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Shares of no. 2 U.S. tax preparer Jackson Hewitt plunged 18% to $26.53 yesterday after the U.S. Department of Justice accused five Jackson Hewitt franchises of defrauding the U.S. Treasury out of over $70 million. The shares rebounded to $27.25 after hours. The investigation accuses 24 individuals who manage or work at the franchises' 125 locations of a "pervasive and massive series of tax-fraud schemes" in which clients were encouraged to claim fake deductions and fuel tax credits in "absurd amounts" and seek refunds based on phony W-2s. There is also evidence of "massive fraud" in claims for the federal earned income tax credit. Some of the defendants are alleged to have taken kickbacks from clients who benefited from the fraudulent claims. A single defendant, Atlanta-based Farrukh Sohail, owns all or part of all five franchises. Sohail is accused of creating a "business environment'' where "fraudulent tax return preparation is encouraged and flourishes.'' "Sohail's main focus is volume, quotes and profit, all at the expense of preparing honest, accurate tax returns,'' the DoJ said. This is the third time Jackson Hewitt has been investigated by federal authorities in a year.

Sources: Press Release, Reuters, Bloomberg, New York Times
Commentary: Fraud Alleged at Jackson Hewitt Sites [Wall Street Journal] • Many Happy Tax Returns [SmartMoney.com] • Jackson Hewitt: U.S. suits unlikely to hurt financials [MarketWatch] • Hewitt Can Do It [Motley Fool]
Stocks/ETFs to watch: Jackson Hewitt Tax Service Inc. (JTX). Competitors: H&R Block, Inc. (NYSE:HRB), Intuit Inc. (NASDAQ:INTU)

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Source: Jackson Hewitt Franchises Accused of "Massive" Fraud