Feds expand inquiry into Jackson Hewitt

The federal inquiry into Jackson-Hewitt Tax Services (NYSE: JTX) has expanded amid allegations that more than 125 of the company's offices knowingly helped tens of thousands of its customers file fraudulent tax returns to obtain $70 million in refunds. Last week, the company disclosed that it was being investigated by the IRS.

The company's stock has not tanked on news, partly because the announcement is just an expansion of the current investigation. For now, the accusations of wrongdoing are limited to the company's franchisees, but that could of course change.

Even if Jackson-Hewitt itself isn't charged, this raises serious questions about the company's internal controls, training, and oversight of its franchisees. The company said in a filing that it "intends to complete the internal review promptly and to implement a variety of enhancements in the areas of compliance and monitoring for the 2008 filings season."

This raises many questions.

Will the scandals hurt the company's growth? Will potential franchisees want to associate themselves with a company that is the subject of such a scandal?

The shares haven't tumbled that much on the news of the investigation and I think the market may be underestimating the effect this will have on the company's growth.