Jackson-Hewitt Accused of Tax Fraud

April 3, 2007

Every year around this time, stories appear of tax cheats trying to abuse one of the myriad of tax deductions that permeate the federal individual income tax code. According to federal investigators, this time one of those tax cheats is the second biggest tax preparer in the country. From Fox News:

Federal investigators have filed suit against five companies that operate Jackson Hewitt Tax Services Inc. franchises, alleging that the firms contributed to tax fraud that bilked the U.S. Treasury out of more than $70 million.

Jackson Hewitt is the nation’s second-largest tax preparer.

The Department of Justice said the companies allegedly operate more than 125 Jackson Hewitt retail tax preparation stores in the Atlanta, Chicago, Detroit and Raleigh-Durham, North Carolina, areas. The lawsuits also target 24 people who manage or work at the franchises, the department said.

“Preparing federal income tax returns based on falsehoods and fabrications is a serious violation of the law,” Assistant Attorney General Eileen O’Connor said in a statement.

The suits allege that the companies and individuals contributed to the filing of false returns by using false deductions and credits, fabricated tax documents and other illegal means.

One example cited by the government was the case of a barber whose Jackson Hewitt prepared tax return claimed entitlement to a fuel tax credit for 25,000 gallons of gasoline. The complaint alleges that in order to consume that much fuel, the customer would have had to drive over 1,000 miles every day, seven days a week for a year.

There are so many deductions and credits in the tax code that taxpayers can legitimately get away with not paying tax on much of their income even without resorting to the sort of cheating that Jackson-Hewitt is accused of. It almost seems odd to call it an “income” tax since there is unfortunately so much income that is not taxed for various reasons (typically political). Perhaps it should be called the “Whatever Congress Feels Like Counting as Income Today Tax.”

The total amount of taxable income in 2004 after exemptions and deductions, according to the IRS, was $4.67 trillion. Compare that to Net National Product from BEA, which was $10.33 trillion. These numbers are radically different because Congress has decided to fill the code with many provisions that merely amount to running spending policy through the tax code, which allows legislators to be called “tax cutters” even though they are typically just implementing a spending program through the tax code, forcing up the rates on those who don’t receive deductions or credits, and/or increasing the deficit (i.e. higher future taxes). This trend has been increasing in recent years. (Look no further than the dramatic increase in the number of lines on the standard 1040 over the past decade — from 63 in 1996 to 77 in 2006.)

The only factors that should determine whether a spending program (such as EITC) should be run through the tax code or through a traditional spending program (like TANF) is economic efficiency and ease of compliance and administration. Political expendiency or a desire by special interests to hide such expenditures are not valid reasons for administering spending through the tax code.

For more on tax reform and tax compliance, check out our sections on the topics.

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