NORFOLK, Va. (WAVY) — One of the largest tax preparation services in the country — which has more than 2,800 stores — must enact better internal compliance controls to detect false tax returns as part of a federal settlement.
The franchisor and owner of Liberty Tax Services, Virginia Beach-based Franchise Group Intermediate L1 LLC, settled in federal court in Norfolk.
The settlement, which includes a $3 million payment to the Internal Revenue Service and other compliance requirements, was announced in a United States Department of Justice news release Tuesday.
The settlement must still be approved by the federal court, but it will finalize years of disputes between the government and Liberty Tax Services.
The Department of Justice filed 10 civil enforcement actions against Liberty stores between 2013 and 2018.
The complaint filed in court alleges Liberty directly controls its own stores and maintains control over its franchise stores. Returns prepared by franchisees are filed electronically with the IRS and then sent through Liberty before they’re filed. The complaint claims Liberty didn’t maintin controls over the tax returns prepared by its franchise stores.
The complaint also alleges Liberty did not take actions to prevent filing of possibly false or fraudulent returns, although it had the capability to identify them and had received notice that some fraud occurred at its stores, according to the release.
It also says Liberty stores made fictitious income for customers so they could claim Earned Income Tax Credits and other customer tax information and expenses.
As part of the settlement, Liberty agrees to implement certain changes to its tax compliance program and pay the IRS $3 million.
The $3 million will be paid in installments over a period of four years, according to a news release from Franchise Group.
It bars employment of certain people at Liberty, including the company’s founder and former CEO John Hewitt.
The feds maintain Liberty claimed over $28 billion in federal tax refunds on behalf of its customers.
Franchise Group says it fully cooperated with the DOJ and IRS and has already taken “extensive steps to establish an industry-leading compliance program” and spent “millions” on tax compliance.
“We have worked tirelessly to establish improved compliance standards. By enhancing our policies, procedures and systems, we can better ensure the integrity of tax returns prepared in the Liberty system, which ultimately benefits our customers,” said Richard Ernst, vice president of compliance for Liberty.
Here’s the full list of requirements, according to the Department of Justice:
- “Implement enhanced compliance measures, including training programs and additional resources to monitor, detect, and report non-compliance with federal laws and regulations, as well as to ensure effective quality control over tax return preparation throughout the Liberty Tax Service system;
- Conduct a minimum number of onsite compliance reviews of its stores, test its stores’ compliance with tax laws using mystery shoppers, and 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 previously 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.”
Franchise Group says it agreed with the Department of Justice to have oversight of the tax compliance measures by an “independent monitor” for three years.