Photo (cc) by Ivy Dawned
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.