Tax preparer H&R Block still has not fully recovered from the loss of refund anticipation loans. Photo Credit: socialwoodlands/Flickr.com/CC-BY

Tax preparation giant H&R Block has just filed for another quarterly loss, despite it being the busiest quarter of the year. Though tax return season is when tax preparers make the bulk of their income, the loss of the refund anticipation loan product has cost Block dearly. The loan against tax refunds is facing extinction as a product.

Number of preparations increase but fail to keep Block in the black

H&R Block, the largest tax preparation service in the nation, has just released a quarterly earnings report, but there is little in the way of good news in it. In the recent report from Block, according to the Wall Street Journal, the company disclosed that the number of tax returns it had prepared in the previous year had increased by 5.7 percent in the period ending March 31. The company also reported that retail preparations had increased by 2.6 percent during March, but preparation fees had declined by 2.2 percent. Block expects to report more significant earnings after the month of April. However, the tax preparer has been hobbled by the loss of the popular refund anticipation loan product when its financing partner, HSBC bank, was forced to stop funding the loans with block.

Refund anticipation loan going extinct

Refund anticipation loans are popular for people short of cash around tax time, and also for tax preparation services because the loans are profitable. A person has their taxes prepared by a service, such as H&R Block or Jackson-Hewitt. The preparer offers them a loan against their tax refund, which is signed over to the preparer. The borrower gets a check for the amount of their refund, less a fee for the lender. It’s technically a short term loan, as it’s repaid very soon. The product is demonized as being similar to payday loans, though there will be few firms still offering the loans soon enough. The IRS can no longer report on the amount or status of a persons’ income tax return to certain types of loan lenders, which disqualifies most banks from meeting FDIC underwriting requirements for funding RALs for tax preparation services. At the end of this tax season, Republic Bank and Trust, a small bank in Louisville, Kent., will be the only bank in the nation providing funding for RALs, according to the Washington Post.

IRS urges electronic filing

The Internal Revenue Service has long advocated that people in a rush electronically file rather than resort to any loans against their tax refunds. Direct deposit can have tax refund money in a persons’ bank account in two weeks or less, but for those that really are counting on a return are not at a loss for finding out where their return is, according to Reuters. Simply head to the Where’s My Refund? section on the IRS Website, and enter the appropriate information. Do not go to any website other than the IRS site to track your refund, as it is likely a scam.

Sources

Wall Street Journal

Washington Post

Reuters

IRS Where’s My Refund?

Getting around taxes has been an American pastime since the 1773 Boston Tea Party. Image from Wikimedia Commons.

The amount of the average tax refund has been steadily increasing over the years, and so is the number of cases of tax fraud. The Internal Revenue Service has seen a rise in the number of fraudulent deductions taken on income tax returns. More people are trying to catch the government napping to scare up some extra cash.

Internal Revenue Service not amused with crazy deductions

Most Americans hate taxes, and finding ways to hoodwink, trick and blatantly lie to the tax man is practically a national pastime. The number of fraudulent tax returns, according to CNN, has skyrocketed since last year. The Internal Revenue Service received 335,341 tax returns that falsely claimed nearly $1.9 billion in deductions. That figure was a 181 percent increase over the number of similar returns last year, when the IRS received 119,484 returns that incorrectly claimed deductions totaling $721 million. However, not all of these returns were brazen acts of fraud, and the term “fraud” can be somewhat misleading.

False deductions aim to claim more money

The Internal Revenue Service investigated 230 people for questionable returns for Fiscal Year 2008 and 504 people for Fiscal Year 2010, according to the Internal Revenue Service website. In 2008, only 155 recommendations to prosecute were made and 301 were made in 2010. Those figures only include cases of bad deductions. The IRS made 1,507 recommendations for prosecution in total during 2010, according to USA Today. The reason people submit bad deductions on tax forms is simple — more deductions means more money. The average tax refund, according to the Wall Street Journal, was $3,003 for 2010, almost double the $1,698 average tax refund in 1999. The number of bad deductions in 2008 compared to 2010 suggests people are trying to claim greater deductions during lean years.

Houses, cars and kids most common bad deductions

The most common falsely or mistakenly taken deductions were for real estate, motor vehicles or children. The Treasury Inspector General for Tax Administration released a report that asserts the most problematic deductions were the Adoption Credit, the Qualified Motor Vehicle Deduction, the Non-Business Energy Property Credit, the Plug-in Electric Drive Motor Vehicle Credit and the First Time Homebuyer Credit. The Qualified Motor Vehicle Deduction and First Time Homebuyer credits caused the most trouble; the Treasury found that 218,069 people claimed $318 million in QMV deductions, but those people would have had to put off paying any sales tax or excise tax for 2009 and 2010. The First Time Homebuyer credit, according to the Los Angeles Times, paid out an estimated $513 million to people who didn’t necessarily qualify for it. At least $326 million was credited to 47,000 people who had previously owned homes.

Sources

CNN

Internal Revenue Service enforcement statistics

USA Today

Wall Street Journal

Los Angeles Times

Treasury Inspector General for Tax Administration

April 18 is Tax Day, and income tax returns are due to the Internal Revenue Service. Photo Credit: Saturnism/Flickr.com/CC-BY-SA

Federal income tax returns are due on April 18, 2011, and most Americans will dutifully fulfill their obligations to do so. There has been a lot of discussion about how large a tax burden is actually placed on the taxpayers, and how oppressive the income tax is. Nearly 50 percent of income tax filers will not owe the government a dime.

55 percent of Americans pay income tax

Tax Day 2011 falls on April 18 rather than April 15. This year nearly 45 percent of households will not have to pay any taxes on their 2010 income, according to Bloomberg. Low-income households receive exemptions and deductions, such as the Earned Income Credit and the Making Work Pay Credit. Those who pay no income taxes are very low income or living on a fixed income such as Social Security or disability income. People who have children but make very little also commonly pay no income taxes. The average tax refund, according to CNN, was $3,003 last year.

Wealthy paying less

The tax burden for the wealthiest taxpayers, according to Daily Finance, has been falling for some time. In 1992, the 400 returns with the highest reported incomes averaged a tax bill of 26 percent of their income, but that figure was 17 percent in 2007. Though the wealthiest 10 percent account for more than half the nation’s tax revenue by dollar amount and the wealthiest 5 percent account for 44 percent, the more lucrative tax breaks, such as for charitable contributions, are available to the rich. There are more than $1 trillion in tax breaks in the current U.S. tax code, enough to get an $8,000 refund per taxpayer per year. However, trying to catch the Internal Revenue Service napping is not a good idea. The IRS is more likely to press charges now than at any point in the past decade, according to USA Today.

Americans pay lower taxes than most developed countries

Though many people protest the U.S. tax system for myriad reasons, most technical literature reveals that Americans pay very little income tax compared with the rest of the developed world, according to MSNBC. The Organisation for Economic Co-operation and Development, or OECD, maintains data on taxes in the developed world. The OECD estimates that Americans average 24 percent of income paid in taxes, compared to 48 percent for Danes, 42 percent for the French, 37 percent in Germany and 27 percent in Australia.

Sources

Bloomberg

CNN

Daily Finance

USA Today

MSNBC

The government shutdown does not mean that people don't have to file their income tax return by the deadline. Image from Wikimedia Commons.

If the government has to shutdown because of the budget showdown, it will not affect the income tax return deadline. The Internal Revenue Service extended the deadline to April 18 this year because of a holiday in Washington D.C. However, tax return checks will be delayed.

IRS employees affected by shutdown

In the event of a government shutdown, there will be a few agencies that are unaffected in their operations. The Internal Revenue Service will not be among them, and all IRS agents and personnel will be told to stay home as long as the shutdown lasts. Unfortunately, according to Bloomberg, that does not mean that the deadline to file an income tax return is postponed. The government shutdown will, unless an unlikely deal is made at the 11th hour is made, begin on April 8.

Electronic filing urged

The IRS will not be able to receive any paper returns during the shutdown, delaying the issue of a tax refund check to those who filed a paper return. The IRS is urging taxpayers to file electronically because any online tax return filings will be processed as normal.

Government workers will be affected most

It is contended that the shutdown is going to occur because Congressional Republicans insist on defunding Planned Parenthood  because the organization provides abortions. Members of Congress, according to CNN, and the president, will still get their paychecks automatically. The people who will suffer are government employees. Those who are considered “unnecessary personnel,” or people who do not perform services for the government that guard the life or property of the people, will be sent home. Those who perform necessary services, like the Federal Bureau of Investigation and the military, will still have to go to work. However, they will have to work completely for free, and there’s no guarantee they will be reimbursed for that time.

Sources

Bloomberg

Time

CNN

Most people would rather get locked in the stocks than deal with an IRS audit, but the odds of getting audited are less than 1 percent for the typical person. Image from Wikimedia Commons.

Everyone dreads getting a notice of a tax audit from the Internal Revenue Service. There are few documents that cause as much terror as an audit notice. However, the odds of being audited are very low.

78 of 100 audits take place via correspondence

According to a recent post on CNN, up to 78 percent of tax audits in the year 2009 took place via mail correspondence. The article also clarified that “22 percent took place in person.” That means fewer Internal Revenue Service agents are being dispatched out to conduct audits. Performing audits via correspondence is cost effective for the IRS, and it is happening more frequently because the IRS has already had to deal with diminishing budgets and is facing a further $600 million in cuts from its budget. A Taxpayers Advocacy Service survey cited in the CNN piece revealed, however, that more people would prefer an audit in person because the legalese is difficult to understand. However, normal taxpayers should fear not, because only 1.6 million people were audited in 2009. That’s less than 1 percent of the U.S. population.

Rich audited more often

Those most likely to be audited by the IRS are the wealthy. According to Forbes, those with an income of $200,000 or more per year stand a 2.7 percent chance of an audit, and the Wall Street Journal reports that those making $10 million or more stood an 18 percent chance of being audited. Forbes and the Wall Street Journal noted that the rate at which the wealthy were being audited was increasing. Though that is awful news for Donald Trump, the rest of us can rest easy knowing there is a 1 percent or less chance of being audited.

If an audit does come around

Beware of any phone calls or emails concerning an IRS audit; those are scams. The Internal Revenue Service only communicates in an official capacity by mail. According to Investopedia, should always keep at least the last three years of income tax returns and related records on hand. Most audits happen for a reason and are triggered by red flags in a person’s tax file. The IRS has a lot of people and a lot of data to keep track of and won’t take the time to perform an audit unless it thinks it should. The most common penalties are 20 percent and 75 percent of the amount of tax that should have been paid.

Sources

CNN

Forbes

Wall Street Journal

Investopedia

E-file that 1040, and with direct deposit you may not need a Refund loan. Image from Wikimedia Commons.

The Internal Revenue Service has announced that it will no longer provide certain information to tax preparers issuing refund anticipation loans. More than once has the product been decried. Opponents have contended that they can be worse than payday loans. An RAL, or Refund Anticipation Loan, is a loan product that depends on the tax return of a borrower. A portion of the total is deducted, and the filer is given a check that day. The only hitch is that this short term loan is not that simple should the return not get accepted.

Even the IRS thinks refund loans are bad

Internal Revenue Service Commissioner Doug Schulman announced in a press release on Aug. 5 that the IRS would no longer provide a “debt indicator” figure to tax preparers for the purposes of administering a refund anticipation loan. He also stated that it no longer seemed prudent to do so. The Internal Revenue Service allows people with adjusted gross incomes (AGI) less than $57,000 to e-file for free and have their returns wired via direct deposit within 10 days.

Electronic filing has become the rule

More than 70 percent of all tax returns are filed electronically. According to Bloomberg, H&R Block reports its average RAL loan to be about $3,000, and the average fees are $62. The term is just less than two weeks, which is about the average term of a payday loan or small personal loan. An RAL with the preparation fee and interest carries a fee of $187 on average. H&R Block, one of the largest tax preparation services in America, lent more than 2 million of these loans last year. The change in policy will affect the 2011 tax season.

Expensive way to get some cash

Refund anticipation loans carry more risk than your average cash advance. If a tax return is accepted, the transaction is closed and a person has just accepted a little less than they would get for instant cash. If a return is not accepted, the principle plus fees and penalties must be paid, which is a hard dollar for people that are already hard up. The usual RAL borrower, according to the Washington Post, has an AGI of $35,000 or less.

Further Reading

Statement from the IRS

Bloomberg

Washington Post