Losing the ability to offer loans against tax refunds has caused tax preparation giant Jackson Hewitt to seek bankruptcy protection. Photo Credit: kenteegardin/Flickr/CC-BY-SA

Tax preparer Jackson Hewitt recently filed for Chapter 11 protection for a short bankruptcy. Hewitt and other tax preparation firms were dealt a heavy blow when changing regulations made it impossible for tax firms to secure funding for tax refund loans. Refund anticipation loans are often vilified alongside payday loans as preying on the poor.

Rule change sends tax preparation industry into tailspin

In 2010, a rule was changed that has severely hampered tax preparation firms, especially those that made much of their money from offering short term loans against tax refunds, or refund anticipation loans. The Internal Revenue Service informed preparers that they will no longer be able to see whether a person is receiving their entire refund, according to USA Today. That caused  funding partnerships to dry up. H&R Block dropped refund anticipation loans altogether before the 2011 tax season. Jackson-Hewitt became the largest entity offering them. Because of the IRS rule, bank regulators consider the loans too risky and therefore look dimly upon companies that still lend them, according to Reuters. Because of that, Hewitt has not been able to secure further financing on its debt and has filed for Chapter 11 protection.

Quick bankruptcy

Hewitt maintains it will be in bankruptcy protection only for a few months, in order to restructure itself and begin repaying its debts. The company got in trouble with its lenders because Hewitt relied heavily on refund loans and needed financial backing to fund the loans and got heavily in debt. However, the company intends to come out of bankruptcy and no longer rely on tax refund loans. The last major organization funding the refund loans, Republic Bank and Trust, is currently in the midst of a battle with the Federal Deposit Insurance Corporation. Republic, according to BusinessFirst, is being fined $2 million by the FDIC for continuing to fund the loans despite warnings to stop doing so. Republic maintains that because it made a record profit during the first quarter of the year while funding the loans, the loans can be lent responsibly.

Credit product disappearing

The refund anticipation loan, or RAL, is going extinct. Consumer groups liken them to payday loans; a person who has their tax returns prepared and is getting a refund is offered a portion of the funds immediately by the preparer. The refund is turned over to the preparer, with the difference being the “fee” for the lender. For instance, a person receiving a $600 refund is offered an RAL of $530 by a preparer, and the customer gets the cash within a few days rather than waiting weeks for a check from the IRS. If the return is accepted, the customer gets the RAL and the preparer gets the refund once the IRS disburses it. The FDIC objects to banks funding RALs because no credit check can effectively be performed before disbursing the loan to the customer.

Sources

USA Today

Reuters

BusinessFirst

Jackson Hewitt is suing H&R Block for defamation. Image from Wikimedia Commons.

Tax preparation giant H&R Block is being sued by Jackson-Hewitt over an ad campaign blasting the short term loan program offered by Jackson Hewitt. Both companies offer some form of a refund anticipation loan or a loan against an income tax return. Tax season is when both companies make the bulk of their revenue.

H&R Block’s short term loan ads land company in court

An advertising campaign run by tax preparation giant H&R Block has resulted in the company being sued by competitor Jackson Hewitt, according to Reuters. The lawsuit alleges that H&R Block deliberately misled consumers about Jackson Hewitt through the commercials about a program called “Second Look,” which mentions Hewitt by name. The commercial offers a free review of returns prepared by competitors. The commercial says two of every three returns prepared by Hewitt had errors and had missed deductions. Hewitt is also claiming that Block made false statements about the short term loan program Hewitt offers, being refund anticipation loans, or RALs. Hewitt maintains that customers can get a loan of up to $1,500 in day.

The tax cash advance

Refund Anticipation Loans are a cash advance against an income tax refund. Filers who are due a refund can get a check for their expected refund amount, minus a fee for the preparer and loan lender. The tax preparer files the return and takes the income tax return as payment, while the borrower walks away with instant cash rather than waiting for a deposit or a check. H&R Block is unlikely to be able to lend these loans this tax season, as a key financier and partner of Block, HSBC, was forbidden from funding the loans by the U.S. Treasury.

IRS advises to e-file

The Internal Revenue Service does not have an official position on RALs but suggests people electronically file and elect to have their refund directly deposited. A refund can be deposited electronically in far less time than it takes for a paper check to arrive, whether the check is being sent to Jackson, Mississippi, or to Hawaii.

Source

Reuters

Tax refund checks and refund anticipation loans could be rendered obsolete by tax refund debit cards from the IRS. substack/Flickr photo.

Tax refunds for people without bank accounts are becoming a problem in the era of electronic banking and tax filing. The Treasury Department thinks tax refund debit cards could be the solution. People without bank accounts, the so-called “unbanked” or “underbanked,” don’t benefit from the electronic funds transfer of a tax refund to a bank account from the IRS. Tax refund checks can take weeks to arrive. Unbanked people often resort to costly “refund anticipation loans” to get their money quickly. Plus, the overhead of printing and mailing checks costs millions of taxpayer dollars.

Tax refund debit cards bring speedy returns

The biggest advantage offered by tax refund debit cards is speed. The Associated Press reports that while direct deposits show up in bank accounts in eight to 15 days, tax refund checks can take six weeks to arrive in the mail. People without bank accounts are likely to borrow against their tax refunds, paying steep fees for a refund anticipation loan. Starting next year, a pilot tax refund debit card program will be offered to several hundred thousand taxpayers. The tax refund debit cards will work like checking accounts — without the checks or the bank. The cards will be insured like bank deposits and will include consumer protections from unauthorized purchases if they are lost or stolen. The cards may also be able to store other income and include bill-paying services.

Taxpayers encouraged to get bank accounts

The Center for Economic Progress estimates up to 26 million taxpayers could benefit from tax refund debit cards. That number was reached by subtracting direct deposit refunds from the 2010 tax season– 70.3 million — from total tax refunds of 96.3 million. Automated Trader reports that the Obama administration is exploring ways to encourage more people to get bank accounts. A $50 million request has been submitted to Congress for the 2011 budget to create “Bank on USA,” a program to help support state and local efforts to get more low-to-moderate income taxpayers into mainstream banking. An FDIC 2009 survey showed roughly 9 million households were without bank accounts.

Nipping refund anticipation loans in the bud

The tax refund debit card initiative is part of a broader program by the Obama administration to curtail federal policies that lead to risky financial decisions and provide people with better financial alternatives. The Wall Street Journal reports that the most recent policy change was announced last month. beginning in the 2011 tax season, the IRS will no longer provide tax return companies with “debt indicators” used by banks to process refund anticipation loans. The move makes it harder for banks to make the short-term loans, which come with high fees that pencil out to annual percentage rates from 50 percent up to 500 percent.

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

When the IRS ended debt indicators, refund anticipation loan facilitators like H&R Block raised objections as their stock price fell. jalefkowit/Flickr photo.

Debt indicators — IRS information about back taxes and other debts taxpayers owe — are going away. The IRS has sent debt indicators to tax preparers to let them know if their customer’s refund might be held to cover back taxes and other debt. Debt indicators are used by refund anticipation loan banks to decide whether to make short-term loans to customers backed by their tax refund.

Debt indicators gone starting with 2011 tax season

Saying they are no longer needed, the IRS announced Aug. 5 that it will stop providing debt indicators starting with the upcoming 2011 tax season. Electronic filing and direct deposit lets taxpayers get their refund in a matter of days. The IRS said that eliminates the necessity for refund anticipation loans. Companies that profit from refund anticipation loans say the elimination of debt indicators limits an essential service they offer to the unbanked and underbanked.

Debt indicators: singling out the delinquents

The debt indicator is a key underwriting tool refund anticipation loan banks use to determine whether they will loan, how much to loan and at what interest rate. Journal of Accountancy reports that until now, when a tax preparer e-filed a client’s tax return, the IRS included a debt indicator in the acknowledgment file if the taxpayer would have any portion of the tax refund offset for delinquent taxes or other debts, including unpaid child support or delinquent federally funded student loans.

IRS criticizes refund anticipation loans

Short-term refund anticipation loans have been criticized by consumer advocates for charging high interest rates and fees in exchange for providing cash just a few days before the tax refund arrives. In 2008, 8.4 million taxpayers paid more than $738 million in fees for refund anticipation loans, according to the National Consumer Law Center. IRS Commissioner Doug Shulman told the Associated Press that refund anticipation loans are often targeted at low-income taxpayers. He said with electronic filing and direct deposit it takes 10 days or less to get a tax refund. He also said:

“I think it’s unfortunate that there’s a lot of hardworking Americans that are in a financial situation where they have to pay a substantial fee to access their refunds a week or two before they can get it from the IRS.”

Refund anticipation lenders unhappy

Companies that facilitate refund anticipation loans argue that debt indicators let taxpayers who are strapped for cash get their money faster. MarketWatch reports that Alan Bennett, president and CEO of H&R Block, said the IRS decision to ax the debt indicator would hurt consumers with significantly lower refund anticipation loan approval rates and higher costs for the most vulnerable taxpayers. He said these consumers are often unbanked or under-banked and will be forced to seek more expensive and unregulated credit. H&R Block said the demise of debt indicators will dent 2011 profits 5 cents a share, sending its shares down 3 percent.

If you’ve ever used a tax preparation service and been owed a refund, chances are you’ve also been offered a refund anticipation loan (RAL). More than 12 million Americans receive a tax refund every year, and many of them succumb to the temptation to take out an RAL. If you want your money within just a couple of days, you can pay around $75-150 for an RAL, or for an extra $25-55 you can even get your refund on the same day. That’s on top of the fees you pay for your taxes to be prepared (typically from $100 to $300) and filed (typically from $40 to $75).

Back when you had to mail in tax forms and wait for months before receiving your refund check, tax refund loans made a lot of sense. But now you can file electronically and, in most cases, get your refund wired to your bank account within a week or two. So unless you’re really flat broke, you can probably hold out until the money arrives. Yet Americans spend $900 million a year on loan fees for tax return advances. To make sure you can avoid paying these fees and still get fast access to your refund money, here are some steps you can take:

Change your tax withholding status

If you don’t pay too much tax in the first place, you won’t have to wait for a refund. Anyone who is paying more tax than they should be can ask for a withholding adjustment. Let’s be clear here: a tax refund is not a gift or windfall. It’s your money – money that you worked hard for and then loaned the government without even charging interest. Wouldn’t it be better if you and your family could have access to that money throughout the year, and not just at refund time? Especially now that times are tough for many of us, surely you could use it to make life a bit easier, or put it in your retirement account.  Be careful not to overdo it, however, when you change your exemption status, or you could end up owing money at tax time.

Save your “overpayment” money each month

Some people figure that by intentionally paying too much tax, they’re putting that money out of reach so they won’t be tempted to spend it. If this sounds like your game plan, find a savings account with withdrawal restrictions that will stop you from using the cash for frivolous purchases. Perhaps your employer can deposit the appropriate sum in that account on each payday so that you won’t miss the money. You’ll even receive some interest on your balance now!

File your taxes electronically

More and more taxpayers are discovering how convenient it is to file online rather than mailing in paper documents. If you’re owed a refund, you’ll find out quickly, and the funds will be in your bank account within a week or two. With just a little patience, you’ll have your refund without taking out an RAL.

Open a bank account if you don’t already have one

Lots of people don’t have bank accounts, so they miss out on the opportunity to have their tax refunds deposited directly. That’s one of the major reasons so many people get RALs. If you’re one of the “unbanked”, you can save a lot of money by opening a bank account, even if it’s just for a few weeks while you’re waiting for your refund.

Be patient, plan ahead, and you won’t need to spend so much time or any money at all to get your tax refund. You’ll be able to take charge of the money — let’s not forget – that is your own, and use it however you want.  You might even decide to put it to work earning some interest for you.

The truth about Tax Refund Loans

The truth is, tax refund loans or refund anticipation loans (RAL) are very expensive. Just like payday loans and cash advances, tax refund loans must be handled with absolute care. In fact, several politicians have tried to cut down on RALs over the past years, citing interest rates on these types of loans exceeding 500% in many cases. What then can a person in need of immediate financing do to obtain money fast?

Consider Payday Loans

If you really need money now, consider payday loans or  installment loans. The difference between a tax refund loan and a payday loan is that one is easier to work with than the other. Payday loans are not only cheaper, but they are much more flexible to work with. You pay a flat one-time fee of $15, $20 or $30 (depending on the lender and/or loan amount) and you will have the money to relieve some of your immediate cash needs in no time. You get just the right amount of money to hold you over – no stress, no pressure, no additional money loss.

On the other hand, if you choose to obtain a refund anticipation loan, your “anticipation” could certainly backfire on your finances. You lose more money in the end –- money that could actually be going towards your savings fund and other important living expenses.

Save, save, save!

Saving money has become the top concern in the minds of many consumers these days. Through the ups and downs of the economy, more people are finding out that there is nothing more shielding than to be financially prepared. Having a sufficient amount of savings will benefit you more than any type of loan made available for your convenience. So, if you feel the need of a tax refund loan, consider other options first before making a final decision. Your wallet will be thankful for it.

Start Your Payday Loan Application HERE!

Tax season is here, and some people may be wondering whether the quick cash of tax refund loans is right for them. The plain and simple answer to that question is that if you don’t mind giving up an expensive chunk of change, go for it. Otherwise, if you’d like to have access to fast consumer credit during a cash emergency, payday loans are a less expensive route in that they are generally free of “fees upon fees” and the charges levied by less than scrupulous tax preparers.

Even the IRS views tax refund loans with suspicion

The Web site Consumer Affairs reports that one of the biggest RAL institutions in the game – Santa Barbara Bank & Trust – has been ordered out of the tax refund loans business by federal regulators. Santa Barbara Bank & Trust was the money man for Jackson Hewitt’s tax refund loans, so now that big-name tax preparation company has to scramble to find funding for over half its locations. Republic Bank & Trust, another big tax refund loans player, has dropped their RAL prices as the industry faces the heat of consumer advocates.

8.4 million American taxpayers were robbed in 2008

By Consumer Affairs’ count, tax refund loans drained $738 million from their hard-earned tax refunds in 2008, just so they could receive their money a few days earlier. What an unnecessary expense; and that doesn’t even take into account $68 million in “other fees.” Then there were 12 million more people who gave up $360 million on products similar to tax refund loans. Consumer groups like the National Consumer Law Center and Consumer Federation of America are sounding the alarm for taxpayers to wake up and smell the tax refund loans ruse.

An IRS task force is examining tax refund loans

Until they’ve put this ultra-expensive product down like Ol’ Yeller’s evil twin,  here some tips to avoid tax refund loans, RALs, RACs or whatever name tax preparers looking for a buck call them.

• File electronically to get your refund more quickly. Wait a week or two and you can save green!
• If you need help, use free sites offered by places like Volunteer Income Tax Assistance and the National Community Tax Coalition. Call the IRS at 1-800-829-1040 for more info. IRS Free File is also a place you should know about.
• Have your refund direct deposited. As check cashers typically charge two percent or more, it pays to have a checking account at a bank or credit union. Why pay $60 to cash a $3,000 refund check when you don’t have to?
• Know what you’re signing if you use a tax preparer. They can easily share or sell your tax return information, so if you see anything that gives them permission to do so, JUST SAY NO.

Tax refund loans can be dangerous; why not consider payday loans?

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Making Work Pay will cost millions of American taxpayers anywhere from $250 to $400 this coming tax season. These people may need payday loans. (Photo: flickr.com)

Were you one of those people who were elated to hear about the “Making Work Pay” tax break that President Obama gifted to the American people? Truly, it did benefit many people. Workers were paid back to the tune of 6.2 percent of their earned income, with a max of $400 for individuals and $800 for married couples filing jointly. Those singles making more than $95,000 and couples making more than $190,000 weren’t eligible, but then they didn’t have to be.

With that refund, those eligible didn’t have to resort to short term loan options like payday loans. However, for millions more, perhaps they’ll be wishing they had gotten a payday loan instead of having to pay back hundreds of dollars. And don’t even get me started on the farce that is tax refund loans (aka refund anticipation loans).

15-Million-Plus Owe Uncle Barack $250 Apiece

And that’s just the retirees!

That’s what the Associated Press is reporting as consumers are attempting to dig their way out of the blight of the recession. People are looking forward to some debt relief without the pain of tax refund loans, and in this instance, perhaps even without payday loans. But according to the IRS, many of people are going to be disappointed. What goes around comes around … and bites you in the hindquarters.

Who Will Owe Money Because of Making Work Pay?

We’re talking those with more than one job and married couples where both parties work (that’s a big one). These groups will have to repay $400, which could mean a smaller refund or even a tax bill. Even those in their golden years with rusty old Social Security and taxable wages will not have the lamb’s blood painted on their door. Their Obama giveback will be $250. Pony up, America!

Ah, the Memories of Magic Refunds and High Hopes

Individuals felt up to $400 worth of love for Making Work Pay, while couples doubled their pleasure up to $800. It was all part of the revolutionary stimulus package back in February of 2009. It pumped paychecks full of chicken broth, which most consumers promptly spent. If you spent it and you aren’t sure if you’re having enough withheld from your paycheck, click here for a handy calculator. If you don’t like what you find, file a new W-4… fast, because the 2009 tax year is almost over! The IRS has known about this problem since last spring, and they’ve been urging people to check their withholding amount since then.

Picking Up the Pieces of a Shattered Stimulus Plan

Payday loans may be short-term glue for what ails your budget, but this whole stimulus thing replaced pro-mise with pro-blems. For instance, a single worker with two jobs could get a $400 Obama-boost for each job, even though he’s only eligible for one $400 buff. That will have to be paid back. Similarly, with married couples where both work, if they combine to earn over $13,000, they enter a new tax bracket. There’s a total $1,200 boost instead of the $800 that should have been allowed. That’s $400 to pay back, friends. The Census Bureau says that 55 percent of all married couples in America are in this boat. That’s 33 million couples with 400 reasons to love Making Work Pay.

Wait, Don’t Forget Victimized Students

If they’re single and work part-time, they were eligible for the $400 credit. But, all my payday loans and garters, if their parents claimed them as a dependent, they didn’t qualify! In this case, Making Work Pay means paying back that $400.

Retirees Making Work Pay for Obama

More than 50 million Social Security recipients got $250 lump sum payments each, all thanks to Making Work Pay. But they were already receiving the credit for being employed, so the $250 refund will have to be paid back. It keeps getting better for American citizens.

Don’t Make the Same Mistakes in 2010

The Making Work Pay credit is still available, so tread cautiously. You certainly don’t want to create the same problem for yourself again. The average refund was about $2,800, so this Making Work Pay giveback will not result in a bill for many. However, some won’t be quite so lucky.

Iowa Sen. Chuck “Seppuku” Grassley of Iowa took a break from his more breathless moments to nail Making Work Pay on the head. It was “another unfortunate example of what can happen when Congress and the White House rush through legislation like the stimulus without thinking through the consequences,” he told the AP.

(Insert forehead slap and “I shoulda had a payday loan!” here)

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