Refund Anticipation Loans and Other Taxing Thoughts

When I started investigating the subject of refund anticipation check offers, I thought it would be relatively straight forward and easy to understand. Hah! Like everything else involved with our tax system tax refunds present a complex maze of opportunities for the unwary to lose money.

I write that individuals who face even a moderately complex tax return should seek professional guidance. Although requirements vary from state to state a Certified Public Accountant (CPA) has five or more years of education and has passed some very stringent exams in order to receive a state license. Over 40 state boards now require that accountants pass an additional exam covering ethics. Unfortunately, even individuals with small incomes can have complex tax returns. I know one such person who works as an independent contractor for at least a half a dozen firms. In addition to dealing with multiple form 1090s, this person is paying for college with funds from a variety of different sources. Even this relatively simple situation generates questions that require professional answers. I counseled this person to seek out a CPA recommended by someone she trusts.

If you have a regular paycheck, a mortgage, and a few investments and you are computer savvy, Turbotax and some of their competitors have a pretty good reputation, but what if you don’t have a computer or understand how to use the software?

How about H&R Block, Liberty, or some other storefront franchised tax preparation service?

My investigations have indicated that using these companies is a crapshoot. Some of their employees are competent. Some of them are not. There are plenty of horror stories out there on the Internet. Too many have discovered that their returns contained costly mistakes. They overpaid and were forced to resubmit amended tax returns. All of this generates more tax preparation fees, not to mention sleepless nights. The average tax preparation fee for 2014 is reported as $273, up 11% from two years ago. The same article from My Way News reports fees in excess of $400 are commonplace. That is approaching the lower end of what CPAs charge.

Some of these fees contain costly charges for refund advance checks or prepaid debit cards. Sometimes the customer willing pays these fees to get their refund money sooner. Sometimes they are not properly informed as to their options. I didn’t know it but these fees are big money. Currently 10% of H&R Block’s revenue is generated by charges for refund anticipation checks. For Liberty Tax Service that would be 20%!

In the past this service was honestly termed a Refund Anticipation Loan. For example the New York Times reported that Beneficial charged a $30 filing fee and a $59 loan fee on a refund of $1,000. That is an effective APR of 250%, just about as bad as a title loan.

Needless to say the most frequent victims of these scams are the working poor.

As the number of complaints increased, IRS rules changed and states started cracking down on some of these practices. Now they are termed Refund Anticipation Checks or some similar name. There are still fees associated with advances that essentially make these instruments a short term, high interest rate loan even if they are no longer called a loan.

Court cases have shut down some of the most egregious tax preparation firms. Wikipedia reports that H&R Block settled a lawsuit brought by the New York City Department of Consumer Affairs for predatory lending practices, but as the laws and regulations change so do the particulars of what remains—A Scam.

The IRS, AARP, and a variety of local community organizations provide free tax preparation services for low income workers and retirees. They can’t handle partnerships or other complex problems, but they are competent to handle most returns. Electronic filing can have your money direct deposited to your checking account in just a couple of weeks. If you can’t wait two weeks for a tax refund, you are cutting it too close.

Especially during tax season, “Let’s be careful out there!”