The United States sued Emanuel Ghebremichael and ERG Financial Corp. dba Instant Tax Service, which “claims on its website to be the ‘4th largest tax preparation company’ in America, one of ‘the fastest growing franchises,’ and the ‘number one new franchise’ brand in the country as of 2009,” according to the federal complaint.
“Defendants Ghebremichael and ERG Financial operate 16 stand-alone tax preparation stores and tax preparation kiosks in or near Chicago, Illinois, under the name Instant Tax Service, and create an environment within their business where fraudulent tax return preparation and violation of federal tax law flourishes,” the complaint states.
Ghebremichael set up his Instant Tax Service franchise in Chicago in 2004. It has grown to 15 outlets in Chicago and one in Calumet City, and prepared more than 15,000 tax returns from 2009-2011, and employed 35 tax preparers, according to the complaint.
“Based on a statistically random sample of the more than 4,000 taxpayers whose 2010 tax returns were prepared by defendants, as well as analysis of information obtained from interviews of over 100 taxpayers, the IRS identified violations of the internal revenue laws associated with over half of these randomly selected Instant Tax Service customers, including instances of outright fraud,” the complaint states. “The government estimates that defendants’ misconduct resulted in a tax loss to the Treasury of approximately $2.1 million for returns prepared in 2011 alone.”
Ghebremichael personally fills out tax returns and supervises the training of his employees at Instant Tax Service’s “tax school,” according to the complaint.
However, “Despite purported training at Ghebremichael’s Instant Tax Service and supposed manager review of tax returns prepared by employees prior to submission to the IRS, tax returns prepared by defendants include, for instance, false or inflated Schedule C income and expenses to obtain improper claims for the EITC [Earned Income Tax Credit], bogus dependents, false filing statuses, improper education credits, and false itemized deductions. …
“Most of defendants’ customers are unsophisticated taxpayers with very low incomes. Many receive public assistance. Some of these customers have no knowledge that Instant Tax Service employees prepare and file fraudulent tax returns on their behalf. For others, Instant Tax Service employees encourage customers to participate in the tax fraud by promising them thousands of dollars of illegal refunds. In either event, defendants keep a significant portion of their customers’ fraudulently obtained refunds, which defendants retain as purported fees,” the complaint states.
“Even when Ghebremichael’s Instant Tax Service prepares non-fraudulent tax returns for customers, defendants improperly charge those customers unconscionably high tax preparation and added fees. ITS Financial CEO Fesum Ogbazion calls the added charges ‘junk fees’ and ‘revenue generators.’ The junk fees include bogus charges for ‘service bureau,’ ‘document preparation,’ ‘technology/software,’ ‘account set up,’ ‘check printing,’ and ‘Efile/electronic transmission.’ Collectively these charges average more than $400-$500 for as little as 15 minutes of return preparation. Because Instant Tax Service deliberately targets low-income taxpayers, defendants’ unconscionably high fees frequently pose a significant financial hardship for their customers.
“Defendants also peddle false and deceptive loan products to low-income customers who are in need of money quickly. Defendants tell customers that they can receive significant cash loans as advances on their expected refunds within 48 hours. Most of defendants’ customers, however, are either denied the loans outright or receive amounts that are so small that they are subsumed by the accompanying junk fees. Even customers whose loan applications are denied are charged junk ‘transmission fees,’ ‘technology fees,’ ‘account set up fees,’ and ‘check-print fees’ that go directly to franchisor ITS Financial or to its affiliate, Tax Tree.
“Apart from being profitable in their own right, the false and deceptive loan products principally serve as an inducement for people to have their tax returns prepared and filed by defendants’ Instant Tax Service stores, so that defendants can charge them their unconscionably high fees.”
And, the U.S. attorney says, “Defendants’ employees encourage customers to create false documents to illegally inflate income and to substantiate phony expenses in order to improperly claim the EITC. … Audits of defendants’ customers for tax years 2007 to 2009 indicate that tax returns for those years contain, inter alia, improper filing statuses, false claims for tax credits, as well as other improper claims for tax deductions associated with nonexistent businesses.”
The U.S. attorney seeks a permanent injunction prohibiting the defendants from being involved in the tax return preparation business in any way, a list of their clients and employees, penalties and other relief, including costs of investigation, as the court deems appropriate.
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