Justice Department Bans Jackson Hewitt Franchisee for Life
WASHINGTON – The U.S. Department of Justice announced last week Tuesday that a Florida-based Jackson Hewitt franchisee, Daniel Prewett, has been banned for life from preparing tax returns. And if that wasn't strong enough, the court also issued an injunction banning Prewett's wife, Elizabeth George; three former tax preparer employees, Frances Carlson, Elsie Chouinard and Natalie Swaney; and three of Prewett's Sarasota-based tax preparation businesses from practicing. The injunctions against Chouinard and George permit them to continue preparing tax returns, but bar them from certain specified conduct when they do so.
Prewett and his Jackson Hewitt franchises used a number of schemes to underreport customer tax liabilities, including setting up fictitious domestic businesses in order to disguise fraudulent business deductions for bogus business expenses and personal assets, such as motorcycles, ATVs and jet skis. One customer, a dentist, used the defendants' scheme to claim fraudulent deductions for the cost and operational expenses of his $781,000 47-foot yacht, which he used solely for his personal pleasure.
Living the high life, Prewett was arrested on federal charges related to cocaine distribution and money laundering in late 2006. A jury convicted Prewett of the charges and he was given an 18-year sentence last June.
The Justice Department says that the defendants' schemes cheated the U.S. Treasury out of more than $130 million dollars.
A Chain's Weakest Link
At heart of the issue for franchise investors who want to buy or grow inside the Jackson Hewitt system is how vulnerable the chain is to this kind of illegal tax activity that can destroy a brand and how forthcoming it is with customers and franchise owners.
Franchise investors naturally want to know what sort of screening do franchisors like Jackson Hewitt have in weeding out criminals because felons can do substantial damage to a brand's reputation, particularly in tax preparation.
Ms. Sheila Cort, Vice President of Corporate Communications for Jackson Hewitt, insists that Mr. Prewett was not a franchisee. Ms. Cort recaps, “It is important to note that Mr. Prewett was a former employee of a former Jackson Hewitt franchisee.”
The Department of Justice regards Prewett as a former Jackson Hewitt franchisee. A subtitle of a Department of Justice press release in 2007 on Prewett boldly declares, “Former Jackson Hewitt franchise owner allegedly understated customers' taxes by over $138 million.”
Cort adds, “The Sarasota locations that were a part of that franchise were sold in 2006 to another franchisee.”
Sarasota's local paper, the Herald-Tribune chronicles that as of February 11, 2007, Prewett owned three Jackson Hewitt franchises. “County records show Prewett has been involved in dozens of local businesses, and he is listed as owner of Jackson Hewitt Tax Service offices at 2041 Bahia Vista St., 1079 N. Tamiami Trail in Nokomis, and 1922 Dr. Martin Luther King Jr. Way,” reports the Herald-Tribune. County records list Prewett's wife as the owner of yet another Jackson Hewitt Tax Service business that Daniel Prewett worked in.
But Paul Steinberg, a New York-based franchise and business attorney, says Prewett didn't bother trying to hide business licenses or registration at the county level. He observes, "It is highly unlikely that anyone ever would look at those records, let alone a franchisor in a distant state."
Learning from Crises and Mistakes
An issue for those looking at investing in a franchise in this sector is how Jackson Hewitt handled the crisis. Money laundering, cocaine distribution and illegal tax activity is the tax service sector's equivalent of having a Subway sandwich employee stuff lettuce up his nose, serve it and post a video of the act on the Internet for the world to see.
Steinberg observes, "Actually, it's worse."
Prewett was a convicted criminal before his troubles began with Jackson Hewitt. The Herald-Tribune reports Prewett was “a felon who did time in a New York prison for a tax-fraud scheme, sold shares of real estate purchases in Sarasota, Costa Rica, North Carolina and South Carolina during the booming real estate market of early 2005. On some agreements, he listed the actual addresses of properties to be purchased; on others he only listed 'projects' the funds would go for, and he promised returns on the investments of up to 164 percent.”
Buyers of tax preparation franchises want to make sure that the franchisor has learned from past mistakes and has some way to keep felons from becoming owner-operators or even employees. Felons can tarnish the brand name, especially in the business of tax preparation.
So how did Prewett get through to run multiple Jackson-Hewitt franchised offices?
In the civil injunction complaint, the Department of Justice said that Prewett controlled a company that bought Jackson Hewitt tax preparation franchises in Florida in 1993, using a friend as nominal owner to conceal Prewett's criminal record and ownership from the franchiser Jackson Hewitt Tax Service Inc., the nation's second-largest tax preparation firm.
For years Jackson Hewitt franchise owners have had to qualify as special electronic filing providers with the Internal Revenue Service. If their qualification for that status with the IRS was lost, then that same operator would lose their right to the franchise.
That level of screening wasn't enough. The company seemed in the dark on who was actually its franchisee and who wasn't.
Attorney Steinberg gives perspective to the dilemma that Jackson Hewitt found itself in. "Prewett seemed to know exactly what he was doing,” he states. “It is difficult for a franchisor to ascertain where there is a straw purchaser. Jackson Hewitt can look to see if the franchise purchaser has assets in their name, but if Prewett put assets in a straw purchaser's name, then it is extremely difficult to stop such a determined scammer."
Jackson Hewitt says it has learned from the experience. For example, the chain now screens tax preparation employees.
Tom Lafferty, a Jackson Hewitt franchise owner outside of St. Louis, Missouri agrees. He thinks that the company has made many significant changes over the past couple of years to lift the brand from being hurt by such rogue franchise owners and employees. “We have taken large steps in a positive direction,” he declares. “I think that most franchisees in the Jackson Hewitt system would agree that we have elevated whatever standard of ethical behavior that the system was at two or three years ago.”
Ms. Cort states, “Jackson Hewitt Tax Service is committed to upholding the highest standards of integrity and provides its franchisees with comprehensive information for the detection and prevention of tax preparer and customer fraud.”
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- Jackson Hewitt Tax Fraud Probe Grows
- Miami Franchise Disciplined for Improper Returns
- Former Jackson Hewitt Franchise Owner Allegedly Understated Customers’ Taxes by Over $138 Million
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