Earlier this month, the Department of Justice asked a federal court to shut down a South Carolina Liberty Tax Service franchise owner for his role in preparing false income tax returns. The owner, Christopher Paul Haynes of Irmo, South Carolina, is accused of deliberately falsifying information on returns in order to receive inflated tax refunds from the Internal Revenue Service (IRS).
That, in itself, is quite unremarkable. Sadly, tax return preparer fraud is all too common, making the IRS’ “Dirty Dozen” list of schemes and scams yet again in 2016.
And if that were the only Liberty Tax story involving alleged tax return preparer fraud for 2016, that would be the end of it.
But just a few days earlier, Maryland Comptroller Peter Franchot announced that he had suspended processing electronic and paper tax returns from 16 Liberty Tax Service franchise locations in the state, citing “a high volume of questionable returns received.” The 16 offices were in addition to seven other Liberty Tax Service franchise locations which had been flagged earlier for the same reasons, bringing the total number of Liberty Tax Service franchise locations under scrutiny to 23. Tax returns which attracted the attention of tax authorities in Maryland included those where business income was reported when taxpayers did not own a business; refund amounts were much higher in previous years; business expenses were inflated and/or undocumented business expenses; dependents were erroneously claimed; and wages were inflated.
(These willful errors reflect many of the IRS’ Dirty Dozen schemes.)
At first, the story didn’t attract much attention. Unfortunately, tax return preparer fraud happens during tax season, and reports have become so commonplace, they’re not even shoulder shrug-worthy in some circles.
But with active investigations involving Liberty Tax franchises in two states, not everyone is sure that this was your run-of-the-mill tax return preparer fraud. Was there something more to this story? Some taxpayers say yes, citing multiple instances of alleged fraud at Liberty Tax Fraud franchises including complaints raised in Illinois and Michigan in late 2015 – in addition to the South Carolina and Maryland reports this year.
Not surprisingly, Liberty Tax says no. Jim Wheaton, General Counsel, Chief Compliance Officer, and Vice President, Legal and Governmental Affairs for Liberty Tax says that the investigations are focused on a “minuscule” percentage of Liberty Tax preparers. In contrast, the company has approximately 4,000 locations in the U.S. and Canada with more than 35,000 tax preparers.
Today, Liberty Tax is the third largest tax preparation franchise in the United States. As a franchise company, most of those 4,000 offices are owned and operated by individual owners: it’s about 95% franchised. That means, explains Wheaton, that while Liberty Tax establishes training standards and expectations for its franchises, there is a limit to what the company can do when a preparer goes rogue. However, Wheaton stresses, the majority of franchise owners are honest and professional and they are expected to comply with federal and state tax requirements.
When the company is made aware of potential problems at a franchise, the company does step in with supplemental training and oversight. They engage in a variety of strategies to ensure quality, including mystery shops and ongoing compliance reviews. The company also continuously studies trends and metrics, looking for signs that a franchise might need additional support.
When a preparer doesn’t comply with attempts to bring them up to the company’s standards, they can be disciplined, including being blacklisted by PTIN or reported to IRS. They can also be terminated as franchise owners (which is the case with former Michigan tax preparer Craig Comer).
Is that enough? The company thinks so.
Others aren’t so sure. It’s been alleged that the company knew about the investigations before Maryland Comptroller Peter Franchot moved to suspend the processing of returns from certain franchises; Wheaton says the company was not contacted by the state of Maryland prior to the shutdown.
Liberty has fully cooperated with all authorities when made aware of accusations against the various franchise owners, according to Wheaton (you can read their official response regarding those Maryland franchises here). He also noted that while allegations involve multiple franchises, many of those franchises were controlled by the same owner; in Maryland, for example, three of the franchise offices in question were owned by the same owner.
As for those tax return preparer fraud allegations in Maryland? They haven’t been restricted to Liberty Tax claims Wheaton. In fact, for 2016, the state of Maryland flagged more tax returns for potential fraud in the first three weeks than all of 2007. And those 23 Liberty tax franchises which were placed on suspension? Comptroller Franchot suspended an additional 15 offices not associated with Liberty over allegations of potential fraud.
And what about those outside of Maryland? Wheaton reminded me that the company is quite large. There might be bad eggs in some offices but, he says, they are not reflective of the majority of franchise owners of the company, nor of the company’s culture. There is, he says, “not a systemic problem.”
