Jackson Hewitt

Jackson Hewitt Tax Service, Inc. prepares tax returns for customers in the United States. The company was founded in 1960 and has been selling franchises since 1986. During the 2007 tax season, its network comprised 5,802 franchised offices and 724 company-owned offices.Parsippany, New Jersey-based Jackson Hewitt is the second-largest U.S. tax preparer behind H&R Block.

The company’s financial products include the Refund Anticipation Loan, Accelerated Check Refund, Assisted Direct Deposit, Jackson Hewitt CashCard,Gold Guarantee, and Money Now.

Its wholly owned subsidiary, Jackson Hewitt, Inc., franchises the Jackson Hewitt Tax Service brand, and owns Tax Services of America, Inc., which operates the company-owned offices. The current company was incorporated in 2004 and is headquartered in Parsippany, New Jersey.

Origin of Jackson Hewitt, Inc.

Originally the company was know as Jackson's Tax Service and offered tax preparation services to individuals and businesses in the Tidewater region of Virginia. In the mid 1980s, Melva Jackson, the then owner of the privately held company sold her business to John Hewitt, who began offering franchises. Mr. Hewitt changed the company name to Jackson Hewitt, Inc. and between the mid-1980s and 1997 led the company to become the second largest income tax preparer in the United States. At some point between Mr. Hewitt's purchase and 1997 the company became publicly traded. In late 1997, following several years of disastrous results the company was purchased by HFS Corporation a Fortune 100 diversified conglomerate. Within 6 months of the HFS purchase, HFS (and Jackson Hewitt along with it) merged with CUC International, another Fortune 100 diversified conglomerate. The HFS-CUC merger created a Fortune 20 company known as Cendant Corporation. Jackson Hewitt, remained a part of Cendant until 2004 when Jackson Hewitt was spun off in an initial public offering. The current "Jackson Hewitt Tax Service, Inc." was created at the time of the initial public offering as a holding company. Other Cendant companies include (and are by no means limited to): Avis, Budget, Howard Johnson, Days Inn, Ramada, ERA, Century 21, and Coldwell Banker. Cendant itself found it very difficult to manage the diverse needs of a company that was a top 3 player in the travel, real estate, and financial services industries and in 2006 Cendant itself split into three different businesses based on those dividing lines.

John Hewitt

Ironically, company co-founder John Hewitt founded and manages the competing Liberty Tax Service, as he had sold his interest in Jackson Hewitt in 1997 and is no longer associated with his first company . Some insiders held then CEO John Hewitt personally responsible for alleged financial difficulties that led to the company being sold, although shareholders received nearly a half billion dollars from HFS/Cendant for the company. Others believe the conflict arose over the planned sale of Jackson Hewitt. In any case, Mr. Hewitt did not simply sell his interest in the company. His departure was in fact a forced resignation in December 1996 Mr. Hewitt then went on to start his second national income tax franchise, Liberty Tax Service; however, he by no means owns the entire company. Liberty Tax Service is a stock company owned by a large number of shareholders including Mr. Hewitt, company employees, franchisees, and investors. Mr. Hewitt does retain a controlling interest in the company through his holdings of voting shares.

Jackson Hewitt and New Product Innovation

Since the buyout by Cendant (and to some extent before that) Jackson Hewitt has been a force for innovation in the tax preparation and electronic filing industries. Since 2000 Jackson Hewitt has worked with its partner banks to bring the following new products to market before any other company in the United States:

  • tax refunds loaded onto prepaid credit cards (2001)
  • tax refund loans in the holiday season (sold under the trade name Holiday Express Loan Program/HELP) (2003)
  • refund loans prior to tax return acceptance by IRS (sold under the trade name Money Now) (2004)
  • refund loans based on a final payroll stub and an estimated refund (also sold under the trade name Money Now) (2005)
  • the checkless RAL-designed to save customers from high check cashing fees (in partnership with Western Union) (2005)

Additionally, Jackson Hewitt was the first tax preparer in the US to ask its RAL bank partners to conduct a major overhaul of its Refund Anticipation Loan product to reduce fees and risk while improving approval rates (2004). This led to the elimination of the RAL rebate pool at Jackson Hewitt. RAL rebates are money from the lending banks that all non-Jackson Hewitt tax preparers continue to receive as rewards for excellent risk management. Since Jackson Hewitt's lender partners eliminated this practice most other major US tax preparers have followed suit.

2007 Department of Justice Investigation

On April 3, 2007, the United States Justice Department announced that the federal government has filed civil injunction suits alleging tax fraud by five corporations owned or partly owned by Farrukh Sohail. According to the four lawsuits filed in federal courts in Chicago, Atlanta, Detroit and Raleigh, N.C, the corporations operate under franchise agreements with Jackson Hewitt Tax Services Inc. On September 28, 2007 the Department of Justice announced that it had reached settlements with each of the defendants in the case. Under the settlement agreements the majority owner, Farrukh Sohail, of each of the businesses will be barred from preparing tax returns for five years, roughly 15 of Mr. Sohail's employees have been permanently enjoined from preparing tax returns. Neither Mr. Sohail nor his incorporated businesses will pay any financial penalties under the settlement agreement, indicating that the fraud committed was not done so with the consent of senior management in Mr. Sohail's business.

According to the complaint, Farrukh Sohail of Atlanta and other defendants "created and fostered a business environment" at the Jackson Hewitt franchises "in which fraudulent tax return preparation is encouraged and flourishes." According to court documents, examples of alleged fraud include filing false returns claiming refunds based on phony W-2 forms; using fabricated businesses and business expenses on returns to claim bogus deductions; claiming fuel tax credits in absurd amounts for customers clearly not entitled to any credits; and massive fraud related to claiming the federal earned income tax credit.

The suits allege that Farrukh Sohail wholly or partly owns each of the five corporations, and that the corporations prepared and filed more than 105,000 federal income tax returns in 2006. The five corporations allegedly operate more than 125 Jackson Hewitt retail tax preparation stores in the Chicago, Atlanta, Detroit and Raleigh-Durham, N.C., areas.

One complaint cites a Jackson Hewitt franchise customer whose Jackson Hewitt-prepared tax return stated he was a barber entitled to a fuel tax credit for buying 25,000 gallons of gasoline for off-highway business use. The complaint alleges that the customer would have had to have driven 1,370 miles each day, seven days a week, to consume that much fuel in one year, leaving little if any time to cut hair.

The suits further allege that some of the Jackson Hewitt franchises' managers and employees received kickbacks from customers for helping the customers file fraudulent tax returns. The suits further allege more than $70 million in combined losses to the U.S. Treasury, and seek court orders barring the franchises and other defendants from preparing tax returns for others. "Preparing federal income tax returns based on falsehoods and fabrications is a serious violation of the law," United States Assistant Attorney General Eileen O'Connor said in a statement.

On April 5, 2007, Jackson Hewitt Tax Services announced that it has hired Fred Goldberg, an ex-commissioner of the Internal Revenue Service, to investigate the federal allegations of massive tax fraud. "We have launched this internal review to investigate the specific allegations against one of our franchisees," Michael Lister, president and CEO of Jackson Hewitt Tax Services said in a statement. The internal probe is being conducted by Fred Goldberg, a partner at the law firm Skadden, Arps, Slate, Meagher & Flom. Mr. Goldberg was IRS commissioner from 1989 to 1992. He was also chief counsel of the IRS and assistant secretary of the Treasury for tax policy.

"USA Today'' quotes court papers stating that at one Jackson Hewitt location, "managers frequently explain to employees that (the outlet) will lose business if [it] turns away customers suspected of providing fraudulent information [. . .] The managers therefore directed employees not to question or turn away such customers, but instead prepare and file their tax returns.. Presently, IRS regulations only bar a tax preparer from preparing a tax return if they have direct knowledge that the tax return is fraudulent. Merely believing that a tax return may be fraudulent does not bar a tax preparer from preparing the return.

On April 10, 2007, Jackson Hewitt Tax Service announced it would suspend business operations at tax offices owned by Farrukh Sohail in Chicago, Atlanta, Detroit, Raleigh-Durham, N.C., and Birmingham, Ala.

In June 2007, the federal government widened its probe into whether Jackson Hewitt helped customers file fraudulent returns to obtain bigger refunds, and the company acknowledged in its SEC regulatory filing that Jackson Hewitt and an unspecified number of its franchisee and company-owned stores now are being investigated by the IRS.


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