Instant Tax Service (“ITS”), the fourth-largest tax preparation business in the United States, has been ordered by a federal court judge to shut down its operations.
U.S. District Judge Timothy S. Black found that ITS had a culture of “fraud and deception.” The order, which was quite extraordinary, was said to be “necessary to protect the public and the Treasury.”
According
to the complaint (downloads as a pdf), ITS engaged in a pattern of false and deceptive practices in all facets of its operations – from marketing the franchises to the preparation of returns and the offering of loan products.
ITS marketed its franchises to practically anyone who could afford to pay the fees, no matter whether they were otherwise qualified. According to the complaint, ITS touted its franchise to potential owners as so simple that, “[n]o tax experience [is] necessary!” ITS claimed that it would train franchisees all they needed to know: they received just seven hours of training related to tax instruction. ITS also ignored its own background checks, setting up a franchise in at least one case with a known felon.
It’s alleged that franchisees did what ever it took to maximize charges to customers. The complaint further charges that ITS tacked on a number of junk fees to its invoices including bogus charges for “service bureau,” “document preparation,” “refund estimate,” “technology/software,” “account set up,” “check printing,” and “Efile/electronic transmission.” Those fees, together with tax prep fees pushed charges to an average of $400–$500 per return; fees could run “as high as $1,000 or more for as little as 15 minutes of return preparation.” Franchisees were accused of failing to disclose all fees and increasing fees without the customer’s consent; often, customers never know the total amount of fees charged because their fees were deducted from the taxpayer’s refund check – without explanation – before the check was made available.
Many of the questionable fees were related to loan products such as Instant Cash Loans (ICLs) and Refund Anticipation Loans (RALs), marketed to ITS customers. Those products were run through Tax Tree, LLC, which is owned by Fesum Ogbazion, who also owns Instant Tax Service, even though customers are given the impression that Tax Tree is an independent, third-party lender.
Tax Tree has an extremely high denial rate for loans but doesn’t share that information with its customers. In fact, ITS did just the opposite: franchisees encouraged customers to apply for loans that they might not be eligible for in order to charge them junk fees. The loan denial rate is bolstered by certain pre-denial criteria set by Ogbazion and his staff: for example, single males who file head-of-household and customers with expected refunds under $2,000 are categorically turned down – but not before paying related fees. Adding insult to injury, in a prior tax season, some taxpayers who met the criteria for loans were issued bad checks.
It wasn’t only the customers who were lied to: the complaint indicated that ITS had a written “IRS Audit Guide” to distribute to franchisees which encouraged lying to the IRS in the event of an audit. For example, the guide recommended telling Internal Revenue Service auditors that corporate policy prohibits filing tax returns based on paycheck stubs rather than forms W-2 (
which is not allowed by the IRS per Publication 1345); in reality, the practice was common at ITS franchisees. The guide also encouraged franchisees to lie to the IRS about their tax preparation fees, claiming that tax preparation fees range from “FREE to $140″ (by now, you already know that fees at ITS average over $400).
The result of these behaviors was an “environment where fraudulent tax return preparation and violations of federal tax laws flourish.” A laundry list of illegal activities related to tax preparation was alleged including:
(1) preparing fabricated W-2s;
(2) preparing phony Forms Schedule C depicting fabricated businesses and income;
(3) falsely claiming education and dependent care credits to which their customers are not entitled;
(4) improperly claiming false filing status;
(5) reporting fictitious income and deliberately circumventing due diligence requirements in order to fraudulently maximize the Earned Income Tax Credit; and
(6) filing federal income tax returns without the taxpayer’s consent and fraudulently omitting certain sources of reportable income.
The feds argued that the powers that be at ITS “knew of and has reason to know of this pervasive illegal conduct, but did virtually nothing to stop it, and, at times, directly or indirectly encouraged it.” In at least one case, the government says that Ogbazion knew that a franchisee’s operation resulted in, from his own words:
[E]very tax return being done is pretty much fraudulent.
Ogdazion, however, did nothing to stop the fraud. In other situations, Ogbazion promoted employees suspected of fraud – once even awarding an accused fraudster with his own ITS franchise.
And how much did these behaviors cost taxpayers? The IRS randomly sampled 2010 tax returns prepared by five ITS franchisees and found that over half of the over 24,000 tax returns prepared by those franchises were non-compliant. The estimated tax loss to the government from those franchisees alone exceeded $16 million in 2011. Yes, from five franchisees.
ITS boasts “hundreds of locations to choose from in 30 states” – the government believes that the losses at those locations would be just as significant.
At trial over the summer, evidence seemed to bolster the government’s claims. In a flurry of post-trial filings, ITS argued that the evidence presented focused on isolated incidents and were not representative of the company as a whole. The company further argued that it was making efforts to resolve these outstanding issues, a charge that the government disputes.
The judge was not convinced by ITS’ protestations,
entering a permanent injunctionordering ITS Financial LLC, the parent company of the Instant Tax Service franchise, to close all operations. The injunction also bars Ogbazion “from operating or being involved with any business relating to tax-return preparation.” Tax Tree LLC and TCA Financial LLC were also ordered to cease operating.
And the judge didn’t mince words, writing that the harm to the public was “extensive and egregious, indeed appalling.”
The court further stated: “Defendants’ repeated attempts at trial and in argument to downplay the gravity of their lawlessness was stunning.”
That attitude was, the court found, the reason for “putting the Defendants permanently out of business.”
Ouch.
