Is a Getaway Car a Deductible Expense?

What do you know? Turns out that the customer is not always right.

At least they're not right when they ask a franchised tax-preparation company to knowingly prepare obviously fraudulent personal income-tax returns. Even if they are willing to kick back some of their tax savings to the tax preparer.

You can look it up: The Justice Department today said it had resolved lawsuits against corporations that ran Jackson Hewitt tax preparation franchises in Atlanta, Chicago, Detroit, and the Raleigh-Durham area of North Carolina.

According to the government complaint, Farrukh Sohail, an Atlanta man who owns all or part of the five franchises involved in the case, "created and fostered a business environment" at the Jackson Hewitt franchises "in which fraudulent tax return preparation is encouraged and flourishes."

The alleged frauds included claiming refunds based on phony W-2 forms, claiming bogus deductions using phony businesses and business expenses, and making "massive" but fraudulent claims for the federal earned income tax credit.

It didn't take an I.R.S. version of Hercule Poirot to find the dodgy claims. One Jackson Hewitt-prepared tax return claimed that a barber was entitled to a fuel tax credit for buying 25,000 gallons of gasoline for off-highway business use. The government's complaint wryly notes that the barber would have had to drive 1,370 miles a day, seven days a week, to consume that much fuel in one year, "leaving little if any time to cut hair." Or sleep, for that matter.

The suits contend that some Jackson Hewitt franchise managers and employees received kickbacks from customers for preparing and filing fraudulent returns.

The government complaints in the cases allege that franchises owned or controlled by Sohail had prepared and filed more than 105,000 federal income tax returns last year alone, making him one of Jackson Hewitt's top franchisees. The government reckons the phony filings cost the Treasury more than $70 million in losses.

Jackson Hewitt is the nation's second-largest chain of tax-preparation firms, after H. & R. Block.

Justice Department prosecutors are seeking a court order to permanently bar the Sohail corporations that owned and operated franchises in Atlanta, Chicago and Detroit from ever preparing federal income tax returns. Those companies are in the process of selling their Jackson Hewitt franchises to new owners.

Jackson Hewitt, based in Parsippany, New Jersey, is undoubtedly happy to see Sohail go away.

by Mark Stein