The Department of Justice filed a lawsuit against Instant Tax Service, its management, and some of its franchisees on Wednesday, alleging that the defendants perpetrated a systematic program of tax fraud.
The suit seeks an injuction to force franchisees in five cities to cease business. DOJ
argues that Instant Tax CEO Fesum Ogbazio "deliberately ignored" the fraud taking place at the company's franchises.
DOJ says that it found instances where Instant Tax had charged a tax filer $1,000 for a return that could have taken as little as fifteen minutes to prepare.
DOJ says that Instant Tax could accomplish that by duping consumers into filing un-neccesarily complicated returns. Those complications meant more forms - which translates to more fees. In turn, Justice says that ITS franchisees also threw in a wide range of "junk fees."
When it came to dollars and "sense," ITS prepares were apparently making choices that consistently inflated deductions. Filers got bigger refunds. For the ones that couldn't wait to get their refund in 8 to 15 days, ITS happily provided them with a refund loan. More loans = more revenue.
DOJ says that the alleged fraud in those five cities resulted in tax losses of $116 million. In the complaint, Justice says that Ogbazion does not track the complaints of fraud that reach his office because he "wouldn't be able to sleep."
The prospect of a loan was critical to the plan. Here is how the process worked:
- Consumers - most of whom have low incomes - come into an Instant Tax franchise in the weeks before the start of tax season.
- Instant Tax reviews their paystubs and provides an "estimate" of how much of a loan the consumer might be able to get. Some customers fill out loan applications on the spot.
- The consumer returns when they get their W-2s.
The result of the early season process was to remove clarity about pricing. Instant Tax never did more than suggest how much a customer might receive. It was then up to the honesty of the franchise to make sure that the loan amount was actually the remainder of the refund minus any specific loan fees.
The IRS Must Hate This Whole Process
The IRS cannot extinguish the refund anticipation loan. They have to rely on their federal friends.
The FDIC is doing its best to do that, but now some independent non-bank entities are starting to test the waters (in a few states) on their own refund loan product. While the FDIC may have done its work, it will soon be incumbent on the CFPB to follow suit.
The IRS is downstream of the problem. Since its inception, the refund loan has been a entry point for all kinds of fraud. While it is worth emphasizing that the great majority of tax preparers act with integrity, it would be wrong to ignore how co-incident the selling of RALs is with tax fraud. The IRS can investigate. DOJ can investigate. They can sue individuals and put franchises out of business. However, they cannot rid the system of the product itself. That must be the kind of thing that keeps at least a few government workers up late at night.