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

Tax preparation giant H&R Block has lost significant ground since the tax preparation service cannot offer a cash advance against tax refunds this year. Image from Wikimedia Commons.

The loss of the ability to offer a cash advance against tax refunds has caused revenues to fall for tax preparation giant H&R Block. The latest earnings reports for the company indicate that revenues so far are less than expected this tax season. Earlier this year, the company was forced to abandon refund anticipation loans when a key partner was sued by the FDIC.

Tax season off to a slower than normal start

A decline in people paying to have their tax returns prepared has led to a decline in revenues for tax preparation giant H&R Block, according to CNBC. Block expects  January earnings will come close to breaking even, but activity began to pick up in mid-February. From Jan. 1 to Feb. 15, online returns prepared through H&R Block increased by almost 28 percent, though total digital tax returns only registered a 7.3 percent increase since the start of the year. Preparation fees for H&R Block have declined by 7.6 percent since the start of the year, and part of the loss is because the company is no longer offering the popular refund anticipation loan, a cash advance against an income tax refund.

Blocked from lending by suit against key partner

Short term loans against tax refunds are similar to payday loans, in that a customer is advanced cash immediately instead of having to wait for their tax refund. The refund is signed over to Block, and borrowers receive less than the total refund because fees are deducted. In December of 2010, H&R Block announced that the company would not be offering refund anticipation loans, a very popular product among lower and mid-income customers. A key partner in the financing of the loans, HSBC, was enjoined by the Federal Deposit Insurance Corporation from lending refund loans. Nearly 17 percent of Block customers took out a refund anticipation loan in 2010.

FDIC countersued by refund loan lender

A prominent tax refund lender has sued the Federal Deposit Insurance Corporation for interfering in the tax refund loan business, according to Business Week. Republic Bank and Trust, a bank based in Kentucky, is suing the FDIC and claims the agency overstepped its boundaries by labeling the loan products “unsafe and unsound” when the FDIC ordered Republic to stop lending the loans last month. Republic lent more than $3 billion in refund loans last year to almost 836,000 people. The bank observed a default rate of only 2.13 percent. The suit alleges that the FDIC is trying to coerce loan lenders into dropping a product that government officials don’t like, even though the product is popular.

Sources

CNBC

Business Week

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!

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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