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Charges announced in alleged tax fraud scheme

Maryland Comptroller Peter Franchot and Attorney General Brian Frosh announce tax fraud charges against nine people.
Maryland Comptroller Peter Franchot and Attorney General Brian Frosh announce tax fraud charges against nine people. (Natalie Sherman/Baltimore Sun)

The former owner of six tax preparation franchises in Baltimore and her staff paid homeless and other vulnerable people to use their services, then submitted false returns to claim refunds they could pocket as fees, according to criminal charges announced Friday by the state.

The owner and her eight employees were charged with preparing false tax returns and conspiring to steal from the state of Maryland. They were affiliates of Liberty Tax Inc. — a Virginia-based company with thousands of offices nationwide that is known for placing people dressed in Statue of Liberty costumes out in the street to market the firm.

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The nine tax preparers filed almost 1,100 fraudulent returns between Jan. 1, 2015, and Feb. 21, 2015, claiming refunds worth $134,500 from the state and $538,000 from the federal government, Maryland Attorney General Brian E, Frosh and Comptroller Peter Franchot said Friday.

The charges come as state officials have raised increasing alarms about tax fraud, especially by preparers. In the last few months, the comptroller's office has stopped accepting returns from about 60 private tax firms at multiple locations, including 23 Liberty Tax franchises.

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"We know this kind of fraud is a major problem," Frosh said at a news conference in Baltimore announcing the criminal case. "We hope we're sending a message today that we will not tolerate this kind of behavior."

Franchises are independently owned and operated. State officials said Liberty Tax Inc., which has affiliates facing charges in several other states, including Michigan and South Carolina, cooperated with the investigation.

"We're looking at every one of these examples as an opportunity to identify additional areas where we can improve our compliance program," said Jim Wheaton, the firm's general counsel and chief compliance officer.

Liberty Tax CEO John Hewitt told investors earlier this month that "fraud concerns" would reduce the firm's profits, but stressed that the cases stem from a small number of the firm's more than 4,000 offices and said the company is committed to compliance.

"It unfortunately is inevitable that some franchisees or preparers or their customers will engage in behaviors that Liberty doesn't condone and will not tolerate," he said, according to a transcript of the earnings call.

The indictments announced Friday in Baltimore allege that Liberty Tax franchisee Lateisha Vanessa Kone, 35, also known as Vanessa Dickens, and eight of her employees recruited clients from homeless shelters and drug rehabilitation centers, promising $50 to customers who used the Liberty Tax services. The preparers allegedly sought to collect more than $400 in fees for each return — more than two-thirds of the typical refund.

The eight employees also charged are Marquea Braxton, 35, Tiona Davis, 33, Miyarta Gray, 29, Whitney Hall, 30, Melinda Ireland, 36, Azucar Johnson, 24, Sharron Lawson, 35, and Krystal Perez, 28.

On the tax documents, the preparers described their clients as household employees — a category that includes baby sitters and house cleaners — but said they did not make enough to force their employers to withhold Social Security or Medicare taxes, the indictments said.

The preparers submitted the information knowing it was false, Frosh said.

The alleged scheme was focused on gaining the maximum credit allowed under the Earned Income Tax Credit program, which provides rebates so that low-income people are encouraged to work.

"This owner and her associates targeted the most vulnerable — the homeless, disabled, drug addicts, and poor people already struggling for stability," Franchot said in a statement. "They lured victims by paying them $50, then submitted false tax returns to make a profit without regard to the consequence to their clients."

Liberty Tax canceled its contract with Kone in February 2015, cutting ties with a franchisee who had received company recognition for the number of returns processed at her locations, after it noticed anomalies internally, Wheaton said. It also alerted the IRS in June to possible problems with returns prepared at Kone's franchises after reviewing the files and contacting clients, he added.

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Kone, who registered her Tax Angel Inc. business with Maryland in 2012, declined to comment. Efforts to reach others named in the indictments were unsuccessful, and they did not have attorneys listed in court filings.

If convicted, the preparers face imprisonment and fines. The tax charges carry potential penalties of up to five years in prison and up to a $10,000 fine. The theft charges carry potential penalties of up to 25 years' incarceration and up to a $100,000 fine, plus restitution.

Officials declined to say how much the state ended up paying in refunds for the allegedly fraudulent returns prepared by Kone and others last year. Frosh also declined to discuss any possible actions against the filers, but Franchot said he did not believe they were to blame.

"Everyone's responsible for their tax return … but … where destitute people are being taken advantage of by a con job, we cut them some slack," he said.

Franchot said this case is "just the tip of the iceberg." His office identified nearly 20,000 fraudulent returns last year, thanks in part to technology that can rapidly sort through electronic filings flagging suspicious patterns, such as significant changes in refund requests from the previous year or inflated or undocumented business expenses.

This year's suspensions include some of the same offices once owned by Kone but now owned by a different Liberty Tax franchisee.

Franchot has asked the state legislature to expand the powers of the comptroller's office to investigate income tax preparers and he said he hopes to see additional criminal cases.

"There are going to be hopefully lots more of these down the road," he said.

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