Compliance called out in Liberty Tax DOJ settlement

The DOJ and Franchise Group Intermediate, the national franchisor and owner of Liberty Tax Service stores, have filed a joint motion to resolve the issues alleged in the DOJ’s complaint, filed Tuesday with a U.S. District Court in Norfolk, Va. The DOJ wants Liberty 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 its compliance with the proposed court order.

In addition, Franchise Group would make monetary payments to the Internal Revenue Service totaling $3 million to be paid in installments over four years.

The DOJ has been investigating Liberty’s policies, practices, and procedures regarding its tax return preparation activities. Between 2013 and 2018, the DOJ filed 10 separate civil enforcement actions against Liberty Tax Service franchisees—or their owners, former owners, or managers—alleging common patterns 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.”

“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,” the DOJ states.

The DOJ requests Liberty founder and former CEO John Hewitt be permanently barred from engaging further with the company. Also requested, among requirements laid out by the DOJ, is that Liberty:

• Implement enhanced compliance measures, including training programs and additional resources to monitor, detect, and report non-compliance with federal laws and regulations;
• 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;
• Maintain a whistleblower program to encourage Liberty employees, franchisees, and franchisee employees to report suspected fraudulent activity; and
• Engage a U.S.-approved third party to act as an independent monitor to review the company’s compliance with the 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. The monitor would serve for a period of three years.

Liberty would also be required to appoint a vice president of compliance to report directly to the CEO and must ensure its compliance department is equipped with a proper budget and staff.

The joint motion would resolve the civil action against Franchise Group without factual admissions or findings. In acknowledging the settlement, Franchise Group said it “has spent millions on its tax compliance program and related organizational enhancements” over the past several years.

“Today, we arrive at a new beginning for Liberty Tax Service,” said CEO Brent Turner in a news release. “We are pleased to resolve this matter, and with the past in our rear-view, we are laser focused on our future, our franchisees and our customers who place their trust in us. We have created a best-in-class compliance program, and our team is excited and motivated to propel Liberty forward.”