Monday, Jan. 03, 2011

Lawsuit accuses Liberty Tax of filing false returns

A civil lawsuit seeking damages of more than $5 million has been filed in federal court in South Carolina alleging that a national income tax preparation service has wrongfully overcharged local customers to boost profits.

The lawsuit against JTH Tax Inc., doing business as Liberty Tax Service, seeks class-action status and asserts the number of plaintiffs could eventually grow to “more than 100,000.” It was filed by eight Midlands residents.

A Liberty Tax spokeswoman denied any wrongdoing.

“We don’t believe this case has any merit. It is our policy not to comment on any details of pending litigation,” said Martha O’Gorman, Liberty chief marketing officer in an e-mail to The State.

Liberty founder and CEO John Hewitt, also a named defendant in the lawsuit, could not be reached for comment.

Hewitt and Liberty, headquartered in Virginia Beach, Va., have until Jan. 4 to file formal legal answers to the lawsuit, which was filed Nov. 22.

The suit alleges Liberty Tax Service “engaged in a pattern” of “systematically increasing the cost of preparing a tax return by causing the preparing and filing of schedules and forms containing false and inappropriate deductions and/or credits.”

Those allegedly inappropriate deductions “served to fraudulently reduce the client’s tax liability” and increase “the amount of refund due the client in order for” Liberty and its officers “to enrich themselves,” the lawsuit says.

On its Internet site, Liberty Tax Service says it has 3,500 offices in the U.S. and Canada, as well as more than 70 in South Carolina. It is highly visible in the Midlands, where local offices often hire people to dress up as the Statue of Liberty to stand on street corners as living advertisements.

The Internet site lists numerous accolades for Liberty and Hewitt, saying that Liberty Tax Service — founded in 1997 — is one of nation’s top tax services and is growing faster than rival tax preparation giant H&R; Block.

Hewitt, the site says, “has a nationally recognized name in the tax and accounting world” and is the founder of two top tax preparation firms. Liberty’s mission statement says one of its core principles is “Be honest, show respect and have integrity.”

The suit was filed by Richland County couples Kenneth and Myra Martin, David and Catherine Goodwine and Terry and Amanda Allen as well as Newberry couple Jeffrey and Tawanna Reid.

They are represented by widely known Columbia lawyers Dick Harpootlian, who in recent years has won a string of multi-million-dollar verdicts and settlements, and Todd Ellis, a former University of South Carolina football quarterback and current football game announcer. Another plaintiffs’ lawyer is Jim Griffin, a former assistant U.S. attorney for South Carolina.

Liberty’s local lawyer is Bill Latham of Nelson Mullins Riley & Scarborough, which, with 400 lawyers, is one of South Carolina’s largest law firms and lobbying groups. Latham declined comment.

“We looked into this for months and talked to the plaintiffs and other people,” Harpootlian said. “The suit speaks for itself.”

The suit says a key witness for the plaintiffs is Annie Fuller, a former Liberty employee who trained employees at local Liberty Tax Service franchises to “misrepresent and mislead” Liberty’s customers “to facilitate the submission of incorrect tax returns with the IRS and state tax agencies, thereby increasing the revenues to Liberty Tax. …”

The suit alleges that the plaintiffs only discovered erroneous tax forms had been prepared by Liberty after IRS and the S.C. Department of Revenue officials contacted them demanding verification of thousands of dollars worth of deductions that Liberty had claimed on their behalf.

The suit says the couples had no knowledge of the erroneous claims — for things like business-related expenses and charitable deductions — submitted by Liberty. Harpootlian and Ellis said the couples were not given copies of their completed returns.

As a result of the unexpected audits, the IRS and the S.C. Department of Revenue ordered three of the four plaintiff couples to pay thousands of dollars in back taxes, penalties and interest, the lawsuit alleges.

Another alleged tactic was to claim an inflated number of children on tax forms so clients could inappropriately receive an earned-income tax credit allowed to low-income wage earners, the lawsuit says.

The suit was filed in federal court in Beaufort.

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