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When you hit the grocery store for milk and eggs, you know you’ll run a gauntlet of impulse buys in the checkout line, from chewing gum to tabloid papers. That’s just one of the tricks of the supermarket trade.
Should you expect to encounter the same type of marketing when you have your taxes prepared?
Increasingly, the answer is yes.
Check out the following story we recently shot about the latest tax preparation impulse buy — refund anticipation checks — then meet me on the other side for more.
Now let’s take a closer look at both refund anticipation checks and loans.
The refund anticipation check
A refund anticipation check is a way to charge an extra fee to those without either bank accounts or the money to pay their preparation bill up front.
Here’s how it works: Say you’re a low-paid worker and walk into the office of a chain tax preparation service. You don’t have a bank account, which means you can’t take advantage of the fastest way to get a refund — direct deposit. You also don’t have the $150 preparation fee. But you do have a fat refund coming — $2,000.
“No worries,” says the friendly preparer. “We’ve got you covered.”
You sign a form or two and a temporary bank account is established in your name. When your $2,000 refund arrives two weeks later via direct deposit, it goes into that account. Then the $150 fee to prepare your taxes is taken out, along with the bank’s $50 fee to establish the account and the $50 fee the preparer tacks on for administrative costs. You get the remaining $1,750, either by check or prepaid debit card, which comes with more fees. The account is closed.
Here’s a better alternative
Say you’re a low-paid worker and walk into one of thousands of VITA (Volunteer Income Tax Assistance) sites nationwide. You don’t have a bank account, which means you can’t take advantage of the fastest way to get a refund — direct deposit. You don’t have money for a preparation fee, but you do have a fat refund coming — $2,000.
“No worries,” says the friendly preparer. “We’ve got you covered.”
Because you made less than $52,000 last year, they prepare and e-file your return absolutely free. Then they help you establish an account with a local bank or credit union so you can get your refund as fast as possible via direct deposit.
When your $2,000 refund arrives electronically two weeks later, it goes into your credit union account, which now becomes an interest-earning emergency fund, the first you’ve ever had. Your entire $2,000 refund goes in, because you didn’t pay a dime for tax preparation, to establish a bank account or for administrative fees.
According to a National Consumer Law Center report, more than 18 million Americans used a refund anticipation check in 2011, up from about 13 million in 2009.
The refund anticipation loan
The reason for the big increase in refund anticipation checks can probably be linked to the big decline in refund anticipation loans. These are simply loans made against pending refunds that allow taxpayers to receive their refunds immediately — for a fee — rather than waiting two weeks to get them via direct deposit.
The National Consumer Law Center estimated about 750,000 consumers paid a total of $65 million in loan fees to use refund loans in 2011. At their height in 2002, more than 12 million consumers paid $1.1 billion in fees to use these loans.
The decline in refund loans isn’t because consumers realized that paying big bucks to get their refund two weeks earlier was stupid. It happened because refund loans simply became much harder to get.
What happened to refund loans
Lending someone money for a couple of weeks when they’ve got a refund coming is a pretty sure bet. After all, Uncle Sam pays what he owes. So these loans were very low-risk for the banks that made them, and very profitable for the preparation services that hawked them.
There’s only one potential fly in the ointment. Namely, just because you’re entitled to a refund doesn’t mean you’ll actually receive it. For example, if you have a delinquent student loan, owe back taxes for previous years, or otherwise are indebted to Uncle Sam, the government will claim your refund.
So before a tax preparer offers you a refund loan, they want to make sure you’re definitely going to receive a refund. In the past that was easy, because the IRS would furnish preparers a filer’s “debt indicator,” which let the preparer know whether or not the person filing a return owed the government money. If they came back “clean,” the preparer gave them the loan.
But with the 2011 filing season, the IRS announced it was going to stop providing that information. As you might imagine, this made these loans much riskier for preparers and the banks they partnered with. So the banks started backing out, until finally there were just a few left – and those set more restrictions to minimize their losses, meaning fewer people could get the loans.
They’re still around
According to the National Consumer Law Center, although traditional banks now back away from refund anticipation loans, non-bank lenders have now stepped into the gap. From its report:
Liberty Tax Service is partnering 1st Money Center and Redpoint Capital to make non-bank RALs in about 26 states. 1st Money Center and Redpoint Capital appear to be linked with Texas payday lenders.
Still, as noted above, the salad days of the refund anticipation loan are over. And good riddance.
The bottom line: Avoid impulse buys
I don’t fault grocery stores for lining the checkout lane with impulse buys. It’s a free country.
I guess the same rules apply to the tax preparation industry. But the impulse buys they’re selling are more expensive than chewing gum or batteries. They’re also often directed at those least likely to be able to afford them, and in the past have allegedly been marketed with deceptive tactics.
Years ago, after learning those with qualifying income could have their taxes prepared at no charge, I interviewed a preparer at one of the nation’s largest preparation services. I asked him, “When someone walks in here you know qualifies for free preparation and filing, do you tell them?” He responded, “No. That’s not my job, it’s yours.”
In that spirit, here’s my advice: Don’t pay for services you can get free because some commercial told you to. And if you do pay for tax preparation, don’t let yourself be talked into impulse buys that do little and cost much.