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Post Date:  12/11/2019
Last Updated:  12/11/2019

Summary
Cross References
- https://www.justice.gov/opa/pr/justice-department-announces-settlement-liberty-tax-service

The Justice Department has announced that it has filed a complaint with a U.S. District Court in Norfolk, Virginia, seeking entry of a court order requiring Franchise Group Intermediate L 1 LLC, (Liberty) the national franchisor and owner of Liberty Tax Service stores, to refrain from specific acts, enact enhanced internal compliance controls regarding the detection of false tax returns, and 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 complaint asserts. According to Liberty's 2019 Annual Report filed with the SEC, and as reflected in the complaint, 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, or their owners, former owners or managers, some of whom Liberty designated as "Elite 18" franchisees because their "performance and attitude set the standard for the [Liberty Tax Service] organization." The government contends its allegations in those lawsuits show common patterns 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.

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