"I am deeply disturbed by the allegation that a major franchisee of the nation's second-largest tax-preparation firm is intentionally preparing improper tax returns with inflated refunds," IRS Commissioner Mark W. Everson said.

Shares of Jackson Hewitt dropped $5.87, or 18%, on Tuesday to $26.53 after earlier hitting a new 52-week low of $26.26 on the New York Stock Exchange. The stock recovered some of the losses on Wednesday; in midday trading, shares were up $2.29 to $28.82, a gain of 8.6%.

A representative from the Parsippany, N.J., company did not immediately return a call for comment.

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