U.S. accuses some Jackson Hewitt outlets of tax fraud

NEW YORK (Reuters) - The U.S. government has sued the operators of more than 125 Jackson Hewitt Tax Service Inc. tax preparation offices, accusing them of cheating the U.S. Treasury out of more than $70 million through a "pervasive and massive series of tax-fraud schemes."

The complaints target five franchises that operate offices located in the Atlanta, Chicago, Detroit and Raleigh-Durham, North Carolina areas, as well as 24 individuals.

Parsippany, New Jersey-based Jackson Hewitt is the second-largest U.S. tax preparer, with 5,802 franchised and 724 company-owned offices as of January 31.

Jackson Hewitt shares fell 18.1 percent, or $5.87, to close at $26.53 on the New York Stock Exchange.

The company has been winning market share in recent years from larger rival H&R Block Inc., which has struggled with its own regulatory and legal problems, as well as losses in its Option One Mortgage Corp. subprime lending unit.

Jackson Hewitt said in a statement: "The complaints announced today by the Department of Justice are limited to one franchisee, whose entities noted in the complaints operate more than 125 locations out of more than 6,500 Jackson Hewitt locations nationwide.

"The company estimates that these entities represent about 2 percent of its total revenue. We do not believe that this matter is likely to have a material adverse effect on our financial position."

Investigators accused defendants in the Jackson Hewitt case of encouraging individuals to file bogus tax returns through such means as claiming fake deductions and fuel tax credits, seeking refunds based on phony earnings statements, and abusing the federal earned income tax credit.

In some cases, managers and employees took kickbacks from customers for helping them file fraudulent tax returns, the government said. The franchises prepared more than 105,000 federal income tax returns last year, the government said.

Mark Everson, commissioner of the Internal Revenue Service, called the case "the largest enforcement action of its kind."

The government is seeking to permanently bar the defendants from the tax preparation business, among other remedies.

"Preparing federal income tax returns based on falsehoods and fabrications is a serious violation of the law," Assistant Attorney General Eileen O'Connor said in a statement.

The government said defendant Farrukh Sohail owns all or part of the five franchises, and comes from the Atlanta area.

A message left at a number listed for Sohail in Marietta, Georgia was not immediately returned. Numbers listed for Sohail's company Smart Tax of Georgia Inc. were disconnected.

Max Baucus, a Montana Democrat who heads the Senate Finance Committee, said the case "underscores the need for closer oversight" of paid tax preparers.

"With a $345 billion total tax gap every year, we have an obligation to close the cracks through which billions of legally owed tax dollars currently fall," Baucus said in a statement.

This is at least the fourth time that investigators have targeted Jackson Hewitt since July, the government said.

In the most recent case, Jackson Hewitt agreed in January to pay $5 million to settle claims it steered low-income people in California to high-cost loans to tide them over while they awaited refunds.

(Additional reporting by Susan Heavey and Rachelle Younglai in Washington, D.C. and Mark Porter in New York)