Taxes 2011 – Beware of These 3 Stupid Tax Tricks

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It should be enough to perform a service and charge a fair fee. But for some tax preparation services, doing people’s taxes in exchange for money apparently isn’t enough. Because some feel the need to squeeze as much as possible out of the unsuspecting for services that either aren’t necessary at all or are of dubious value.

Let’s take a look at three examples.

Stupid tax trick 1: Charging for services the taxpayer could be getting free

Every year I do a TV news story explaining how to get free in-person tax preparation. Here’s this year’s version: 3 Tips for Free Help. To boil it down, if you made less than $49,000 last year, you can walk into any of thousands of locations and have your taxes done by a trained volunteer and electronically filed absolutely free.

This is a fact obviously known to any major tax preparation service. And yet some don’t hesitate to charge eligible taxpayers to prepare their return.

Stupid tax trick 2: Refund anticipation loans

As we reported in August of 2010, the practice of getting your tax refund back by taking out a “refund anticipation loan” may be a trick that’s getting harder to do.

Refund anticipation loans, or RALs, are high-cost, short-term loans for consumers who want their refund “instantly.” They’ve been criticized by consumer advocates – including me – for years: See Difference Between a Loan Shark and a Tax Refund Loan? Not Much. The reason is simple. These loans, often targeted at the working poor, typically come with fees that translate into annual percentage rates of 50 – 500 percent. That’s a lot to borrow what’s already yours – your tax refund.

Check out the following news story, then meet me on the other side for more on these loans.

So, as you saw in the video above, refund anticipation loans are getting harder to find: That’s the good news. The bad news? Because they’re getting harder to find, they’re also getting more expensive.

Why RALs are dying.

In recent years, refund anticipation loans finally started attracting unwanted attention from government agencies, including the IRS.

“Refund anticipation loans are often targeted at lower-income taxpayers,” IRS Commissioner Doug Shulman said in this press release last year. “With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”

And the IRS did more than issue a press release. Last year they also stopped providing tax preparation services with something called a Debt Indicator, a service that allowed preparers and banks to ensure that a taxpayer didn’t owe the government money and was therefore entitled to a refund. Without the Debt Indicator, making loans to taxpayers became a lot more risky.

Another factor negatively affecting RALs is that more and more banks are leaving the business, either voluntarily or involuntarily. Last April, for example, one of the largest banks in the RAL business, JPMorgan Chase, stopped the practice. Last October, the Office of Thrift Supervision issued a directive that effectively put another big player, MetaBank, out of the business. In December 2010, the Office of the Comptroller of the Currency issued a directive prohibiting HSBC – previously the banking partner for H&R Block – from offering RALs.

Today there are only three small banks in the refund loan business, all headquarterd in Louisville, KY: Republic Bank & Trust, River City Bank, and Ohio Valley Bank. Because there are fewer banks in the business and the volume is drying up, the fees they charge to make these loans are increasing.

Stupid tax trick 3: Refund anticipation checks

Unfortunately, refund anticipation loans aren’t the only way tax preparation services try to squeeze fees out of hapless consumers. There’s also the refund anticipation check, or RAC.

The fastest way to get a tax refund is to file electronically and have the IRS deposit the refund directly into a bank account. This often allows taxpayers to get their refunds in less than two weeks, and is a major reason refund loans no longer make sense. The problem? Millions of taxpayers don’t have a bank account.

That’s where a RAC comes in. A refund anticipation check allows the unbanked to harness the speed of IRS direct deposit to get their refund. It’s not complicated…

  • A bank working with the tax preparer opens a temporary account for the taxpayer.
  • The IRS direct deposits the refund check to that taxpayer’s account.
  • The bank issues a refund check to the taxpayer, then closes the temporary account.

Simple? Yes. Smart? No. Because the taxpayer often pays in the range of $30 for this “service.” And while it’s possible that there are unbanked millionaires, one imagines that most taxpayers enticed into these arrangements probably aren’t, and can ill-afford to pay $30 to do something they could do for free: open a bank account. Even if the taxpayer chooses not to have a bank account, they can still have their refund direct deposited to a prepaid card, including any existing payroll or prepaid card they already have.

According to this press release from the National Consumer Law Center and the Consumer Federation of America, in 2009 12.9 million people got their refunds this way, thus transferring about $387 million dollars of their money to these company’s bottom lines.

“Consumers should considering opening a real bank account to get their refunds fast, instead of paying $30 for a one-time use account,” recommended Jean Ann Fox of Consumer Federation of America.

Here’s a novel idea: Maybe tax preparation services should stop trying to nickel and dime this nation’s working poor and do what the rest of us do, make an honest living.

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Comments & discussion

We welcome your opinions, but let’s keep it civil. Like many businesses, we reserve the right to refuse service to anyone. In our case, that means those who communicate by name-calling, racism, using words designed to hurt others or generally acting like an uninformed bully. Also, comments that include links to email addresses or commercial websites typically aren't posted. This isn't a place to advertise your business.

  • Anonymous

    I really hate when the tax preparation industry keeps getting ripped about the service they provide regarding RAL’s. Those that come in to get their taxes done and get a RAL or ACR do so because they can’t afford to pay the tax prep fee upfront so they have the fee deducted from their refund before they get the balance of their money. Most want their MONEY NOW!!! Some of the sob stories are they have to pay their rent, their mortgage, get their electric paid before the service is shut off, etc and on and on with the stories. They ARE NOT being taken advantage of. Most of them are low income and getting EIC so it’s free money to them and they want it NOW. So no one is taking advantage of the low income. They come in ready to game the system and tax preparers really have to watch out for the fraudulent returns and the kids they shuffle around to the one relative who will get the most in refund. They know all the right answers to get the best refund and they want it NOW!

  • Anonymous

    Personally, I take some offense to the comment and the implication that as a tax preparer I am “nickel and diming” the public and am not making”an honest living” Nobody forces people to come to a tax prep company. They come there because they either dont know how to prepare a tax return or dont want to wait at some place for people to prepare their return for free. They are paying for the service of having someone prepare their return or for not having to spend their time waiting to have it done for them. That is not a dishonest service! Many of these people make a choice whether to have a bank account or not. They do not have to set up a temporary accout to have their refund sent to. It is offered that they can file electronically and have the refund check sent to their house or their bank account directly. They make the choice whether to pay for the service rendered up front or to have the prep fees paid out of their refund and pay approx. $32 or so for that.

    I take exception to you calling that a “tax trick”. Mr Johnson, would you go into a grocery store and insult the people working there, telling them they are not making an “honest living” because they are selling food to people? People, some of who, can go to any of several food pantries and get the same food for free.

    • http://www.moneytalksnews.com Stacy Johnson

      I didn’t say or imply that preparing tax returns for money wasn’t an honest way to make money. But charging excessive and/or unnecessary fees to get refund checks is. While it’s true that adults are capable of making their own informed decisions, some large tax preparation companies have for years used sales tactics and devices to promote these services. You’ve only to drive by and look at the signs on their windows to see it.

      I stand by my opinion and my story. And btw, I don’t always have nice things to say about the way food is marketed either.

  • http://www.facebook.com/michael.trosper Michael Trosper

    I also take offense at the implication that I am nickel and diming poor folks to death. I, unlike most of the “trained” volunteers, do this type of work on a year-round basis, and I am constantly doing continuing education, both in the form of actual seminars and lots of reading and studying tax publications. And I charge accordingly for my time. Not once have I ever forced a client into letting me prepare their taxes. No, I don’t tell them that they can go elsewhere and get their taxes done for free. I do tell them that I am not the cheapest preparer around… nor am I the most expensive. Would a dentist tell his patient that he could go down the street to Joe the Plumber and get his tooth pulled a lot cheaper, because Ol’ Joe is “trained” to use his pliers? As for the RAL’s and RAC’s… I always have and will continue to explain to my clients that these options are available, but that I think they are not a good value. On rare occasions, theh have opted to pay my prep fees up front and have their refund directly deposited into their bank account… but more often than not they stick their heads out the window like they are on a J.G. Wentworth commercial and shout that “IT’S MY MONEY… AND I WANT IT NOW!”

    • Anonymous

      so because I did make less than $49K last year, you’re telling me H&R Block could’ve done my taxes for free?????