In an October 29th filing in the Southern District of Ohio, the Department of Justice filed a preliminary injunction against various parts of the Instant Tax Service chain which could threaten the future of the company.
The injunction says that the US will ultimately seek to permanently prevent Fesum Ogbazion, ITS
Financial, TCA Financial, and Tax Tree from operating any tax preparation business. For now, a preliminary injunction will force the company to provide extensive documentation to verify that customers are not being encouraged to file returns that make false claims for deductions and credits.
A civil suit filed by the DOJ in the Western Division of the United States District Court, Northern District of Ohio, has frozen $4.3 million from an account at PNC held by Tax Tree because of allegations of wire fraud.
The preliminary injunction prevents the stores from offering non-RAL loans, including pay stub advances, holiday loans, or instant cash loans. The order still allows Instant Tax to provide RALs via a third-party lender.
Instant Tax recognizes that the loans can be a significant factor in the likelihood that their customers bring their preparation business to their stores. Many applicants within the portion of the tax preparation market served by Instant Tax want bank products. Without the ability to advertise such a product, management may have imagined that fewer people would come into their stores.
Last year Instant Tax did offer refund anticipation loans, but in a manner that was somewhat deceptive. With no bank partner, Instant Tax could not cash flow every loan that was applied for by their customers. Liquidity is a challenge with any RAL program. Most RALs are made within a span of four or five weeks, as filers impatient to get a refund generally finish their taxes as soon as possible after the season begins in mid-January. Even Pacific Capital, a bank with billions in assets back when it made tax loans, purchased brokered deposits to make it through tax season. A non-bank does not have that privilege. But even if Instant Tax could ultimately not cash flow all of those loans, nothing prevented the company from advertising the availability of the product.
"The joke in the franchise community," a franchisee said, "is that we run a "denial program" because the program is underfunded."
One analyst estimated that Instant Tax stores may have denied as many as 95 percent of applicants for a loan. The catch with such a plan is that very few people will subsequently withdraw their application once they have worked through a filing. Instead, most will go ahead with the return. They pay for the prep, even though they may have chosen Instant Tax in order to get a loan, because they don't want to be inconvenienced.
Justice's aim is squarely focused upon Ogbazion - both as an individual and upon business enterprises of which he is the owner, but the suit could create a lot of collateral damage for ITS franchisees. Franchisees generally pay more than $30,000 for a territory and often spend another $25,000 to get an office up and running. Thus, Fesum's troubles could be a big problem for many people.
Ogbazion previously founded and owned the Instant Tax Refund Service. He sold that business to Jackson Hewitt in 1999. Soon thereafter he opened up Instant Tax.
The case will go to trial after the 2013 tax season, but provided that court approval is granted, the preliminary injunction will be in effect.
There are hundreds of Instant Tax stores. The chain's footprint spans 35 states. Tax Tree, LLC is and independent bank product company. Instant Tax is a subsidiary of ITS Financial. Ogbazion owns both ITS Financial and Tax Tree, LLC.
The issue of ownership by franchisees of their Instant Tax franchises is not at stake. However, the claims made in the injunction could do substantial damage to the public image of both of these franchises, and in doing so could harm the ability of those franchisees to earn as much revenue as in the past. Nonetheless, the status of the ongoing viability of their franchise is eliciting concern from franchisees.
Future Concessions Made By Instant Tax for Monitoring
The injunction requires the defendants to run a daily "Red Flag Report" which intends to monitor the work of individual franchisees. In the report, the Defendant (corporate, not the franchisees) must relay the number and percentage of returns reporting credits, deductions, or losses for:
- Schedule C income
- Schedule A deductions
- Earned Income Tax Credits
- Education Credits
- any other refundable credits
They are also required to reveal any consumer complaints to the local State Attorney General.
Personally, I think it is fine if Instant Tax - and any other preparer - is enjoined from offering a refund anticipation loan. That standard currently exists across the industry already, by virtue of the work of the FDIC, so it is not as if this creates undue hardship for Instant Tax. I think that franchisees are square with this, as well. They feel comfortable to go about their business without a pay stub loan offering.
Impact on Business Remains Unknown
"When I read this," said one franchise owner, "part of me is worried that clients will flee. I worry even more that ITS continued its less than honest business practice when they skimmed through this serious document during the franchise convention. As a matter of fact, they went on to boast that they will have a pre-season product for the upcoming season! I suspect it was a crisis control move for fear that franchisees will flee the system because of all the negative media attention.
This last detail - that ITS says it will have a pre-season product - could be a monumentally risky move by management.