The Justice Department has sued to shut down 125 franchises of No. 2 U.S. tax preparer Jackson Hewitt Tax Service Inc. after the IRS accused the outlets of submitting thousands of fraudulent returns that cost the government more than $70 million.

The Justice Department said the franchises' fraudulent practices included using phony W-2 forms, bogus deductions and fuel tax credits and false claims regarding the earned income tax credit.

Jackson Hewitt Tax Services Inc. is the nation's second largest tax preparer. The franchises were either totally or partially owned by Farrukh Sohail, the Justice Department said, and involved "a pervasive and massive series of tax-fraud schemes," according to court filings.

Sohail and other defendants "created, directed, fostered, and maintained a business environment" at the Jackson Hewitt franchises "in which fraudulent tax return preparation is encouraged and flourishes," according to court documents.

Employees were encouraged to ignore telltale signs of fraudulent information and to file claims even when it was obvious customers were using fake W-2 forms or false deductions.

A sample of returns prepared by franchises connected to Sohail found 31 percent contained false information such as phony earned income tax credit claims, bogus deductions and fraudulent W-2 forms.

The suits, filed in federal courts in Chicago, Atlanta, Detroit and Raleigh, N.C., also allege that managers and employees at the Jackson Hewitt franchises took kickbacks for filing fraudulent returns.

Managers at the franchises repeatedly told tax preparers that "we are not the IRS" and that it is not their responsibility to prevent customers from filing bogus returns.

Many of the stores catered to customers seeking refund anticipation loans based on phony returns.

In one instance, a Jackson Hewitt franchise customer claimed a fuel tax credit so absurd that the tax filer would have had to drive almost 1,400 miles a day.

The suits seek court orders shutting down the franchises.

"I am deeply disturbed by the allegation that a major franchisee of the nations second-largest tax preparation firm is intentionally preparing improper tax returns with inflated refunds," said IRS Commissioner Mark W. Everson.
The government said Tuesday it is trying to shut down more than 125 Jackson Hewitt tax preparation stores in four states for systematic "tax-fraud schemes."