Thursday, December 11, 2014

SFALP Students Assist in Filing Tax Fraud Case in California

Students from Yale Law School’s San Francisco Affirmative Litigation Project (SFALP) recently helped file a lawsuit against a tax-preparation company in Oakland, California. The complaint in People v. LILAY Inc. alleges that a franchise of Instant Tax Service engaged in a host of illegal business practices that defrauded low-income taxpayers. Through SFALP, Yale students worked closely with the City Attorney’s Office to determine the scope of the lawsuit and the precise theories of liability. Students then assisted in drafting the complaint itself. The suit was filed on November 20.

“We researched and wrote memoranda to help answer critical legal questions, and then discussed and strategized with the attorneys in our bi-weekly conference calls until the basic structure of the suit was determined,” said Joshua Levin ’15. “Then, the attorneys gave us the opportunity to write the first draft of the complaint and revise it based on the attorneys’ comments. We learned so much from working with the attorneys in the drafting process and from seeing how a case evolves from a set of facts and ideas to a filed complaint.”

The target is Instant Tax, a franchise of Instant Tax Service that was once the nation's fourth largest tax-preparation company. The lawsuit alleges that the one-time Instant Tax franchisee Kebron Daniel engaged in tax-preparation and loan-making schemes that routinely skimmed profligate fees from refunds owed to unsuspecting taxpayers. Daniel pocketed fees of as much as $1,500 for loans as small as $50.

“By filing this complaint, San Francisco is joining the nationwide effort that has begun to rein in fraudulent tax-preparation practices and ensure that working families receive the money that is rightfully theirs.” —Joshua Levin ’15

The complaint documents how Daniel ran his seasonal Instant Tax business out of check-cashing outlets in low-income neighborhoods. Daniel allegedly targeted working families eligible for the Earned Income Tax Credit —a refundable credit under federal law that aims to boost low-wage workers out of poverty. Often lured by the promise of quick refunds or small "refund anticipation loans," taxpayers hired Daniel's company to complete and file their tax returns electronically. But the company's pattern has been to mislead consumers at every turn, students said. According to the allegations set forth in the complaint, Instant Tax failed to provide required disclosures, failed to disclose the full cost of services, failed to provide copies of tax documents, and — most egregiously — directed its customers' refunds into its own account without taxpayers' consent or knowledge. Daniel's company would then withhold large, undisclosed portions of the eventual refunds before providing a significantly diminished balance — if anything — to customers, the lawsuit states.

“If the lawsuit is successful, the City of San Francisco could obtain a sweeping court order requiring that the Defendants restore to customers all unlawfully obtained funds,” explained Zayn Siddique ’16. “We are all hopeful that this suit will also deter other unlawful tax-preparation schemes and raise awareness among consumers about the deceptive practices that some tax-preparation providers use to scam customers, so that fewer such providers are able to get away with them in the future.”

Instant Tax could also be permanently enjoined from engaging in further illegal acts. The lawsuit could thus remedy and eliminate this scheme that has deprived so many low-income California taxpayers of large portions of their hard-earned tax refund. While the total number of individuals defrauded by Instant Tax is not yet known, the City Attorney estimates that thousands may have been victimized.

Levin and Siddique said that the hands-on experience they gained while working on this case so far has been tremendous. They also said that the significance of the case will stretch far beyond San Francisco and even California, as Instant Tax is part of a massive national industry.

“This case was amazing to work on because many of the victims of Instant Tax would never have had their day in court were it not for the unique ability of the City Attorney’s office to bring suit on behalf of the people,” said Levin. “By filing this complaint, San Francisco is joining the nationwide effort that has begun to rein in fraudulent tax-preparation practices and ensure that working families receive the money that is rightfully theirs.”

The San Francisco Affirmative Litigation Project (SFALP) is a partnership between Yale Law School and the San Francisco City Attorney’s Office. SFALP students work with Deputy San Francisco City Attorneys to conceive, develop, and litigate some of the most innovative public-interest lawsuits in the country—lawsuits that tackle problems with local dimensions but national effects. SFALP students are also mentored by Yale faculty member Heather Gerken and by the SFALP Fellow, who is appointed by Yale to supervise the clinic.