The poll also found that 68 percent of respondents believe that either their state government and/or the federal government requires paid tax preparers to be licensed—when in fact only four states (California, Maryland, New York and Oregon[i]) require mandatory standards for paid tax preparers who are not already credentialed as enrolled agents, attorneys, or Certified Public Accountants.

This poll, like the previous poll results released in 2016, found that more than 4 out of 5 respondents believe that paid tax preparers should be required to pass a competency test; be licensed by the state; and provide a clear, upfront list of fees before completing a taxpayer’s return.

“This second national poll commissioned by CFA not only shows that the public continues to support licensure and minimums standards for paid tax preparers, but also that 68 percent of respondents believe that licensure is already required,” said Michael Best, Senior Policy Advocate at the Consumer Federation of America.  “The extensive use of paid preparers, the high instance of problems with paid preparers, the public support of, and the misperception of many that such protections already exist, means that the time has long passed for minimum standards in this industry.”

The poll found that:

1. Half of the public uses paid tax preparers from time to time and nearly a third uses them frequently.  Forty-nine percent of those surveyed used a tax preparation company in the past five years, which is consistent with the GAO estimate that approximately 56 percent of individual tax returns were completed by a paid preparer in 2011.[ii]

2. 68 percent of respondents believe that either state and/or federal government requires licensing for paid preparers while only 20% believed that neither require licensing. In fact only four states have mandatory standards for unenrolled paid preparers.

3. 86 percent of the public supports requiring paid tax preparers to pass a test administered by government that would ensure that paid preparers have the knowledge and training to complete taxpayer returns correctly.

4. 88 percent of the public supports licensing requirements for paid tax preparers by a state agency that would also accept and resolve complaints, and enforce consumer protections.

5. 88 percent of respondents support requiring paid preparers to supply an upfront list of fees. Tax preparation is a rare industry where prices are often not given up front before the work is completed.[iii]

6. 59 percent believe paid preparers should have special training but don’t need a degree and 31 percent of the public believe that paid tax preparers should have a college degree in accounting.

The complete results of the poll are available here.

The poll was commissioned by Consumer Federation of America in response to concerns about frequent errors and fraud by paid tax preparers that are used by millions of Americans.

In 2014, the U.S. Government Accountability Office (GAO) sent undercover investigators to 19 randomly selected tax preparer offices.  Only two of the 19, or 11 percent of the returns, had the correct refund amount.  The mistakes ranged from giving taxpayers $52 less to $3,718 more than they were entitled to.[iv]  Incorrect refunds harm consumers by returning less money than they are owed or exposing them to possible fines if they receive more than they are entitled to.  Several advocacy groups have conducted multiple rounds of mystery shopper tests of tax preparers and reached similar conclusions.[v]

Green bars in graph indicate government reports

Forty-nine percent of poll respondents used a tax preparation company in the past five years.  The GAO estimates that approximately 56 percent of 145 million individual tax returns (81 million) and 59 percent of returns claiming the Earned Income Tax Credit (EITC) were completed by a paid preparer in 2011.[vi]

A training requirement, discussed in the poll results, makes particular sense for those who prepare tax returns for lower income consumers who rely on the EITC, as they can be severely impacted by an incompetent paid preparer.  A consumer can lose the credit for ten years if it was claimed but the consumer is later found to be ineligible.[vii]

While a 2014 court decision stripped the IRS of its ability to protect consumers without action from Congress, state legislatures have the ability to take action to protect consumers from errors (California, Maryland, New York and Oregon[viii] have enacted standards) that put their tax returns at risk.

Consumer and Community Groups React to Results

CFA works with a coalition of national and state groups to promote consumer protections designed to prevent errors and fraud during the tax preparation process.

“The erosion of trust in our tax system is a symptom of how confused taxpayers are about the tax code and how it impacts them” said David Marzahl, CEO of the Center for Economic Progress in Chicago. “The survey results make clear that taxpayers need to have greater trust in those who prepare their returns and their desire for stronger consumer protections.”

“The poll results confirm what we continually hear from families across Colorado,” said Ali Mickelson, director of tax and legislative policy for the Colorado Fiscal Institute. “Most people assume tax preparers are already licensed and have minimum competency requirements.”

“You wouldn’t give your Social Security number to your stylist or your bank account information to a hot dog vendor. Yet these people are more regulated than tax preparers entrusted with your most sensitive financial information.”

“Choosing the right tax preparer can seem like playing ‘pin the tail on the donkey’ and a bad choice can really haunt you because even taxpayers who pay for help are personally responsible for mistakes on their taxes,” said Linda Sherry, director of national priorities for Consumer Action. “The poll results show how much confusion there is among consumers on this issue. The poll is just more proof of why licensing and minimum standards for paid tax preparers is so crucial.”

“It is time Florida provided licensure and some minimum standards for paid tax preparers. The polls show what we have heard repeatedly from Florida consumers – the assumption that all paid tax preparers are already required to do this, stated Alice Vickers Director of Florida Alliance for Consumer Protection. “Consumers need that protection from error and fraud in the preparation of their taxes.”

“These poll results are similar to findings from our 2016 study of paid tax preparation services in southwest Atlanta. In our survey of consumers, we found that most did not know their most recent tax preparer was not licensed by the State of Georgia, said Beth Stephens, Sr. Director of Public Policy and Advocacy with Georgia Watch.  “This report further demonstrates the need for legislation that provides transparency and protections for consumers.”

“Data clears shows what we have seen for years – there are consistent quality and competency issues with paid tax preparers. Overwhelming public opinion supports increased transparency and accountability. Inflated refunds hurt taxpayers who have to pay them back and our federal and state budgets,” says Robin McKinney, Director of the Maryland CASH Campaign.

“The poll results show that the majority of Americans incorrectly believe that either the federal or state government is protecting their interests by licensing preparers,” noted Chi Chi Wu, National Consumer Law Center ​staff attorney, “We are leaving American taxpayers woefully unprotected by failing to adopt preparer licensing that is ​in ​line with consumer expectations.”

National Contacts:

Consumer Federation of America, Michael Best, 202-939-1009, mbest@consumerfed.org

Consumer Action, Linda Sherry, 202-544-3088, linda.sherry@consumer-action.org

National Consumer Law Center, Chi Chi Wu, cwu@nclc.org or Jan Kruse, jkruse@nclc.org, 617-542-8010

Localized Contacts:

Center for Economic Progress, David Marzahl, 312-630-0250, dmarzahl@economicprogress.org

Colorado Fiscal Institute, Ali Mickelson, 720-379-3019 ext. 222, mickelson@coloradofiscal.org

Florida Alliance for Consumer Protection, Alice Vickers, 850-556-3121, alicevickers@flacp.org

Georgia Watch, Beth Stephens, 404-525-1085, bstephens@georgiawatch.org

Maryland CASH Campaign, Robin Mckinney, 443-692-9422, robin@mdcash.org

The Consumer Federation of America is an association of more than 250 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education.

Founded in 1990, the Center for Economic Progress (CEP) helps low-income, working families as a trusted provider of tax and financial services. Everything we do, from direct service to informing public policy, improves the financial stability of those we serve. Operating one of the largest and oldest tax preparation programs in the country, CEP has been on the forefront of turning tax time into an opportunity for 300,000+ families to get ahead–returning more than $500 million in refunds to Illinois communities. For more information, visit www.economicprogress.org

Colorado Fiscal Institute is a nonprofit, nonpartisan organization that provides credible, independent and accessible analyses of fiscal and economic issues facing Colorado in order to inform policy debates and foster greater economic prosperity for all.  www.coloradofiscal.org

Consumer Action has been a champion of underrepresented consumers nationwide since 1971. A non-profit 501(c)(3) organization, Consumer Action focuses on consumer education that empowers low- and moderate-income and limited-English-speaking consumers to financially prosper. It also advocates for consumers in the media and before lawmakers to advance consumer rights and promote industry-wide change.

Florida Alliance for Consumer Protection is a nonprofit, nonpartisan enterprise whose mission is to advance consumer protection and tenants rights through research, education and advocacy.  www.flacp.org

Founded in 2002, Georgia Watch is a statewide consumer advocacy organization whose mission is to protect and empower Georgia consumers on matters that impact their quality of life. Through education, advocacy and policy development, Georgia Watch works to influence public policies to positively impact consumers, safeguard consumer protections in the area of personal finance, promote access to safe and affordable healthcare, encourage fair utility rates and renewable energy options, and protect consumers’ right to seek redress in a civil court of law when they’ve been harmed in the marketplace.

The Maryland CASH Campaign is a statewide network of organizations that promotes programs, products and policies that increase the financial security of low-to moderate-income individuals and families across Maryland. Maryland CASH advocates on behalf of these families, as well as provides financial education programs such as the Maryland CASH Academy at http://www.mdcashacademy.org/. Their partner organizations provide free tax preparation sites offering access to appropriate financial services and benefits screening.  For more information, contact Ms. Robin McKinney, Director of the Maryland CASH Campaign, at robin@mdcash.org or 443-692-9422. www.mdcash.org @Maryland_CASH @MDCASHAcademy 

Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has worked for consumer justice and economic security for low-income and other disadvantaged people, including older adults, in the U.S. through its expertise in policy analysis and advocacy, publications, litigation, expert witness services, and training. www.nclc.org

[i] Oregon does not exempt enrolled agents but has less stringent requirements for them to be become a Tax Consultant. 

[ii] Statement of James R. McTigue, Paid Tax Return Preparers, GAO, April 8, 2014.  http://www.finance.senate.gov/imo/media/doc/GAO%20Testimony%20(McTigue).pdf

[iii] Chi Chi Wu, Prepared in Error Mystery Shoppers in Florida and North Carolina Uncover Serious Tax Preparer Problems, National Consumer Law Center, Pg. 2, April 2015.  http://www.nclc.org/images/pdf/pr-reports/report-prepared-in-error.pdf

[iv] Paid Tax Return Preparers, Statement of James R. McTigue, GAO, April 8, 2014. http://www.finance.senate.gov/imo/media/doc/GAO%20Testimony%20(McTigue).pdf

[v] See Chi Chi Wu, Prepared in Error Mystery Shoppers in Florida and North Carolina Uncover Serious Tax Preparer Problems, National Consumer Law Center, April 2015.  http://www.nclc.org/images/pdf/pr-reports/report-prepared-in-error.pdf and Fraud & Arbitrary Fees: A Secret Shopper Study of Paid Tax Preparation Services in Southwest Atlanta, Georgia Watch, 2016.  http://www.georgiawatch.org/wp-content/uploads/2016/06/Errors-Fraud-Arbitrary-Fees-Final-Formatted-Report.pdf

[vi] Statement of James R. McTigue, Paid Tax Return Preparers, GAO, April 8, 2014.  http://www.finance.senate.gov/imo/media/doc/GAO%20Testimony%20(McTigue).pdf

[vii] Chi Chi Wu, Riddled Returns, National Consumer Law Center Updated March 2014.  http://www.nclc.org/issues/riddled-returns.html

[viii] Oregon does not exempt enrolled agents but has less stringent requirements for them to be become a Tax Consultant. 

The post Second National Poll Indicates Strong Support for Reform of Paid Tax Preparer Industry appeared first on Consumer Federation of America.

• Refund delays for millions of vulnerable taxpayers. Refunds for EITC and ACTC recipients will be delayed until late February, which may cause problems for millions of financially-strapped taxpayers who expect to receive their refunds several weeks earlier.
• Fraud and errors from unregulated preparers. The majority of paid tax preparers are not required to meet any minimum educational, competency, or training standards. Consumers are at risk from preparers who make errors or commit fraud.
• A confusing landscape of financial products. Paid preparers offer and promote financial products that vary in their cost and usefulness. “No fee” refund anticipation loans (RALs) do not charge taxpayers a direct fee and may be tempting to taxpayers facing delayed refunds. But unscrupulous preparers could pad their fees to borrowers and some lenders might impose a hidden fee by charging more if borrowers later opt for another product, a refund anticipation check.

“Tax time is often a tough time for consumers,” noted Chi Chi Wu, staff attorney at the National Consumer Law Center, “Delays created by Congress, incompetent and abusive preparers, and financial products of varying cost will make it even more confusing and tricky.”

PATH Act Will Result in Tax Refund Delays

Many low-income taxpayers will face an unpleasant surprise — their refunds will be delayed due to a new law passed by Congress. The Protecting Americans from Tax Hikes (PATH) Act requires the IRS to delay refunds to taxpayers claiming the EITC or ACTC until at least February 15, 2017, and more likely until late February. The IRS must delay the entire refund – even the portion not associated with the EITC and ACTC – until that date.

The PATH Act mandated the tax refund delay in order to give the IRS more time to help detect and prevent fraud involving the EITC and ACTC. The IRS has cautioned that, while it will begin to release EITC/ACTC refunds starting February 15, these refunds likely won’t arrive in bank accounts or prepaid cards until the week of February 27 due to “several factors, including banking and financial systems needing time to process deposits.”

The tax refund delay will likely cause problems for many taxpayers who receive the EITC or ACTC. These taxpayers are low-income working taxpayers, the vast majority of whom have children. They often depend on receiving their refunds early in the tax season to help pay for groceries, holiday bills, overdue utility debt, or other pressing expenses.

Even though refunds may be delayed, taxpayers should still file as early as possible.  In addition to making sure the refund can be processed as soon as possible after February 15, early filing provides a cushion of time if a tax return has other issues, such as math errors.

Information on the PATH Act tax delay is available from the IRS. The Consumer Financial Protection Bureau has advice on dealing with financial issues arising from the delay.

Lack of Minimum Competency Standards

Lack of minimum standards for paid tax preparers continues to be a serious problem plaguing taxpayers. In all but four states (CA, MD, NY and OR), paid tax preparers are not required to meet any minimum educational, competency, or training standards. While some tax preparers are licensed as certified public accountants (CPAs) or credentialed by the IRS as enrolled agents, these certifications are not mandatory and most preparers do not have them. Indeed, the only tax preparers — apart from CPAs, attorneys and enrolled agents — required to pass a test are the unpaid volunteers at Volunteer Income Tax Assistance (VITA) and AARP Tax-Aide sites.

The lack of competency standards for paid tax preparers exposes consumers to potential errors or even fraud, as well as potentially costing federal and state governments tens of millions of dollars in lost tax revenue. Multiple rounds of mystery shopper tests of tax preparers have found high levels of errors, ranging from 25% to over 90%, and even instances of fraud.

“Minimum competency and training standards need to be adopted in the 46 states that don’t have them,” recommended Michael Best, senior policy advocate at the Consumer Federation of America, “Taxpayers deserve no less.”

“No Fee” RALs

With the PATH Act tax refund delay, “no fee” RALs may prove attractive to many consumers. These are loans that are secured by the taxpayer’s refund, but the lender does not charge the taxpayer a fee or finance charge. Instead, some lenders charge the preparer a fee. Many lenders and preparers call these products an “advance,” but they are actually a loan.

Advocates recommend that taxpayers avoid no fee RALs if possible. One risk is that some unscrupulous tax preparers might charge more in their tax preparation fees to “no fee” RAL borrowers. Also, last tax season lenders such as EPS and River City Bank appeared to actually impose a price for “no fee” RALs by charging a higher price for a refund anticipation check (RAC) if the preparer was offering these loans. (With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund monies. After the refund is deposited, the bank issues the consumer a check or prepaid card and closes the temporary account. RACs do not deliver refund monies any faster than the IRS can, yet cost $25 to $60.)

If a taxpayer is determined to get a “no fee” RAL, advocates advise that it is absolutely critical to choose a preparer very carefully. “Taxpayers seeking a no fee RAL have twice the reason to be cautious in selecting a preparer, both to avoid incompetent and fraudulent preparers and to prevent being charged hidden fees,” stated Wu.

Some of the questions a taxpayer should ask are:

• What kind of training do you have in tax preparation? Have you taken formal classes or a course in tax preparation?
• How long have you been preparing taxes?
• Do you have any credentials (attorney, CPA, enrolled agent or completing voluntary IRS certification)?
• How much will I be charged for tax preparation? Will I be charged more if I get a loan or an “advance’?
• Are there any other fees that I will be charged?

Taxpayers may wish to consider a credentialed preparer, such as a Certified Public Accountant, an enrolled agent, an attorney, or a preparer who has voluntarily completed the IRS Annual Filing Season Program. A directory of credentialed preparers is available on the IRS website. An infographic on Choosing Your Preparer Wisely is available from CFA.

A free or inexpensive alternative for low-income taxpayers is free tax preparation sites, including VITA sites (1-800-906-9887 or www.irs.gov) and AARP Tax-Aide sites: (www.aarp.org/findtaxhelp). Choosing a VITA or AARP Tax-Aide site saves eligible taxpayers the cost of a tax preparation fee. Many VITA sites can also help taxpayers open a bank account or get a low-cost prepaid card, which enables taxpayers to get refunds faster via direct deposit without paying a fee. Free tax preparation may be available on military bases as well.

If taxpayers experience problems with RALs or RACs, they can complain to the Consumer Financial Protection Bureau (CFPB), which tries to resolve consumer complaints and often is able to help. It also uses information from consumers to identify and improve bad practices.   Complaints about improper tax preparation practices by a paid tax preparer can be sent to the IRS or the taxpayer’s State attorney General’s Office.

Related Resources

Report: Minefield of Risks: Taxpayers Face Perils from Unregulated Preparers, Lack of Fee Disclosure, and Tax-Time Financial Products

Report: Public Views on Paid Tax Preparation: Strong Public Support for New Consumer Protections to Prevent Errors and Fraud, January 2016

Report: Prepared in Error: Mystery Shoppers in Florida and North Carolina Uncover Serious Tax Preparer Problems, April 2015

Report: Riddled Returns: How Errors and Fraud by Paid Tax Preparers Put Consumers at Risk and What States Can Do, March 2014

State Model Law to Ensure Competent Paid Tax Preparers

Submit a complaint to the CFPB here or call toll-free (855) 411-2372

Contact: 

National Consumer Law Center: Chi Chi Wu (cwu@nclc.org) or Jan Kruse (jkruse@nclc.org); 617.542.8010

Consumer Federation of America: Michael Best (mbest@consumerfed.org); 202.939.1009

Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has worked for consumer justice and economic security for low-income and other disadvantaged people, including older adults, in the U.S. through its expertise in policy analysis and advocacy, publications, litigation, expert witness services, and training. www.nclc.org

The Consumer Federation of America is an association of more than 250 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education.

The post Tax Time Troubles: Delays and Risks Await Many Taxpayers in 2017 appeared first on Consumer Federation of America.

The post CFA Encourages Senate Finance Committee to Support Consumer Protections for Taxpayers, Implement Paid Preparer Standards appeared first on Consumer Federation of America.

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Consumer Federation of America

“For many families their tax return is the largest financial transaction of the year and we want to provide some basic questions to ask when they choose who will do their taxes,” said Michael Best, Senior Policy Advocate at Consumer Federation of America.  “Consumers may not realize that most paid tax preparers are not required to meet any kind of training or competency standards or that they may qualify to have their taxes prepared for free by volunteers certified by the IRS.”

The Bell Policy Center

“Coloradans that we talked to want to be sure that their taxes are prepared accurately and professionally.  It is important that they use tax preparers who are properly trained and know what they’re doing.” – Rich Jones, Director of Policy and Research, The Bell Policy Center.

Center for Economic Progress

“As one of 46 states that does not regulate tax preparers, we are concerned that Illinois taxpayers face undue risks in determining whether their tax preparer is qualified to prepare their return.” – David Marzahl, President & CEO, Center for Economic Progress.

CFED

“Paid preparer regulations, like the training and certification process VITA programs use to achieve a 94% accuracy rate, is critical to ensuring that low and moderate income taxpayers are not at an elevated risk for unscrupulous and uncertified tax preparation services“ – Jeremie Greer, Vice President, Policy & Research, CFED.

Consumer Action

“Unqualified tax preparers can do more than cost you hundreds in excessive fees, they can also subject you to costly errors and even tax fraud,” said Linda Sherry, Consumer Action’s director of national priorities. “Savvy taxpayers can avoid being taken advantage of by understanding what, if any, regulations exist in their state and the resources available to research preparer credentials.”

Florida Alliance for Consumer Protection

“We advise all consumers to use caution in hiring a paid tax preparer and whenever possible to visit their local VITA or AARP tax sites.” – Alice Vickers, Director, Florida Alliance for Consumer Protection.

Michigan Economic Impact Coalition

“Choosing the right person to prepare and file your taxes is about more than just getting your refund back quickly. You want to make sure you find an honest and reputable tax professional who is credentialed and maintains a set of ethical standards; one who strives to prepare an accurate return, protect your personal information and educates on ways to improve your tax situation in future years. Protect yourself and choose wisely because just one unethically or incompetently prepared return can create a mess that will last for many years.” – Ross H. Yednock, program director of the Michigan Economic Impact Coalition

National Consumer Law Center

“Consumer groups have seen extremely disturbing levels of errors and fraud in the mystery shopper testing we’ve conducted,” stated Chi Chi Wu, staff attorney at the National Consumer Law Center, who co-authored four reports on this testing. “When you use a paid preparer, you’re placing your financial well-being in preparer’s hands.”

Reinvestment Partners

“Taxes affects almost all Americans and yet in most states the responsibility is still on the taxpayer to choose their preparer wisely. Tax returns prepared in error are bad for everyone from the individual taxpayer to state and federal government. The taxpayer is on the hook for the errors of the preparer, and the government could be taking a hit due to an improper return amount. We need a better system.” – Amelia O’Rourke-Owens, Staff Attorney, Reinvestment Partners

Contact: Consumer Federation of America, Michael Best, 202-939-1009, mbest@consumerfed.org

The Bell Policy Center, Rich Jones, 303-297-0456, ext. 224, jones@bellpolicy.org

Center for Economic Progress, David Marzahl, 312-217-2412, dmarzahl@economicprogress.org

CFED, Jeremie Greer (jgreer@cfed.org) or Kristin Lawton (klawton@cfed.org), 202-408-9788

Colorado Fiscal Institute, Ali Mickelson, 720-379-3019 ext. 222, mickelson@coloradofiscal.org

Consumer Action, Linda Sherry, 202-544-3088, linda.sherry@consumer-action.org

Florida Alliance for Consumer Protection, Alice Vickers, 850-556-3121, alicevickers@flacp.org

Georgia Watch, Elise Blasingame, 404-525-1085, eblasingame@georgiawatch.org

Maryland CASH Campaign, Robin Mckinney, 443-692-9422, robin@mdcash.org

Michigan Economic Impact Coalition, Ross Yednock, 517-485-3588, yednock@cedam.info

National Consumer Law Center, Chi Chi Wu (cwu@nclc.org) or Jan Kruse (jkruse@nclc.org), 617-542-8010

Neighborhood Housing Services of Greater Cleveland, David Rothstein, 440-668-7178, drothstein@nhscleveland.org

Reinvestment Partners, Amelia O’Rourke-Owens, 919-667-1000, amelia@reinvestmentpartners.org

_____________________________________________________________________________________

The Consumer Federation of America is an association of more than 250 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education. www.consumerfed.org

The Bell Policy Center is committed to making Colorado a state of opportunity for all. We seek to reinvigorate the debate on issues affecting the well-being of Coloradans and to promote policies that open gateways to opportunity.  www.bellpolicy.org

Founded in 1990, the Center for Economic Progress (CEP) helps low-income, working families as a trusted provider of tax and financial services. Everything we do, from direct service to informing public policy, improves the financial stability of those we serve. Operating one of the largest and oldest tax preparation programs in the country, CEP has been on the forefront of turning tax time into an opportunity for 300,000+ families to get ahead–returning more than $500 million in refunds to Illinois communities. For more information, visit www.economicprogress.org

As a leading source for research and ideas about household financial security and policy solutions, CFED understands what families need to succeed. We provide policymakers with research and ideas; we offer data, training and technical assistance to hundreds of nonprofits across the country; and we invest in social enterprises that create pathways to financial security and opportunity for millions of people. Established in 1979 as the Corporation for Enterprise Development, CFED works nationally and internationally through its offices in Washington, DC; Durham, North Carolina; and San Francisco, California. www.cfed.org

Through multilingual consumer education materials, community outreach and issue-focused advocacy, Consumer Action empowers underrepresented consumers nationwide to assert their rights in the marketplace and financially prosper. http://www.consumer-action.org/

Colorado Fiscal Institute is a nonprofit, nonpartisan organization tha provides credible, independent and accessible analyses of fiscal and economic issues facing Colorado in order to inform policy debates and foster greater economic prosperity for all.  www.coloradofiscal.org

Florida Alliance for Consumer Protection is a nonprofit, nonpartisan enterprise whose mission is to advance consumer protection and tenants rights through research, education and advocacy.  www.flacp.org

Founded in 2002, Georgia Watch is a statewide consumer advocacy organization working to empower and protect Georgia consumers on matters that impact their wallets and quality of life. Through education, advocacy and policy development, Georgia Watch focuses on safeguarding consumer protections in personal finance, as well as ensuring lower utility bills, cleaner energy, access to quality, affordable healthcare, protecting the right to trial by jury and promoting access to the courts.  www.georgiawatch.org 

The Maryland CASH (Creating Assets, Savings & Hope) Campaign  is a statewide network of organizations that promotes programs, products and policies to increase the financial security of low-to-moderate income individuals and families across Maryland, advocating on their behalf, as well as providing financial education programs such as the Maryland CASH Academy. www.mdcash.org

The Michigan Economic Impact Coalition unites individuals, organizations and local initiatives committed to supporting tax credit and asset building opportunities for Michigan families through improved access to free, quality, income tax preparation assistance.  www.meic.cedam.info/ 

Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has worked for consumer justice and economic security for low-income and other disadvantaged people, including older adults, in the U.S. through its expertise in policy analysis and advocacy, publications, litigation, expert witness services, and training. www.nclc.org

NHS of Greater Cleveland is a 40 year old housing and financial counseling group – providing programs and services to help families achieve, preserve, and sustain the American dream of homeownership. www.nhscleveland.org

Reinvestment Partners’ mission is to advocate for economic justice and opportunity. The agency is active in housing counseling and community development, and is a Volunteer Income Tax Assistance site that provides job development training and employment to workers providing free tax preparation service.  www.reinvestmentpartners.org

The post Choose Your Tax Preparer Wisely! appeared first on Consumer Federation of America.

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• Fraud and errors from unregulated preparers. The vast majority of paid tax preparers are not required to meet any minimum educational, competency, or training standards. Consumers are at risk from preparers who make errors or even commit fraud, exposing them to the possibility of audits by the Internal Revenue Service (IRS) or even criminal sanctions.

• Lack of price transparency and inability to comparison shop. Tax preparation is one of the few services that do not provide meaningful price information to consumers. Fees can be as high as $400 to $500, but preparers often refuse to provide firm price quotes ahead of time.

• Needless fees paid for financial products. Paid preparers offer and promote financial products that can be unnecessary and expensive, such as refund anticipation checks (RACs).

“There’s a minefield of dangers for the tens of millions of consumers who use paid tax preparers to fill out their most important financial document of the year,” said Chi Chi Wu, staff attorney at the National Consumer Law Center (NCLC). “The hazards range from losing a chunk of their refund for unnecessary financial products, to errors or even fraud committed by unregulated preparers.”

Consumer advocates are also seeing a new generation of refund anticipation loans (RALs) on the market. These RALs are different from the ones that were driven from the market several years ago in that they claim not to charge a fee for the loan. However, some of these products could pose other perils, such as the possibility that paid preparers will increase their tax prep fee to include the cost of the RAL.

Taxpayers at Risk from Incompetent and Abusive Paid Preparers

In all but four states (CA, MD, NY and OR), paid tax preparers are not required to meet any minimum educational, competency, or training standards. While some tax preparers are licensed as attorneys, certified public accountants (CPAs) or credentialed by the IRS as enrolled agents, these certifications are not mandatory and most preparers do not have them.  Indeed, the only tax preparers, apart from attorneys, CPAs and enrolled agents, required to pass a test are the unpaid volunteers at Volunteer Income Tax Assistance (VITA) and AARP Tax-Aide sites.

A recent national poll commissioned by the Consumer Federation of America reveals broad public support for government oversight of tax preparers. The poll found that more than 4 out of 5 respondents believe that paid tax preparers should be required to pass a competency test, be licensed by the state, and provide a clear, upfront list of fees before completing a taxpayer’s return. In particular, the poll found that:

• 80% of the public supports requiring paid tax preparers to pass a test administered by the government that would ensure that paid preparers have the knowledge and training to complete taxpayer returns correctly.
• 56% believe paid preparers should have special training but don’t need a degree and 31% of the public believes that paid tax preparers should have a college degree in accounting.
• 83% of the public supports licensing requirements for paid preparers by a state agency that would also accept and resolve complaints, and enforce consumer protections.

The complete results of the poll are available at:  http://bit.ly/1PpGALd

“This new national poll shows that taxpayers want the protection and peace of mind that their preparer is competent and held accountable,” said Michael Best, senior policy advocate at the Consumer Federation of America. “State legislatures and Congress have the authority to implement common sense protections for taxpayers, who have expressed strong support for such protections.”

The lack of competency standards for paid preparers exposes consumers to potential error or even fraud, as well as potentially costing federal and state governments tens of millions of dollars in lost tax revenue. Multiple rounds of mystery shopper tests of tax preparers have found high levels of errors, and even instances of fraud by tax preparers.

In 2015, mystery shopper testing by consumer advocacy groups in Florida and North Carolina found inaccuracies in 27 out of the 29 tax returns prepared by paid tax preparers. One group of testers posed as a single parent who was not entitled to claim her minor child because the child lived with the other parent for more than 50% of the time. Yet 8 of the 15 preparers claimed the child, resulting in an improper Earned Income Tax Credit (EITC) of $2,523.  Another set of testers posed as graduate students with a paid internship for which s/he was given a 1099. Ten of the 14 preparers did not properly use a Schedule C to report the internship income, resulting in the omission of nearly $1,300 in self-employment tax.  And 3 of the 4 preparers who did properly use a Schedule C took questionable deductions, including one preparer who made up $9,562 in fictitious businesses expenses.

In 2014, the U.S. Government Accountability Office (GAO) sent undercover investigators to 19 randomly selected tax preparer offices. Only two of the 19, or 11 percent, of the returns had the correct refund amount. Other rounds of mystery shopper testing are summarized in a March 2014 report by NCLC, with the percentages of problematic tests in these other testing programs ranging from 25 percent to 90 percent. NCLC has developed a Model Individual Tax Preparer Regulation Act for states to consider in regulating tax preparers.

 Tax Preparation Fees Are High and Opaque

Tax preparation fees are often high, and almost always non-transparent, making it nearly impossible for consumers to comparison shop.  Tax preparers can charge up to $500 or more in fees, yet many will claim they cannot give a price quote or will give inaccurate estimates.

Mystery shopper testing conducted last year by consumer groups revealed wildly differing fees for each of the two testing scenarios. Fees ranged from $37 to $427 for the single parent scenario, and $50 to $341 for the graduate student scenario. Furthermore, fees were generally higher for the single parent tester when the preparer improperly claimed the daughter. The GAO testing in 2014 similarly found widely varying fees, even between offices affiliated with the same chain: between $160 to $408 for one testing scenario and $300 to $587 in the other.

“The lack of transparency and disclosure in tax preparation fees is appalling,” stated National Consumer Law Center staff attorney Chi Chi Wu. “Without adequate price information, it’s a complete failure of the competitive market.”

The CFA poll, previously discussed above, found overwhelming public support for requiring paid preparers to disclose their fees: 89% of respondents support requiring paid preparers to supply an upfront list of fees. The NCLC Model Individual Tax Preparer Regulation Act includes a provision that would require paid preparers to provide a standardized disclosure of their fees in the form of a table.

“It is not surprising that the public overwhelmingly supports requiring upfront pricing from paid preparers—households need every penny of their refunds and should be able to comparison shop paid preparers for the best value just like they can for other services,” said CFA senior policy advocate Michael Best.

 Two free alternatives for low-income taxpayers are Volunteer Income Tax Assistance (VITA) sites (1-800-906-9887 or www.irs.gov) and AARP Tax-Aide sites: (www.aarp.org/findtaxhelp).  Choosing a VITA or AARP Tax-Aide site saves eligible taxpayers the cost of a tax preparation fee. Many VITA sites can also help taxpayers open a bank account or get a low-cost prepaid card, which enables taxpayers to get fast refunds without paying a fee.  Free tax preparation may be available on military bases as well.

There are also a number of websites that allow low- and middle-income taxpayers to prepare and file their taxes online for free, such as the IRS Free File program (www.irs.gov).

 Tax-Time Financial Products Evolve

In the past, millions of taxpayers lost a significant chunk of their refunds to high-cost, high-risk refund anticipation loans (RALs) made by banks. While these bank RALs are no longer being made, other tax-time financial products can drain the refunds of taxpayers or otherwise put them at risk.

• Refund anticipation checks (RACs) – RACs are a financial product used to deliver tax refunds and to pay for tax preparation fees by deducting them from the refund. Preparers charge a fee for these RACs of $25 to $60, instead of setting up direct deposit for free.
• RALs from non-bank lenders – Payday and other non-bank lenders are offering RALs. These loans could be more expensive and riskier than bank RALs.
• “No–fee” RALs – Some lenders are offering RALs that do not impose a charge directly on the consumer, though there is concern that some preparers may pass the cost of the loans onto the taxpayer through an increased tax preparation fee or junk fees.

RACs

With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund monies.  After the refund is deposited, the bank issues the consumer a check or prepaid card and closes the temporary account.  RACs do not deliver refund monies any faster than the IRS can, yet they cost $25 to $60. Some preparers charge additional “add-on” junk fees for RACs, fees that can range from $25 to several hundred dollars.

RACs are the major tax-time financial product on the market.  There were an estimated 21.6 million taxpayers who received a RAC in 2014.

Since the main purpose of a RAC is to defer payment of the tax preparation until the refund arrives, it can be viewed as a high-cost loan of that fee.  If a taxpayer pays $35 to defer payment of a $350 tax preparation fee for 3 weeks, the annual percentage rate (APR) is 174%.

 Non-bank and “No-Fee” RALs

After banks exited the RAL market in 2012, non-bank lenders, such as payday lenders, started to make RALs. These RALs are not nearly as widespread as bank RALs once were.  In 2014, only 35,000 consumers applied for a non-bank RAL, according to IRS data. In comparison, about 12.7 million consumers obtained a RAL at the height of the industry in 2002.

Non-bank RALs could be more costly or riskier than the ones made by banks. For example, in 2015, the Consumer Financial Protection Bureau (CFPB) took enforcement action against a non-bank RAL lender, Southwest (S/W) Tax Loans, that targeted Native American taxpayers. The CFPB alleged that the RALs had Annual Percentage Rates (APRs) of over 240%, but that S/W Tax Loans fraudulently disclosed lower APRs. In addition, when customers asked about the status of their refunds, they were deceptively persuaded to take out a second or third RAL even though the IRS had already sent their refunds.

One of the largest non-bank RAL lenders is 1^st Money Center. Previously, 1^st Money Center offered RALs through Liberty Tax Service and software providers such as Drake Software, for which it charged fees translating into APRs as high as 218%. This year, 1^st Money Center is offering “advances” that do not impose a charge on the consumer for the loan.  In addition, 1^st Money Center states it has exited the payday loan business.

1^st Money Center is offering “no-fee” RALs of up to $750 through a number of entities, such as Jackson Hewitt and Liberty Tax. In addition, 1^st Money Center is the official lender for the “Prefund” no-fee RAL offered by Santa Barbara Tax Products Group (SBTPG), which was purchased in 2014 by prepaid card provider Green Dot.

Another lender that is making “no-fee” RALs is Republic Bank & Trust. Republic was the last bank to stop making high-cost RALs in 2012, and it appears that the bank is back in the business of tax refund lending.

Even though these “no-fee” RALs do not impose a fee directly on the consumer, this new generation of tax-time loans could present risks for consumers. The lenders charge the tax preparers a fee of $35 to $45 for these RALs. Preparers might pass along these fees, or charge even more, by padding their tax preparation fees or by charging separate “add-on” junk fees. Since few consumers get a firm price estimate before having their refund prepared, these hidden fees can be hard to avoid. SBTPG has stated that it prohibits preparers from charging higher tax preparation fees to Prefund customers and that it will audit preparers to enforce that rule. In addition, consumers apply for Prefund RALs directly with SBTPG, so the preparer does not know which customers are approved for the loan.  However, tax preparers who use RALs offered through other channels might pass along the RAL fee.

Previously, one risk of RALs was that, if the refund is miscalculated or seized by the government to repay a student loan or another debt, the consumer could be liable for repaying the loan. However, SBTPG has stated that its no-fee RALs is a non-recourse loan, i.e., the consumer is not required to repay the loan if the refund is not received.  According to the blog BankTalk, Republic Bank’s loan is non-recourse as well. However, it is unclear whether other “no-fee” RALs are non-recourse.

 Upcoming Report Available in March 2016

NCLC and CFA will publish its annual comprehensive report on the tax preparation industry and tax-time financial products in March 2016. The report will be available on NCLC’s website at www.nclc.org and on CFA’s website at www.consumerfed.org.

Related Materials

NCLC:

NCLC Report: Prepared in Error (April 2015) is available at: http://www.nclc.org/issues/prepared-in-error.html

NCLC Report: Riddled Returns (March 2014) is available at: http://www.nclc.org/issues/riddled-returns.html.

NCLC’s Model Individual Tax Preparer Regulation Act (November 2013), is available at: http://www.nclc.org/images/pdf/high_cost_small_loans/model-individual-tax-preparer-reg-act.pdf.

NCLC has worked for over a decade on the issue of tax-time financial products, particularly refund anticipation loans (RALs). NCLC’s annual RAL reports and other materials are available at www.nclc.org/issues/refund-anticipation-loans.html.

CFA:

CFA Report: Public Views on Paid Tax Preparation: Strong Public Support for New Consumer Protections to Prevent Errors and Fraud (January 2016) is available at: http://bit.ly/1PpGALd

CFA Report: Protecting Consumers at Tax Time: Federal and State Efforts to Address Common Problems Associated with Paid Tax Preparation (January 2015) is available at: http://bit.ly/1He2Cm5

Contacts: NCLC: Chi Chi Wu (cwu@nclc.org) or Jan Kruse (jkruse@nclc.org), 617-542-8010; CFA: Michael Best (mbest@consumerfed.org), 202-939-1009

Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has worked for consumer justice and economic security for low-income and other disadvantaged people, including older adults, in the U.S. through its expertise in policy analysis and advocacy, publications, litigation, expert witness services, and training. www.nclc.org

The Consumer Federation of America is an association of more than 250 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education. www.consumerfed.org

The post A Minefield of Risks for Taxpayers appeared first on Consumer Federation of America.

Michael highlights the poll results, discusses the current state of regulation, the high instance of consumer use, the documented problems with paid preparers, and how consumers can find a credentialed preparer on Consumer Talk with Michael Finney on KGO 810 and Money Life with Chuck Jaffe.

Consumer Talk (starts at 18:10 min. mark)

Money Life

The post On the Radio: Michael Best Discusses New National Poll Showing Strong Public Support for Regulating Paid Tax Preparers appeared first on Consumer Federation of America.

The poll found that more than 4 out of 5 respondents believe that paid tax preparers should be required to pass a competency test, be licensed by the state and provide a clear, upfront list of fees before completing a taxpayer’s return.

“Errors on tax forms put consumers at risk of fines and lost tax refunds yet few states have taken action to ensure that paid tax preparers are licensed and, trained and disclose what are often high and unpredictable fees” said Tom Feltner, Director of Financial Services at the Consumer Federation of America.

The complete results of the poll are available here.

The poll was commissioned by Consumer Federation of America in response to concerns about frequent errors and fraud by paid tax preparers that are used by millions of Americans.

Multiple rounds of mystery shopper tests of tax preparers found instances of incompetence and even fraud, with 24 percent of the tax returns prepared as part of a 2008 test, 44 percent of returns in a 2011 test, and 93 percent of returns in a 2015 test presenting problems.[i]  In 2014, the Government Accountability Office (GAO) sent undercover investigators to 19 randomly selected tax preparer offices.  Only two of the 19, or 11 percent, of the returns had the correct refund amount.

Forty-nine percent of poll respondents used a tax preparation company in the past five years.  The GAO estimates that approximately 56 percent of 145 million individual tax returns (81 million) and 59 percent of returns claiming the Earned Income Tax Credit (EITC) were completed by a paid preparer in 2011.[ii]  A training requirement, discussed in the poll results below, makes particular sense for those who prepare tax returns for lower income consumers who rely on the EITC, as they can be severely impacted by an incompetent paid preparer.  A consumer can lose the credit for ten years if it was claimed but the consumer is later found to be ineligible.[iii]

The poll found that:

• 80 percent of the public supports requiring paid tax preparers to pass a test administered by government that would ensure that paid preparers have the knowledge and training to complete taxpayer returns correctly.
• 56 percent believe paid preparers should have special training, although not necessarily a degree.
• 89 percent of respondents support requiring paid preparers to supply an upfront list of fees as tax preparation is a rare industry where prices are often not given up front before the work is done.[iv]
•  83 percent of the public supports licensing requirements for paid preparers by a state agency that would also accept and resolve complaints, and enforce consumer protections.

Despite the high instance of taxpayer use and problems with paid preparers only four states (California, Maryland, New York and Oregon[v]) have mandatory standards for paid tax preparers who are not already credentialed as enrolled agents, attorneys, or Certified Public Accountants.

While a 2014 court decision stripped the IRS of its ability to protect consumers without action from Congress, state legislatures have the ability to take action to protect consumers from errors that put their tax returns at risk.

“State legislatures have the authority to implement common sense protections for taxpayers.  This new national poll shows that taxpayers want the protection and peace of mind that their preparer is held accountable and is upfront about the fees that they charge,” said Michael Best, Senior Policy Advocate at the Consumer Federation of America.

Consumer and Community Groups React to Results

CFA works with a coalition of national and state groups to promote consumer protections designed to prevent errors and fraud during the tax preparation process.  Below are reactions to CFA’s national poll results from some of our coalition members.

“Consumer groups have seen extremely disturbing levels of errors and fraud in the mystery shopper testing we’ve conducted,” stated Chi Chi Wu, staff attorney at the National Consumer Law Center, who co-authored four reports on this testing. “A tax return may be the most important financial document for an American consumer during the year, and consumers who use paid preparers are placing their financial well-being in preparer’s hands. It’s no wonder consumers want preparers to have a minimum level of competence.”

“With budget cuts at the Internal Revenue Service that limit customer service, more and more people will need to consult a paid tax preparer to get help with their taxes,” said Linda Sherry, National Priorities Director for Consumer Action. “The thought that consumers pay good money for bad advice is appalling. New consumer protections must be adopted to prevent errors and fraud and ensure that taxpayers can rely on the advice they are paying for.”

“The erosion of trust in our tax system is a symptom of how confused taxpayers are about the tax code and how it impacts them” said David Marzahl, CEO of the Center for Economic Progress in Chicago. “The survey results make clear that taxpayers need to have greater trust in those who prepare their returns and their desire for stronger consumer protections.”

“Mystery shopper testing in Florida in 2015 showed a high rate of incompetence, at best, possible fraud, in the preparation of taxes by unregulated paid tax preparers. The poll results reveal that consumers are eager for this incompetence and abuse by paid tax preparers to end through some form of state guidelines for paid tax preparers. The Florida legislature should act.”

“Of course the public supports tax preparer regulation: participation in taxes is almost universally required and errors can cost tax-payers thousands of dollars,” said Amelia O’Rourke-Owens, Staff Attorney at North Carolina-based Reinvestment Partners, “It’s high time for state legislators to recognize what the public already knows and regulate paid preparers.”

“You wouldn’t give your Social Security number to your stylist or your bank account information to a hot dog vendor,” said Ali Mickelson, director of tax and legislative policy for the Colorado Fiscal Institute. “Yet these people are more regulated than tax preparers entrusted with your most sensitive financial information.”

“The polling findings ring true based on what people tell us.  Coloradans want to be sure that their taxes are prepared accurately and professionally, by people that know what they’re doing.  Plus they want to know how much it will cost them up front, not after the fact.”  Said Rich Jones, Director of policy and research at the Bell Policy Center.

“These results emphasize the inability of consumers to shop around yet a strong desire by tax filers to have upfront pricing,” said David Rothstein. “Given that this is the most important financial transaction of the year, it is imperative that consumers have an understanding and knowledge of the costs. It’s time to mandate a price disclosure box for paid tax preparation.”

Contacts:

Consumer Federation of America, Michael Best, 202-939-1009, mbest@consumerfed.org

Bell Policy Center, Rich Jones, 303-297-0456, jones@bellpolicy.org

Center for Economic Progress, David Marzahl, 312-630-0250, dmarzahl@economicprogress.org

Colorado Fiscal Institute, Ali Mickelson, 720-379-3019 ext. 222, mickelson@coloradofiscal.org

Consumer Action, Linda Sherry, 202-544-3088, linda.sherry@consumer-action.org

Florida Alliance for Consumer Protection, Alice Vickers, 850-556-3121, alicevickers@flacp.org

Georgia Watch, Elise Blasingame, 404-525-1085, eblasingame@georgiawatch.org

National Consumer Law Center, Chi Chi Wu (cwu@nclc.org) or Jan Kruse (jkruse@nclc.org), 617-542-8010

Neighborhood Housing Services of Greater Cleveland, David Rothstein, 440-668-7178, drothstein@nhscleveland.org

Reinvestment Partners, Amelia O’Rourke-Owens, 919-667-1000, amelia@reinvestmentpartners.org

_____________________________________________________________________________________________

The Consumer Federation of America is an association of more than 250 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education. www.consumerfed.org

The Bell Policy Center is committed to making Colorado a state of opportunity for all. We seek to reinvigorate the debate on issues affecting the well-being of Coloradans and to promote policies that open gateways to opportunity.  www.bellpolicy.org

Founded in 1990, the Center for Economic Progress (CEP) helps low-income, working families as a trusted provider of tax and financial services. Everything we do, from direct service to informing public policy, improves the financial stability of those we serve. Operating one of the largest and oldest tax preparation programs in the country, CEP has been on the forefront of turning tax time into an opportunity for 300,000+ families to get ahead–returning more than $500 million in refunds to Illinois communities. For more information, visit www.economicprogress.org

Colorado Fiscal Institute is a nonprofit, nonpartisan organization that provides credible, independent and accessible analyses of fiscal and economic issues facing Colorado in order to inform policy debates and foster greater economic prosperity for all.  www.coloradofiscal.org

Through multilingual consumer education materials, community outreach and issue-focused advocacy, Consumer Action empowers underrepresented consumers nationwide to assert their rights in the marketplace and financially prosper. http://www.consumer-action.org/

Florida Alliance for Consumer Protection is a nonprofit, nonpartisan enterprise whose mission is to advance consumer protection and tenants rights through research, education and advocacy.  www.flacp.org

Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has worked for consumer justice and economic security for low-income and other disadvantaged people, including older adults, in the U.S. through its expertise in policy analysis and advocacy, publications, litigation, expert witness services, and training. www.nclc.org

NHS of Greater Cleveland is a 40 year old housing and financial counseling group – providing programs and services to help families achieve, preserve, and sustain the American dream of homeownership. www.nhscleveland.org

Reinvestment Partners’ mission is to advocate for economic justice and opportunity. The agency is active in housing counseling and community development, and is a Volunteer Income Tax Assistance site that provides job development training and employment to workers providing free tax preparation service.  www.reinvestmentpartners.org

[i] See Chi Chi Wu, Prepared in Error Mystery Shoppers in Florida and North Carolina Uncover Serious Tax Preparer Problems, national Consumer Law Center, April 2015.  http://www.nclc.org/images/pdf/pr-reports/report-prepared-in-error.pdf

[ii] Statement of James R. McTigue, Paid Tax Return Preparers, GAO, April 8, 2014.

http://www.finance.senate.gov/imo/media/doc/GAO%20Testimony%20(McTigue).pdf

[iii] Chi Chi Wu, Riddled Returns, NCLC, Updated March 2014.  http://www.nclc.org/issues/riddled-returns.html

[iv] Chi Chi Wu, Prepared in Error Mystery Shoppers in Florida and North Carolina Uncover Serious Tax Preparer Problems, national Consumer Law Center, Pg. 2, April 2015.  http://www.nclc.org/images/pdf/pr-reports/report-prepared-in-error.pdf

[v] Oregon does not exempt enrolled agents but has less stringent requirements for them to be become a Tax Consultant.  http://www.oregon.gov/obtp/pages/becoming_licensed.aspx

The post New National Poll Indicates Strong Support for Reform of Paid Tax Preparer Industry appeared first on Consumer Federation of America.

The post Public Views on Paid Tax Preparation appeared first on Consumer Federation of America.

Tests latest in a series showing a need for better regulation of paid preparers

WASHINGTON, D.C. (April 15, 2015)—As the deadline for filing 2014 taxes looms, and consumers turn to paid tax preparers, a coalition of consumer and community organizations and advocates is calling attention to a recent report, Prepared in Error: Mystery Shoppers in Florida and North Carolina Uncover Serious Tax Preparer Problems, which details problems found with 27 of 29, or 93 percent, of “mystery shopper” tests.

The report, released by National Consumer Law Center (NCLC), Florida Alliance for Consumer Protection (FLACP), and Reinvestment Partners, analyzes 29 “mystery shopper” tests conducted by FLACP and Reinvestment Partners in Florida and North Carolina respectively.

In one testing scenario, which included a hypothetical single parent, 8 of the 15 preparers, or 53 percent, had the tester claim a minor child incorrectly, and 12 of the 15 preparers, or 80 percent, did not report the $800 in side income the scenario presented.  In another scenario, where the tester was a hypothetical graduate student, 10 out of 14, or 71 percent, of preparers did not correctly use the schedule to report income from a paid internship.  Of the four preparers in the graduate-student scenario that did use the correct schedule, three of those preparers took “questionable” deductions.

“This report shows that in absence of any regulation or enforceable uniform standard for paid preparers to follow, a consumer will never truly be able to know what they are getting when they go to have their taxes prepared,” said Ross Yednock, program director of the Michigan Economic Impact Coalition. “As a result, disreputable tax preparers tarnish the industry as a whole, consumers are vulnerable to fraud and abuse and taxpayers are ultimately left to pick up the tab when fraud and mistakes cost federal and state treasuries revenue.”

“Our testing uncovered a very high level of errors, which was extremely disturbing,” stated Chi Chi Wu, staff attorney at the National Consumer Law Center.  “A tax return may be the most important financial document for an American consumer during the year, and consumers who use paid preparers are placing their financial well-being in the preparers’ hands.”

“Taxpayers with incorrectly prepared returns can face harsh penalties,” according to Alice Vickers, executive director of the Florida Alliance for Consumer Protection. “This report shows the urgent need for states to take the lead in establishing minimum standards for preparers.”

Elise Blasingame, director of community education for the consumer advocacy organization Georgia Watch, noted that “though the report highlights error and abuse in Florida and North Carolina, we hear of the same issues in Georgia from our consumers and community partners every day. Consumers should feel confident that tax preparers in their state have a standard level of competency and professionalism that is painfully absent in states without preparer regulation. We are infinitely grateful to the advocacy groups who are highlighting this important issue.”

George Awuor, policy analyst at the Bell Policy Center in Colorado, also underlined that the problem with paid preparers is not limited to the states where mystery shopper tests were most recently conducted.  “The 2015 tax season is coming to an end, and Colorado taxpayers have once again had to depend on unregulated tax preparers. The lack of minimum standards for tax preparers’ education, training or competency results in fraud and abuse, as confirmed by the recent NCLC report. This is unacceptable — for consumers and for the U.S. Treasury. We at the Bell believe that regulation of tax preparers is an urgent need.”

“Minimum standards for tax preparers are needed to build trust that tax filings are honest and accurate,” said Peter Skillern, executive director at Reinvestment Partners.

Michael Best, policy advocate at Consumer Federation of America, echoes the concerns of coalition members.  “This is the latest in a long line of research which shows the need for reform at the state and federal level.”

Beyond problems with the prepared returns themselves, the report also noted that the cost of preparation varied widely from $37 to $427 for the single-mother scenario and from $50 to $341 for the graduate-student scenario.

According to David Rothstein, director of resource development and public affairs at Neighborhood Housing Services of Greater Cleveland, and coauthor of a recent white paper, Improving the Tax preparation Experience, which recommends that preparers be required to disclose their fees in a “Schumer Box,” “this report shows the growing lack of transparency and disclosure in paid tax preparation. A disclosure box is critical for families to understand what they are paying for. Otherwise, families will continue to pay high fees for preparation and finance those through additionally costly products – which squashes the impact of important tax credits like the Earned Income Tax Credit.”

Also, for some taxpayers (those making $53,000 or less, with disabilities, the elderly, taxpayers with limited English and taxpayers 60 years or older) another option besides unregulated tax preparers are free tax preparation services offered by IRS-certified volunteers.

“The problems raised in this report are exactly why the 96,000 IRS trained volunteer tax preparers in the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs are essential. Increasing funding to these volunteer programs is a great way to provide American taxpayers with much-needed high quality assistance” noted J.C. Craig, director of the Taxpayer Opportunity Network.

Contact:

Consumer Federation of America, Michael Best, 202-939-1009, mbest@consumerfed.org

CFED, JC Craig, 202-408-9788, jccraig@cfed.org

Bell Policy Center, George Awuor, 303-297-0456, awuor@bellpolicy.org

Florida Alliance for Consumer Protection, Alice Vickers, 850-556-3121, alicevickers@flacp.org

Georgia Watch, Elise Blasingame, 404-525-1085, eblasingame@georgiawatch.org

Michigan Economic Impact Coalition, Ross Yednock, 517-485-3588, yednock@cedam.info

National Consumer Law Center, Chi Chi Wu (cwu@nclc.org) or Jan Kruse (jkruse@nclc.org), 617.542.8010

Neighborhood Housing Services of Greater Cleveland, David Rothstein, 440-668-7178, drothstein@nhscleveland.org

Reinvestment Partners, Peter Skillern, 919-667-1000, Peter@Reinvestmentpartners.org

The Consumer Federation of America is an association of more than 250 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education. www.consumerfed.org

The Bell Policy Center is a non-partisan, non-profit research and advocacy organization founded on progressive values and dedicated to making Colorado a state of opportunity for all. With expert policy research and analysis, we advocate for policies that help children grow up strong, young people prepare for good jobs and working families save for the future. www.bellpolicy.org

As a leading source for research and ideas about household financial security and policy solutions, CFED understands what families need to succeed. We provide policymakers with research and ideas; we offer data, training and technical assistance to hundreds of nonprofits across the country; and we invest in social enterprises that create pathways to financial security and opportunity for millions of people. Established in 1979 as the Corporation for Enterprise Development, CFED works nationally and internationally through its offices in Washington, DC; Durham, North Carolina; and San Francisco, California. www.cfed.org

Florida Alliance for Consumer Protection is a nonprofit, nonpartisan enterprise whose mission is to advance consumer protection and tenants rights through research, education and advocacy. www.flacp.org

Founded in 2002, Georgia Watch is a statewide consumer advocacy organization working to empower and protect Georgia consumers on matters that impact their wallets and quality of life. Through education, advocacy and policy development, Georgia Watch focuses on safeguarding consumer protections in personal finance, as well as ensuring lower utility bills, cleaner energy, access to quality, affordable healthcare, protecting the right to trial by jury and promoting access to the courts. www.georgiawatch.org

The Michigan Economic Impact Coalition unites individuals, organizations and local initiatives committed to supporting tax credit and asset building opportunities for Michigan families through improved access to free, quality, income tax preparation assistance. www.meic.cedam.info/

Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has worked for consumer justice and economic security for low-income and other disadvantaged people, including older adults, in the U.S. through its expertise in policy analysis and advocacy, publications, litigation, expert witness services, and training. www.nclc.org

NHS of Greater Cleveland is a 40 year old housing and financial counseling group – providing programs and services to help families achieve, preserve, and sustain the American dream of homeownership. www.nhscleveland.org

Reinvestment Partners’ mission is to advocate for economic justice and opportunity. The agency is active in housing counseling and community development, and is a Volunteer Income Tax Assistance site that provides job development training and employment to workers providing free tax preparation service. www.reinvestmentpartners.org

The post “Mystery Shopper” Tests Show Problem with over 90 Percent of Tax Returns Filed by Paid Preparers appeared first on Consumer Federation of America.

Consumer Advocates Warn of Risks from Incompetent and Unscrupulous Tax Preparers

Download the full report: http://bit.ly/17YkUHK

(BOSTON, March 9, 2015 ) As the tax season goes into full swing, advocates from the National Consumer Law Center and Consumer Federation of America have issued their annual report on tax-time consumer issues: Taxpayer Beware: Unregulated Tax Preparers and Tax-Time Financial Products Put Taxpayers at Risk.

The biggest problem cited by the report is the lack of regulation for paid tax preparers. “Tens of millions of consumers will use paid tax preparers to fill out their most important financial document of the year, yet most of these preparers are not subject to any minimum educational, training, or competency standards,” said Chi Chi Wu, staff attorney at the National Consumer Law Center (NCLC).

Because of this lack of minimum standards, consumers are at risk from incompetent preparers or preparers who commit fraud. Consumers who select incompetent or unscrupulous preparers could face audits by the Internal Revenue Service (IRS) or even criminal sanctions. Incompetence and fraud also could be costing federal and state governments tens of millions of dollars in lost tax revenue. Another risk is unscrupulous tax preparers who redirect taxpayers’ refund to a prepaid card under the preparers’ control.

Other problems faced by taxpayers using paid preparers are:

• Needless fees paid for financial products. Paid preparers offer and promote financial products that can be unnecessary and expensive, such as refund anticipation checks (RACs). In addition to the $25 to $60 fee charged by the banks that offer the RACs, preparers sometimes also charge their own “add-on” fees for these financial products.

• Inability to comparison shop for tax preparation fees. Paid preparers often either decline to give price quotes for preparation services or give widely inaccurate estimates.

Taxpayers at Risk from Incompetent and Abusive Paid Preparers

In the vast majority of states, paid tax preparers are not required to meet any minimum educational, competency, or training standards. While some tax preparers are licensed as certified public accountants (CPAs) or credentialed by the IRS as enrolled agents, these certifications are not mandatory and most preparers do not have them. Indeed, the only tax preparers, apart from CPAs and enrolled agents, required to pass a test are the unpaid volunteers at Volunteer Income Tax Assistance (VITA) and AARP Tax-Aide sites. “With the 2014 court decision striking down the IRS rules requiring preparers to pass an exam and complete continuing education requirements, states need to develop minimum competency and educational requirements,” noted Michael Best, policy advocate at the Consumer Federation of America. “Four states regulate tax preparers,[1] and we need to work to expand that number so that taxpayers are protected from fraud and abuse.”

This lack of regulation has allowed incompetence and abuses by tax preparers to flourish. An April 2014 study from the Government Accountability Office (GAO) found disturbingly high levels of errors. The GAO sent undercover investigators to 19 paid preparer offices. Only 2 of the 19 preparers (11 percent) produced returns with the correct refund amount. The mistakes in the returns ranged from giving taxpayers $52 less to $3,718 more of a refund than they were entitled to receive. Some of the errors bordered on fraud, although the GAO did not characterize them as such. For example, the GAO report described how:

Two paid preparers demonstrated what the refund amount would be if the side income were reported compared to if it were not reported. Both preparers did not record the side income.

In response to the investigator mentioning her unreported cash tip income, one paid preparer told her that tips not included on the Form W-2 do not need to be reported.

A report issued in March 2014 by NCLC summarized other mystery shopper testing studies conducted by consumer groups, advocacy organizations, and others, which found similar results. The percentages of problematic tests in those studies ranged from 25 percent to 90 percent. The NCLC report calls on states to regulate tax preparers and includes a Model Individual Tax Preparer Regulation Act for states to consider.

Refund Anticipation Checks and Non-Bank Refund Anticipation Loans

One problem that millions of taxpayers no longer face is high-cost, high-risk refund anticipation loans (RALs), which are no longer available from banks on a large scale, nationwide basis. However, taxpayers are still at risk of needless fees from tax-time refund products, such as:

• Refund anticipation checks (RACs) – RACs are a financial product used to deliver refunds and to pay for tax preparation fees by deducting them from the consumer’s tax refund.
• RALs from non-bank lenders – A few payday and other non-bank lenders are offering RALs. These loans could be more expensive and riskier than bank RALs.

RACs

With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund monies. After the refund is deposited, the bank issues the consumer a check or prepaid card and closes the temporary account. RACs do not deliver refund monies any faster than the IRS can, yet cost $25 to $60, plus some banks charge another $10 to $13 for a RAC of the state tax refund. Some preparers charge additional “add-on” junk fees, which can range from $25 to several hundred dollars. The report finds that the cost of RACs has increased in recent years, and their pricing structures present the possibility of abuse.

Many consumers who previously took out RALs may have now shifted to RACs. There were an estimated 21 million taxpayers who received a RAC in 2013, and 21.6 million in 2014, nearly 9 million more than the 12.9 million consumers who received a RAC five years earlier in 2009.

Since the main purpose of a RAC is to defer payment of the tax preparation until the refund arrives, it can be viewed as a high-cost loan of that fee. If a taxpayer pays $35 to defer payment of a $350 tax preparation fee for 3 weeks, the annual percentage rate (APR) is 174%.

Nonbank RALs

With the end of RALs made by banks, non-bank lenders have stepped into the fray. This year, Jackson Hewitt has partnered with First Money Center to offer a $200 “advance” to its customers. Jackson Hewitt claims the loan is interest-free and has no fees. First Money Center also appears to be offering RALs through Drake Software to other tax preparers, with annual percentage rates of up to 218%.

RALs made by nonbank lenders are not nearly as widespread as bank RALs once were. In 2014, a mere 34,000 consumers applied for a non-bank RAL. In 2013 – the first year in which only nonbank lenders made RALs – only 100,000 consumers applied for the loans. In comparison, about 12.7 million consumers obtained a RAL at the height of the industry in 2002.

One reason that non-bank RALs are not as widespread is that, unlike banks, nonbank lenders are covered by state laws that cap interest rates, i.e., usury laws. Tax-time loans from payday lenders and other storefront outlets that offer to prepare taxes and make loans may be subject to state loan laws, usury caps, or loan broker requirements in states that have them. A number of states have laws that prohibit extremely high rate lending. Also, nonbank lenders may not have the funding necessary to make RALs on a broad scale. In order to make even the 100,000 RALs in 2013, nonbank lenders needed access to $50 million in capital (assuming loans of $500).

Tax Preparation Fees Are High and Opaque

Tax preparation fees are often high, and almost always non-transparent, making it nearly impossible for consumers to comparison shop. Tax preparers can charge up to $500 or more in fees, yet many will claim they cannot give a price quote or will give inaccurate estimates. The GAO’s 2014 report found that the fees charged for tax preparation varied widely, even between offices affiliated with the same chain. In one testing scenario, fees ranged from $160 to $408; in the other testing scenario, fees ranged from $300 to $587. The GAO report also noted:

Paid preparers provided various reasons for the amount of the tax preparation fee, including, (1) the EITC form is the most expensive form to file, (2) the pricing and fees are at their peak from mid-January through February and then go down, and (3) there is a price difference depending if the tax return is completed in the morning or the evening.

“Tax preparation is one of the few businesses in this country where consumers can’t get an accurate price quote before buying the service,” stated David Rothstein, director of Resource Development & Public Affairs at NHS of Greater Cleveland and author of “Improving Tax Preparation with a Model Fee Disclosure Box.” “The lack of transparency and disclosure is stunning. How can there be a competitive market if consumers can’t comparison shop due to lack of price information?”

Free or inexpensive alternatives for low-income taxpayers are free tax preparation sites, including VITA sites (1-800-906-9887 or www.irs.gov) and AARP Tax-Aide sites: (www.aarp.org/findtaxhelp). Choosing a VITA or AARP Tax-Aide site saves eligible taxpayers the cost of a tax preparation fee. Many VITA sites can also help taxpayers open a bank account or get a low-cost prepaid card, which enables taxpayers to get fast refunds without paying a fee. Free tax preparation may be available on military bases as well.

There are also a number of websites that allow low- and middle-income taxpayers to prepare and file their taxes online for free, such as the IRS Free File program (www.irs.gov).

Related Materials

Government Accountability Office: Paid Tax Return Preparers: In a Limited Study, Preparers Made Significant Errors, GAO-14-467T, Apr. 8, 2014, is available at: http://www.gao.gov/assets/670/662356.pdf.

CFA Report: Protecting Consumers at Tax Time: Federal and State Efforts to Address Common Problems Associated with Paid Tax Preparation (January 2015) is available at: http://bit.ly/1E0GkPK

NCLC Report: Riddled Returns (updated March 2014) is available at: http://www.nclc.org/issues/riddled-returns.html.

NCLC’s Model Individual Tax Preparer Regulation Act (November 2013), is available at: http://www.nclc.org/images/pdf/high_cost_small_loans/model-individual-tax-preparer-reg-act.pdf.

NCLC has worked for over a decade on the issue of tax-time financial products, particularly refund anticipation loans (RALs). NCLC’s annual RAL reports and other materials are available at www.nclc.org/issues/refund-anticipation-loans.html.

Contacts:

NCLC: Chi Chi Wu (cwu_at_nclc.org) or
Jan Kruse (jkruse_at_nclc.org), 617-542-8010

CFA: Michael Best (mbest_at_consumerfed.org), 202-939-1009

Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has worked for consumer justice and economic security for low-income and other disadvantaged people, including older adults, in the U.S. through its expertise in policy analysis and advocacy, publications, litigation, expert witness services, and training. www.nclc.org

The Consumer Federation of America is an association of more than 250 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education. www.consumerfed.org

[1] Maryland, Oregon, California, and New York.

The post Tax Prep Services: Buyer Beware appeared first on Consumer Federation of America.

The post Protecting Consumers at Tax Time: Federal and State Efforts to Address Common Problems Associated with Paid Tax Preparation appeared first on Consumer Federation of America.

WASHINGTON D.C. (January 29, 2015)—As millions of consumers turn to paid tax preparers to help complete what, for many taxpayers, is their largest financial transaction of the year, a coalition of consumer and community organizations and advocates is calling on federal and state policymakers to ensure that taxpayers are protected from fraud or incorrectly prepared returns.  However, a recent lawsuit has blocked the ability of the Internal Revenue Service to institute minimum licensing and training requirements, shifting the responsibility to protect consumers to state legislatures.

A report, released today entitled Protecting Consumers at Tax Time: Federal and State Efforts to Address Common Problems Associated with Paid Tax Preparation, details the challenge consumers face when trying to pick a paid tax provider and the key components of a successful state reform effort.

“Transparency of pricing, minimum training and competency standards, regulation of credit products and a prohibition on junk fees represent the key components of meaningful reform,” said Michael Best, Policy Advocate at Consumer Federation of America.

The report is available here: http://bit.ly/1He2Cm5

The prevalence of incorrect returns from paid tax preparers

More than half of all federal tax returns are completed by a paid preparer, and nearly 60 percent of low-income taxpayers claiming the Earned Income Tax Credit use paid preparers.  However, multiple rounds of mystery shopper tests of tax preparers found instances of incompetence and even fraud, with 24 percent of the returns in a 2008 test and 44 percent of returns in a 2011 test presenting problems.  In 2014, the Government Accountability Office sent undercover investigators to 19 randomly selected tax preparer offices.  Only two of the 19, or 11 percent, of the returns had the correct refund amount.  The mistakes ranged from giving taxpayers $52 less to $3,718 more than they were entitled to.

“Taxpayers with incorrectly prepared returns face harsh penalties and may even lose the ability to claim the Earned Income Tax Credit for up to ten years,” according to Chi Chi Wu, National Consumer Law Center staff attorney.

“This tax season in particular is gearing up to be the most complicated in decades.  With the implementation of the Affordable Care Act and new tax filing requirements for those who either did not have insurance or gained coverage through healthcare.gov, it is essential that all consumers receive accurate information on how this will impact their refunds.  We will likely see more predatory and uninformed preparers than usual provide incorrect information this tax season as a result.” said Elise Blasingame, Director of Community Education for the consumer advocacy organization, Georgia Watch.

Federal and state standards are necessary to protect consumers

Previous federal efforts to improve the oversight of paid tax preparers have been unsuccessful.  In February 2014, the DC Court of Appeals held that the Internal Revenue Service (IRS) lacks the authority to regulate tax return preparers.  In response, the IRS implemented a voluntary standard which includes that preparers will receive a Record of Completion in a searchable database after completing continuing education requirements with a comprehension test component administered by third parties.

“A voluntary federal standard is an important first step, but states need to take up this issue and ensure that taxpayers, particularly low-wealth taxpayers are protected from fraud and return errors that can result in considerable fines and other penalities,” said Alice Vickers, Director of the Florida Alliance for Consumer Protection.

“The Maryland law protects taxpayers and tax preparers who are doing the right thing, but the lack of clarity or consistency in the IRS’ role creates a loophole for bad actors to flourish,” said Robin McKinney, Director of the Maryland CASH (Creating Assets, Savings & Hope) Campaign.  “Federal and state laws should work in tandem for maximum quality, transparency, and accountability for taxpayers.”

Recognition at state level of need for consumer protections

Four states, California, Maryland, New York and Oregon, have enacted laws to regulate the practice of tax preparation.  Recent proposals include, in Ohio, a standardized disclosure box that would list the cost of services for particular tax forms and any fees, and a bill in Colorado, narrowly defeated in 2014, would have required paid tax preparers to provide consumer disclosures about qualifications, fees, year-round contact information, and the preparer’s obligation to sign any returns they prepare.

“The lack of any real regulations or requirements for paid tax preparers is astounding when you think about it.  Consumers are bombarded by false or misleading advertising claims, taxpayers have little or no protection from unscrupulous actors and inaccurate or fraudulent filings increase government costs.  For the sake of everyone involved – the millions of hardworking taxpayers, thousands of competent and honest tax professionals, and taxing agencies – we need to pass reasonable reforms and protections in the tax preparation industry,” said Ross H. Yednock, program director for the Michigan Economic Impact Coalition.

“In Colorado, we had broad support for a state solution to tax preparer error and fraud.  We recognized this issue as a critical consumer protection measure and we are encouraged to see other groups from across the country also working on policy changes regarding tax preparation,” stated Ali Mickelson, Director of Tax and Legislative Policy at the Colorado Fiscal Institute. “As we say in Colorado, you wouldn’t give your social security number to the hot dog vendor or your bank statements to your hairdresser; yet these professions are more regulated than tax preparers,” noted Ali Mickelson.

According to George Awuor, Policy Analyst at The Bell Policy Center, “while working on the legislation in Colorado, there was recognition that errors, incompetence and in some cases fraud during the tax preparation, denied many citizens the chance to claim and receive the EITC.  To ensure that the EITC reaches those who qualify, EITC groups became important coalition members in support of the regulation of tax preparers in Colorado.”

“One critical move that state and federal policymakers can make is to enact a disclosure box policy that allows consumers to compare and contrast fees and services,” said David Rothstein.  A white paper on the disclosure box concept is being released Friday by the Asset Building program at the New America Foundation.

To supplement the voluntary IRS program and make sure that taxpayers, especially low-income taxpayers, receive the funds they are entitled to, state legislatures need to enact much-needed consumer protections.  The report, Protecting Consumers at Tax Time: Federal and State Efforts to Address Common Problems Associated with Paid Tax Preparation, will help policymakers do that by framing the problem and pointing legislatures to solutions and resources, such as the model state tax preparer law developed by the National Consumer Law Center.

“The Model Law is based on the strongest elements of the existing state laws and the IRS program,” explained Chi Chi Wu of NCLC, “We urge the 46 states that do not regulate tax preparers to join the four that do.”

Contact:

Consumer Federation of America, Michael Best, 202-939-1009, mbest@consumerfed.org

Bell Policy Center, George Awuor, 303-297-0456, awuor@bellpolicy.org

Colorado Fiscal Institute, Ali Mickelson, 720-379-3019 ext. 222, mickelson@coloradofiscal.org

Florida Alliance for Consumer Protection, Alice Vickers, 850-556-3121, alicevickers@flacp.org

Georgia Watch, Elise Blasingame, 404-525-1085, eblasingame@georgiawatch.org

Maryland CASH Campaign, Robin Mckinney, 443-692-9422, robin@mdcash.org

Michigan Economic Impact Coalition, Ross Yednock, 517-485-3588, yednock@cedam.info

National Consumer Law Center, Chi Chi Wu (cwu@nclc.org) or Jan Kruse (jkruse@nclc.org), 617-542-8010

Neighborhood Housing Services of Greater Cleveland, David Rothstein, 440-668-7178, drothstein@nhscleveland.org

Reinvestment Partners, Peter Skillern, 919-667-1000, Peter@Reinvestmentpartners.org

The Consumer Federation of America is an association of more than 250 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education. www.consumerfed.org

The Bell Policy Center is a non-partisan, non-profit research and advocacy organization founded on progressive values and dedicated to making Colorado a state of opportunity for all. With expert policy research and analysis, we advocate for policies that help children grow up strong, young people prepare for good jobs and working families save for the future. www.bellpolicy.org

Colorado Fiscal Institute is a nonprofit, nonpartisan organization that provides credible, independent and accessible analyses of fiscal and economic issues facing Colorado in order to inform policy debates and foster greater economic prosperity for all. www.coloradofiscal.org

Florida Alliance for Consumer Protection is a nonprofit, nonpartisan enterprise whose mission is to advance consumer protection and tenants rights through research, education and advocacy. www.flacp.org

Founded in 2002, Georgia Watch is a statewide consumer advocacy organization working to empower and protect Georgia consumers on matters that impact their wallets and quality of life. Through education, advocacy and policy development, Georgia Watch focuses on safeguarding consumer protections in personal finance, as well as ensuring lower utility bills, cleaner energy, access to quality, affordable healthcare, protecting the right to trial by jury and promoting access to the courts. www.georgiawatch.org

The Maryland CASH (Creating Assets, Savings & Hope) Campaign is a statewide network of organizations that promotes programs, products and policies to increase the financial security of low-to-moderate income individuals and families across Maryland, advocating on their behalf, as well as providing financial education programs such as the Maryland CASH Academy. www.mdcash.org

The Michigan Economic Impact Coalition unites individuals, organizations and local initiatives committed to supporting tax credit and asset building opportunities for Michigan families through improved access to free, quality, income tax preparation assistance. www.meic.cedam.info/

Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has worked for consumer justice and economic security for low-income and other disadvantaged people, including older adults, in the U.S. through its expertise in policy analysis and advocacy, publications, litigation, expert witness services, and training. www.nclc.org

NHS of Greater Cleveland is a 40 year old housing and financial counseling group – providing programs and services to help families achieve, preserve, and sustain the American dream of homeownership. www.nhscleveland.org

The post Consumer and Community Groups Seek State Solutions for Tax-Preparer Mistakes and Fraud After Federal Standards Struck Down in 2014 appeared first on Consumer Federation of America.

Preparer Fraud, High Fees, and Tax-Time Financial Products Plague Consumers

Boston (February 28, 2014) – As the tax season goes into full swing, advocates from the National Consumer Law Center and Consumer Federation of America have issued their annual report on the tax-time consumer issues: It’s a Wild World: Consumers at Risk from Tax-Time Financial Products and Unregulated Preparers.

The biggest problem cited by the report is the lack of regulation for paid tax preparers. “This year, tens of millions of consumers will use paid preparers to fill out one of the most important financial documents of their year,” stated Chi Chi Wu, staff attorney at the National Consumer Law Center (NCLC). “Yet most of these preparers are not subject to any minimum educational, training, or competency standards.”

The lack of regulation has allowed incompetence and abuses by tax preparers to flourish, putting consumers at risk of audit by the Internal Revenue Service (IRS) or even criminal sanctions. Another problem faced by consumers is that they cannot get price quotes or estimates about how much a paid preparer will charge them.

One problem that is no longer facing millions of taxpayers are high-cost, high-risk refund anticipation loans (RALs), which are no longer available from banks on a large scale, nationwide basis. However, taxpayers are still at risk of needless fees from tax-time refund products, such as:

• Refund anticipation checks (RACs) – RACs do not deliver refund monies any faster than the IRS can, yet cost $30 to $55. Some preparers charge additional “add-on fees,” which can range from $25 to several hundred dollars.
• RALs from fringe, non-bank lenders – A few payday and other high-cost lenders are offering RALs. These loans could be more expensive and riskier than bank RALs.

Consumer advocates suggest that taxpayers looking for quick refund cash should consider lower-cost or free alternatives. Taxpayers with a bank account can get their tax refunds in 8 to 21 days with e-filing and direct deposit. Taxpayers without a bank account can get the same fast refund by e-filing and having their refund deposited to a prepaid card, including any payroll or prepaid card that the taxpayer already has. Taxpayers without a bank account should also consider opening a bank account to receive their refund. “Getting a big refund is the perfect time to open a savings account and start a nest egg,” advised Tom Feltner, director of financial services for Consumer Federation of America.

The Wild World of Paid Tax Preparers

One of the most surprising aspects about paying taxes in the United States is the lack of regulation for most tax preparers. Forty-six states do not have any minimum educational, competency, or training standards for paid tax preparers. While some tax preparers are licensed as certified public accountants (CPAs) or credentialed by the IRS as enrolled agents, the vast majority do not have such qualifications. Indeed, the only tax preparers apart from CPAs and enrolled agents subject to testing and regulatory oversight are the unpaid volunteers at Volunteer Income Tax Assistance (VITA) sites. “All 50 states regulate hairdressers, but only four regulate tax preparers,” noted Wu. “It’s up to Congress or the states to step up to the plate.”

A recent NCLC report documented how this lack of regulation has allowed incompetence and abuses by tax preparers to flourish. The report, Riddled Returns, analyzed years of mystery shopper testing by government agencies, consumer groups, and advocacy organizations, all of which found disturbingly high levels of incompetency and outright fraud, such as:

• Intentional omission of income;
• Falsifying information to make the taxpayer eligible for various credits and deductions, such as charitable deductions, job-related or business expenses, and the Earned Income Tax Credit (EITC); and
• Inability to accurately handle education-related items, such as grants and tuition credits.

Government enforcement actions also provide evidence of widespread abuses by paid tax preparers. The latest example is a decision issued this past November by a federal judge shutting down the nation’s fourth largest tax preparation chain, Instant Tax Service, and permanently banning its owner from the business of tax preparation due to “an astonishing array of repeated fraudulent and deceptive conduct.”

Incompetence and fraud could be costing federal and state governments tens of millions of dollars in lost tax revenue. It ultimately hurts consumers as well, by exposing them to potential IRS audits, civil penalties, or even criminal sanctions.

The NCLC report calls on states to regulate tax preparers to address preparer abuse and incompetency. The IRS attempted to address the problem in 2011 with regulations requiring tax preparers to register with the IRS and pass a competency exam. A federal court struck down these common-sense requirements as exceeding the IRS’s statutory authority, a decision that was recently upheld by the D.C. Court of Appeals.

To assist states seeking a solution to the problem of unregulated tax preparers, NCLC released a Model Individual Tax Preparer Act with its report. The model law is based on three of the four state laws that do regulate tax preparers (Maryland, Oregon, and California), as well as the IRS regulations. (In December 2013, New York also began regulating paid preparers.)

High Tax Preparation Fees

Another problem facing consumers when using paid tax preparers is the severe lack of transparency regarding the fees for these services. Taxpayers, especially lower-income recipients of the EITC, may pay up to $500 or more in fees. Yet taxpayers often cannot get information beforehand on how much tax preparation will cost them because many preparers claim they cannot give a quote or give inaccurate lowball estimates. “Tax preparation is one of the few businesses in this country where consumers can’t get an accurate price quote before buying the service,” stated David Rothstein, director of Resource Development & Public Affairs at NHS of Greater Cleveland and author of “Improving Tax Preparation With a Model Fee Disclosure Box. “The lack of transparency and disclosure is stunning. How can there be a competitive market if consumers can’t comparison shop due to lack of price information?”

A free or inexpensive alternative for low-income taxpayers are free tax preparation sites, including VITA sites (1-800-906-9887 or www.irs.gov) and AARP Tax-Aide sites ). Choosing a VITA or AARP Tax-Aide site saves eligible taxpayers the cost of a tax preparation fee. Many VITA sites can also help taxpayers open a bank account or get a low-cost prepaid card, which enables taxpayers to get fast refunds without paying a fee. Free tax preparation may be available on military bases as well.

There are also a number of websites that allow low- and middle-income taxpayers to prepare and file their taxes online for free, such as the IRS Free File program (www.irs.gov).

RACs and Non-Bank RALs

Refund anticipation checks (RACs) are a financial product used to deliver refunds and to pay for tax preparation fees by deducting them from the consumer’s tax refund. With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund monies. After the refund is deposited, the bank issues the consumer a check or prepaid card and closes the temporary account. A RAC allows the consumer to pay for tax preparation fees out of the refund and provides the speed of direct deposit of tax refunds for unbanked taxpayers, but generally at an additional cost.

Banks generally charge about $30 – $55 for a RAC delivered via check (with discounts for delivery by prepaid card or direct deposit). In addition, some tax preparers charge their own “add-on” fees, which can range from $25 to several hundred dollars. Consumer advocates recommend that taxpayers consider alternatives to a RAC, or at least choose a preparer that does not charge add-on fees.

Since the main purpose of a RAC is to defer payment of the tax preparation until the refund arrives, it can be viewed as a high-cost loan of that fee. If a taxpayer pays $30 to defer payment of a $200 tax preparation fee for 3 weeks, the annual percentage rate (APR) is 260%. Two courts have held that a RAC constitutes a loan of the tax preparation fee, and thus the fee is a finance charge under the Truth in Lending Act.

With the end of RALs made by banks, high cost non-bank lenders have stepped into the fray. Last year, Liberty Tax Service offered a non-bank RAL in partnership with two companies that appeared to be linked with Texas payday lenders. Fortunately, RALs made by nonbank lenders are not nearly as widespread as bank RALs. Last year – the first in which only nonbank lenders made RALs – a mere 100,000 consumers applied for the loans. In comparison, about 12.7 million consumers obtained a RAL at the height of the industry in 2002.

One reason that non-bank RALs are not as widespread is that nonbank lenders do not have the legal ability, unlike banks, to flout state laws that cap interest rates, i.e., usury laws. Tax-time loans from payday lenders and other storefront outlets that offer to prepare taxes and make loans may be subject to state loan laws, usury caps, or loan broker requirements in states that have them. Seventeen states and the District of Columbia do not permit payday lending at all. Also, nonbank lenders may not have the funding necessary to make RALs on a broad scale. In order to make even those 100,000 RALs, nonbank lenders needed access to $150 million in capital (assuming loans of $1,500).

RAL and RAC Data for Prior Years

RALs were bank loans secured by the taxpayer’s expected refund ─ loans that lasted about 7 to 14 days until the actual IRS refund repays the loan. RALs are expensive. In 2012, the last of the RAL banks (Republic Bank) charged $61.22 for a RAL of $1,500, which translated into an APR of 149%.

RAL lending dropped significantly during the last two years in which banks made the loans.

• In 2012, about 840,000 taxpayers applied for a RAL and we estimate that 630,000 obtained them.
• In 2011, one million taxpayers applied for a RAL and we estimate that 750,000 received them.

In contrast:

• In 2010, 6.85 million taxpayers applied for a RAL and we estimated that 5 million received them.
• At their height in 2002, about 12.7 million taxpayers obtained a RAL.

The small number in 2012 was due to the fact that only one bank, Republic Bank & Trust, made RALs that year. All of the other RAL-lending banks had either voluntarily stopped making the loans or were forced out of the business by their federal bank regulator. By 2013, the first year in which only nonbank lenders made RALs, a mere 100,000 consumers applied for a RAL.

Many RAL borrowers have now shifted to RACs. In 2012 and 2013, the number of taxpayers receiving a RAC increased to an estimated 21 million. This is in comparison to 18.4 million taxpayers in 2011; 14.6 million taxpayers in 2010 and 12.9 million in 2009.

Download the full report here

Contact:

NCLC: Jan Kruse (jkruse_at_nclc.org) or

Chi Chi Wu (cwu_at_nclc.org), 617-542-8010

CFA: Tom Feltner (tfeltner_at_consumerfed.org), 202-618-0310

Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has worked for consumer justice and economic security for low-income and other disadvantaged people, including older adults, in the U.S. through its expertise in policy analysis and advocacy, publications, litigation, expert witness services, and training. www.nclc.org

The Consumer Federation of America is an association of nearly 300 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education. www.consumerfed.org

The post Tax-Time Consumer Troubles appeared first on Consumer Federation of America.

The post Consumers at Risk from Tax-Time Financial Products and Unregulated Preparers appeared first on Consumer Federation of America.

BOSTON ─ As tax season shifts in to full swing, the National Consumer Law Center (NCLC) and Consumer Federation of America (CFA) have issued their eleventh annual report on the tax-time financial products industry: Something Old, Something New in Tax-Time Financial Products: Refund Anticipation Checks and the Next Wave of Quickie Tax Loans.

The good news? For the first time in decades, millions of taxpayers will avoid having their refunds drained by refund anticipation loans (RALs), which are no longer available from banks on a large scale, nationwide basis.  The bad news? Taxpayers are still at risk of needless fees from tax-time refund products, such as:

• RALs from fringe, non-bank lenders – Some payday and other high-cost lenders are offering RALs.  These loans could be more expensive and riskier than bank RALs.
• Shady tax preparers offering phantom RALs – In 2012, some preparers promoted RALs, but apparently did not have the financial capacity to make them to a large number of customers.  These RAL offers were allegedly bait-and-switch schemes to get customers into their offices.
• Refund anticipation checks (RACs) – RACs do not deliver refunds any faster than the IRS can, yet cost $30 to $55 delivered via check.  Some preparers charge add-on fees which can range from $25 to several hundred dollars.

“While we are glad to see the disappearance of bank RALs, consumers should avoid the other traps still out there on the market,” said Chi Chi Wu, staff attorney at the National Consumer Law Center. “They should especially steer clear of RALs made by payday lenders, which are likely to be more expensive and riskier.”

Consumer advocates suggest that taxpayers looking for quick refund cash should consider lower-cost or free alternatives.  Taxpayers with a bank account can get their tax refunds in 21 or less days with e-filing and direct deposit.[1] Taxpayers without a bank account can get the same three week or less refund by e-filing and having their refund deposited to a prepaid card, including any existing payroll or prepaid card that the taxpayer already has.

Non-Bank RALs and Phantom RALs

With the end of RALs made by banks, high cost non-bank lenders have stepped into the fray. Liberty Tax Service is partnering 1st Money Center and Redpoint Capital to make non-bank RALs in about 26 states. 1st Money Center and Redpoint Capital appear to be linked with Texas payday lenders.

RALs made by nonbank lenders will most likely not be as widespread as bank RALs. Unlike banks, nonbank lenders do not have the legal ability to flout state laws that cap interest rates, i.e., usury laws. Tax-time loans from payday lenders and other storefront outlets that offer to prepare taxes and make loans may be subject to state loan laws, usury caps, or loan broker requirements in states that have them. Eighteen states (and the District of Columbia) do not permit payday lending at all (for a complete listing of state payday lending laws, see www.paydayloaninfo.org/state-information).

Nonbank lenders may also lack the funding necessary to make RALs on a broad scale.  One problem last year was “phantom” RAL lending, where less-than-scrupulous tax preparers claimed to have RALs but did not.  For example, the U.S. Department of Justice’s lawsuit against one such preparer – Instant Tax Service – alleged that the chain promoted RALs to entice customers, but was so severely undercapitalized that its overall denial rate was often over 90%. Note that in order to make 1 million RALs, a lender would need $1.5 billion in capital (assuming loans of $1,500).  Preparers allegedly used phantom RAL offers to lure customers into their offices, where some of them ended up paying $400 to $500 or more for tax preparation, RACs, and add-on fees.

Refund Anticipation Checks

With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund check. After the refund is deposited, the bank issues the consumer a check or prepaid card and closes the temporary account. A RAC allows the consumer to pay for tax preparation fees out of the refund and provides the speed of direct deposit of tax refunds for unbanked taxpayers, but generally at an additional cost.

Banks generally charge about $30 – $55 for a RAC delivered via check (with discounts for delivery by prepaid card or direct deposit).  While this is much less than the price of a RAL, some tax preparers also charge their own add-on fees, which can range from $25 to several hundred dollars.

Since one of their purposes is to defer payment of the tax preparation fee until the refund arrives, RACs may represent a high-cost loan of that fee.   If a taxpayer pays $30 to defer payment of a $200 tax preparation fee for 3 weeks, the APR would be equivalent to 260%.

Prepaid cards are one alternative to allow taxpayers without a bank account to receive a faster refund. Taxpayers, however, should be cautious when selecting a prepaid card.

“As with any financial product, taxpayers should compare prepaid card costs and consumer protections,” recommends Tom Feltner, director of financial services for Consumer Federation of America. Taxpayers without a bank account should also consider opening a bank account to receive their refund. “Getting a big refund is the perfect time to open a savings account and start a nest egg,” advised Feltner.

Low-income taxpayers have a number of options for free tax preparation, including Volunteer Income Tax Assistance (VITA) (1-800-906-9887 or www.irs.gov) and AARP Tax-Aide sites (). Choosing a VITA or AARP Tax-Aide site saves taxpayers the cost of the tax preparation fee. Many VITA sites also offer services to help open a bank account or get a low-cost prepaid card, which enables taxpayers to get faster refunds without paying a fee. Free tax preparation may be available on military bases, and since servicemembers are required to have bank accounts, they are able to benefit from the speed of electronic delivery of their tax refunds

There are also a number of websites that allow many taxpayers to prepare and file their taxes online for free, such as the IRS Free File program (www.irs.gov).

RAL History and Data for Prior Years

RALs were bank loans secured by the taxpayer’s expected refund ─ loans that lasted about 7 to 14 days until the actual IRS refund repaid the loan. RALs were expensive. In 2012, the last of the RAL banks (Republic Bank) charged $61.22 for a RAL of $1,500, which translated into an APR of 149%.

RAL lending had dropped significantly during the last two years of their existence.  In 2011, about 1 million taxpayers applied for a RAL, and National Consumer Law Center and the Consumer Federation of America estimate that 750,000 people obtained a RAL at a cost of $46 million in loan fees.  This contrasts with 2010, in which 6.85 million taxpayers applied for a RAL, and an estimated 5 million received them at a cost of $338 million.  At their height in 2002, about 12.7 million taxpayers obtained a RAL at a total cost of $1.1 billion.

The dramatic drop in 2011 was because the three largest RAL lending banks were forced out or exited the market, leaving only three small state-chartered banks making RALs.  This development also left industry giant H&R Block without a RAL lender.

Many RAL borrowers have now shifted to RACs.  In 2011, the number of taxpayers receiving a RAC increased to an estimated 18.3 million, up from 14.6 million taxpayers in 2010 and 12.9 million in 2009.

Contact:

NCLC: Jan Kruse, jkruse@nclc.org; Chi Chi Wu, cwu@nclc.org, 617-542-8010

CFA: Tom Feltner, tfeltner@consumerfed.org, 202-618-0310

Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has worked for consumer justice and economic security for low-income and other disadvantaged people, including older adults, in the U.S. through its expertise in policy analysis and advocacy, publications, litigation, expert witness services, and training.

The Consumer Federation of America is an association of nearly 300 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education.

[1] In previous years, taxpayers could get refunds in as little as 8 to 15 days; however, refunds will take longer this year in part due to new IRS anti-fraud measures.

The post New Report Documents Evolving Tax-Time Financial Products Market appeared first on Consumer Federation of America.

THE PARTY’S OVER FOR QUICKIE TAX LOANS: BUT TRAPS REMAIN FOR UNWARY TAXPAYERS

The NCLC/CFA 2012 Refund Anticipation Loan Report

Chi Chi Wu, National Consumer Law Center

Contributing author: Jean Ann Fox, Consumer Federation of America

February 2012

EXECUTIVE SUMMARY

Refund anticipation loans (RALs) are one to two week loans made by banks, facilitated by tax preparers, and secured by the taxpayer’s expected tax refund.  RALs can carry triple digit APRs, and expose taxpayers to the risks of unpaid debt if their refunds do not arrive as expected.

This is the twelfth annual report on the RAL industry from the National Consumer Law Center and Consumer Federation of America.  This is also the last year that these high-cost, high-risk loans will be made, at least on a large scale by banks. In December 2011, the last of the RAL-lending banks entered into a settlement with the FDIC and agreed to cease making RALs after April 2012.  While an occasional fringe lender may make a tax-time loan, the sale of RALs as a widespread industry-wide practice is over.  RALs will no longer drain the tax refunds of millions of mostly low-income taxpayers.

Even with the end of RALs, low-income taxpayers still remain vulnerable to profiteering.  Tax preparers and banks continue to offer a related product – refund anticipation checks (RACs) – which can be subject to significant add-on fees and may represent a high-cost loan of the tax preparation fee.  Tax preparation fees can often be opaque and expensive, with taxpayers unable to obtain estimates of fees to comparison shop. The next challenge is to ensure that RACs are made unnecessary and tax preparation fees subject to a standardized, easy-to-understand disclosure.

Other findings of this report include:

• This year, the price for a typical RAL (from Republic Bank & Trust) for a loan of $1,500 is $61.22, plus another $29.95 for a refund anticipation check for the remainder of the consumer’s refund.  The $61.22 fee translates into an APR of 149%.

• The latest IRS data shows that RAL volume again declined significantly from 2009 to 2010.  Tax preparers and their bank partners made approximately 5 million RALs during the 2010 tax-filing season compared to 7.2 million in 2008, and a high of 12.4 million in 2004.

• Consumers paid an estimated $338 million in RAL fees in 2010 to get quick cash for their refunds—essentially borrowing their own money, sometimes at extremely high interest rates.

• In addition to RAL fees, consumers in 2010 paid another estimated $48 million in add-on fees, such “data and document storage,” “administrative,” “e-filing,” “service bureau,” “transmission,” or “processing” fees.

• H&R Block announced it would not make RALs for the 2012 tax season.  Block had previously lost its RAL partner bank, HSBC, when that bank’s regulator ordered it out of the market.  Block’s announcement meant that it would not seek another bank to replace HSBC.  In addition, Block offered a free refund anticipation check (RAC) during the first two weeks of the 2012 tax season for holders of its Emerald Card.

• Liberty Tax has begun exploring the option of RALs made by non-bank lenders.  It has partnered with SGS Credit Services, Inc. and several other companies with similar names, which appear to be linked with Texas payday lenders.  TaxWorks, a division of RedGear, which is owned by H&R Block, is promoting a “Tax Season Cash Advance” provided by Schear Lending Group and Atlas Financial Services. Schear Lending Group appears to be affiliated with Ohio-based payday lenders.

• Small chains, such as Mo’ Money Taxes and Instant Taxes, appear to be embroiled in controversy over RAL/RAC checks that have allegedly bounced or not been honored, as well as other problems.  In addition, the Arkansas Attorney General obtained a settlement in its case against Mo’ Money Taxes over alleged violation of the Arkansas RAL Act and the Arkansas Deceptive Trade Practices Act.

PART I.  UPDATES AND STATISTICS

A.   Introduction

Refund anticipation loans (RALs) are loans secured by and repaid directly from the proceeds of a consumer’s tax refund from the Internal Revenue Service (IRS).  Because RALs are usually made for a duration of about seven to fourteen days (the difference between when the RAL is made and when it is repaid by deposit of the taxpayer’s refund), fees for these loans can translate into triple digit annual percentage rates (APRs).

Historically, RALs drained hundreds of millions of dollars from the pockets of consumers and the U.S. Treasury.  RAL lenders and preparers targeted the working poor, especially those who receive the Earned Income Tax Credit (EITC), a refundable credit intended to boost low-wage workers out of poverty.  The EITC is the largest federal anti-poverty program, providing nearly $57 billion to over twenty-five million families in 2010.[1]

This report updates the NCLC/CFA annual reports on the RAL industry and the drain caused by RALs from tax refunds and EITC benefits.  Those interested in background information on the industry and regulation should refer to the first NCLC/CFA RAL Report published in January 2002.[2] In addition to our yearly reports, we have issued special reports on the IRS Debt Indicator,[3] “pay stub” RALs,[4] a rebuttal of industry-funded RAL studies,[5] RALs and fringe tax preparers,[6] and three reports regarding mystery shopper testing of RAL providers.[7]

B.        End of Bank RALs

During the past few years, there have been a number of major developments in the RAL industry. The three biggest banks in RAL lending – JPMorgan Chase, HSBC and Santa Barbara Bank & Trust – had left or were forced out of the business by December 2010. As a result of these actions, there were only three small, state-chartered banks making RALs in 2011– Republic Bank & Trust, River City Bank and Ohio Valley Bank, all based in Louisville, Kentucky.

In February 2011, the FDIC notified these banks that the practice of originating RALs without the benefit of the IRS Debt Indicator was unsafe and unsound. River City Bank and Ohio Valley Bank accepted the FDIC’s decision, but Republic Bank & Trust decided to fight.  Republic appealed the decision to an administrative law judge, and sued the FDIC in federal court. In May 2011, the FDIC issued an amended complaint that detailed widespread legal violations in Republic’s RAL program and proposed a $2 million civil penalty.[8]

In December 2011, the FDIC reached a settlement with Republic in which the bank agreed to cease making RALs after April 2012, and to pay a $900,000 civil penalty.[9] Thus, after this tax season, there will be no banks left that make RALs.

Even with the end of RALs, low-income taxpayers still remain vulnerable to profiteering.  Tax preparers and banks continue to offer a related product – refund anticipation checks (RACs) – which can be subject to significant add-on fees and may represent a high-cost loan of the tax preparation fee, as discussed in Section I.G below.  Some preparers are exploring partnering with non-bank fringe lenders to make RALs, discussed in Sections II.C and II.F below.  Finally, the reforms that have signaled the end of RAL lending have been issued by the IRS and banking regulators.  With different regulators, these decisions could be easily reversed.

C.  RAL Volume Drops Again

RAL volume had already been decreasing prior to the dramatic changes in the industry discussed above.  The latest available IRS data indicates that RAL volume dropped significantly from 2009 to 2010, by about 30%.  This follows a 14% drop from 2008 to 2009.  About one in twenty taxpayers applied for a RAL in 2010.[10]

Based on IRS data, we estimate there were approximately 5 million RALs made in 2010.  IRS data shows that there were 6.85 million RAL applications in 2009.[11] However, not all RAL applications result in loans, as a certain percentage of applications are rejected.

Historically we have used approval rates of 90% and 85% to estimate the number of RALs made in relationship to the number of applications.[12] However, Liberty Tax Service stated that its approval rate was much lower in 2010, at 55%.[13] For 2010, we therefore assumed that H&R Block (with a market share of 68%) had an approval rate of 85%, and the rest of the industry had an approval rate of 55%, for an overall approval rate of about 75%.

The following table shows the trends in RALs since 2000, using a 25% rejection rate for 2010, a 15% rejection rate for 2007 to 2009 and 10% for years earlier.[14] To give a better indicator of RAL trends, it also includes RAL applications in addition to total RALs made.  Note that even a rejected RAL costs the taxpayer a fee, because the taxpayer is automatically given a refund anticipation check (RAC) at a cost of about $30 to $35.

TABLE 1

Part of the dramatic drop in RAL volume in 2010 was caused by the departure of Santa Barbara Bank & Trust (SBBT) from the RAL market.[15] SBBT was one of the three biggest RAL lending banks, and the RAL lender for Jackson Hewitt and Liberty Tax Service.  After SBBT’s departure, both Liberty Tax and Jackson Hewitt were able to reach an agreement with Republic Bank & Trust to offer Republic RALs.  However, SBBT’s departure left Jackson Hewitt without RALs in about half of its offices.

D.  Taxpayers Paid About $386 Million for RALs in 2010

A typical RAL in 2010 from one of the RAL lenders was around $3,700.[16] RAL consumers in 2010 paid different prices, depending on the RAL lender and tax preparer.  H&R Block charged $69.54 for a RAL of $3,700.[17] H&R Block had about 3.4 million RAL customers in 2010.[18]

In 2010, JPMorgan Chase charged $69 for a RAL of $3,700.[19] Republic Bank & Trust charged $58.81.[20] Republic had about 837,000 RALs.[21]

Given these various prices, we assume the following amounts were paid for RALs in 2010:

H&R Block customers                        $ 236.4 million

Republic Bank & Trust customers      $   49.2 million

All others                                            $   52.6 million

Total                                                    $ 338.2 million

This compares to an estimated $606 million in RAL fees in 2009[22] and the high of $1.24 billion in RAL loan fees in 2004.[23] This estimate is much lower than the 2009 estimate because of reduced loan volume, as well as the fact that Republic and JPMorgan Chase both followed Block’s lead in reducing RAL prices.

This $338 million estimate for 2010 does not include the added fees paid for loan products that provide a RAL on the same day that the taxpayer’s return is prepared.  In 2010, lenders charged an additional $25 to $55 for same-day RALs, a fee that the consumer paid on top of regular RAL fees.[24] However, we do not have data on the number of same-day RALs made by the industry. [25]

In addition to the fee charged by the RAL lenders, tax preparers and other third parties can charge their own fees for RALs.  These fees, which we call “add-on” fees, are discussed in detail in Section I.I, below.

In 2010, Block did not charge add-on fees.  Jackson Hewitt started charging them again in 2010, allowing its franchisees to set a “Data and Document Storage Fee” of up to $40.[26] Liberty also appears to have charged an add-on fee.[27] Furthermore, many independents and smaller chains charged add-on fees in 2010.  These smaller players had over 70% of the paid preparer market,[28] and 15% of the RAL market in 2010.[29] In contrast to Jackson Hewitt’s $40 fee, we have seen add-on fees from independent preparers sometimes total up to several hundred dollars.[30]

If we assume that Jackson Hewitt, Liberty Tax, and about half of independent preparers charge add-on fees, it would equate to about 1.2 million consumers, or about 25% of RAL borrowers.  Using Jackson Hewitt’s cap of $40—a conservative assumption given the proliferation of multiple fees—these add-on fees increased by about $48 million the amount paid for RALs in 2010.  Thus, taxpayers lost somewhere in the neighborhood of $386 million collectively to get loans a mere one to two weeks sooner than they could have gotten their refunds from the IRS.

E.         Impact on Low-Income Taxpayers and EITC Recipients

RALs are mostly marketed to low-income taxpayers.  According to IRS data, 92% of taxpayers who applied for a RAL in 2010 were low-income.[31] A study from the Urban Institute found that the median adjusted gross income of RAL borrowers is under $20,000, and that one in four taxpayers earning $10,000 to $25,000 use a RAL.[32] In fact, this study found that “taxpayers living in extremely low-income communities are an astonishing 560 percent more likely to use RALs and 215 percent more likely to use RACs—controlling for their family characteristics and their income.”[33] In other words, RAL users are typically not just poor; they live in poor communities.  The authors of the study theorized that this phenomenon could be due to targeting by tax preparation chains, particularly in placement of store locations, or due to significant “peer effects.”[34]

The most likely RAL users are recipients of the Earned Income Tax Credit (EITC).  RALs drain hundreds of millions of dollars from that program each year.  IRS data shows that in 2010 nearly two-thirds (66%) of RAL consumers were EITC recipients, or 3.4 million families.[35] Yet EITC recipients made up only 20% of individual taxpayers in 2010.[36] Thus, EITC recipients are vastly over-represented among the ranks of RAL consumers.

In addition, IRS data shows that 18% of EITC recipients applied for a RAL in 2010.[37] Almost 41% of EITC recipients obtained either a RAL or a RAC; in other words, a sizable portion of EITC recipients paid part of their publicly funded benefits to a bank to obtain a tax-related financial product.  In contrast, only about 7% of taxpayers who do not receive the EITC get a RAL or RAC.[38] The Urban Institute RAL report found that an EITC recipient with a qualifying child is over 125% more likely to get a RAL and over 75% more likely to get a RAC than a non-EITC recipient.[39]

Based on this IRS data, we estimate that about $223 million was drained out of the EITC program in 2010 by RAL loan fees.[40] Add-on fees contributed another $32 million to the drain.[41]

Non-loan fees also drain significantly from EITC benefits.  The EITC is the nation’s largest anti-poverty program.  One criticism has been that no other anti-poverty program requires its beneficiaries to pay for the cost of accessing the benefit, which includes the drain created both by RALs and by tax preparation fees.  Including tax preparation fees provides a fuller picture of how EITC benefits are chipped away.  An average tax preparation fee in 2010 would have been $189 (this is the average fee at H&R Block)[42] and could be higher for other preparers.[43]

Thus, EITC recipients who got RALs paid an estimated $643 million in tax preparation fees.  Including tax preparation fees, RALs drained $898 million from EITC recipients who got RALs for tax year 2010.

TABLE 2

F.         RAL Pricing

This year, only Republic Bank & Trust is offering a bank RAL, limited to $1,500. Republic charges a fee of $61.22,[44] representing an APR of 149%.  If the refund is greater than $1,500 plus fees, Republic delivers the rest of it in the form of a RAC, at a cost of $30.  Since Republic requires a minimum refund of $2,000 in order to be eligible for a RAL, it is quite likely the taxpayer will pay a total of $91.22 to Republic.

Furthermore, it appears that both Jackson Hewitt and Liberty Tax, the two tax preparers that use Republic Bank & Trust for their RALs, also charge add-on fees.[45] Jackson Hewitt charges as much as $40, so the total could rise to as much as $131.

The fee for the RAL comes on top of the fee for tax preparation, with an average of about $189.  Altogether, the consumer might pay about $320.  A low-income taxpayer could save this entire amount and still receive a quick refund using direct deposit by choosing a free tax preparation program that offers e-filing.

G.        Refund Anticipation Checks

Refund anticipation checks (RACs) are another tax-time financial product offered by RAL banks as well as several other financial institutions.  With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund check.  After the refund is deposited, the bank issues the consumer a paper check or prepaid debit card with the RAC proceeds, or direct deposits the refund to the taxpayer’s own account and closes the temporary account.  For taxpayers who can receive direct deposit from the IRS into a bank account or onto a prepaid card, a RAC does not provide any advantage in terms of a faster refund, and the only reason to incur this added expense is to delay payment of tax preparation fees.

In 2010, RACs generally cost $30.  This year H&R Block offered a free RAC for the first three weeks of the 2012 tax season, if the taxpayer used the Block Emerald Card.  An H&R Block customer who obtained a free RAC could receive his or her refund in 8-15 days, pay for tax preparation out of his or her refund, and pay only those fees incurred by using the Emerald Card.  After February 4, the price of an H&R Block RAC was increased to $34.95.[46]

In the past three years, the IRS has separately reported RAC data.  In 2010, about 14.6 million taxpayers received a RAC,[47] at a cost of about $438 million.  This was a 9% increase from 12.9 million taxpayers in 2009.[48]

Thus, the number of RACs has increased significantly from 2009 to 2010, and exceeds both the number of RALs and the amount paid in fees for RALs.  RACs present different issues than RALs.  They are less expensive than a RAL, although they are still very pricey for what is essentially a one-time use bank account.  Consumers with a bank account can receive their refunds in the same amount of time as a RAC.  A taxpayer who does not have a bank account should be encouraged to open one.  In addition to speeding refunds, bank accounts help taxpayers avoid paying check cashing fees.

RACs present other problems.  Like RALs, RACs permit the taxpayer to have the price of tax preparation deducted from the refund.  This practice makes taxpayers less sensitive to the price of tax preparation, permitting tax preparers to hide the ball when consumers might attempt to comparison shop.  Furthermore, when taxpayers obtain a RAC simply because they cannot afford the price of tax preparation upfront, the RAC is essentially a loan of the tax preparation fee—and an expensive one at that.  Paying $30 to borrow a tax preparation fee of $189 for two weeks equates to an APR of 414%!

In addition to H&R Block’s free RAC, there are a number of other, less expensive products available to enable taxpayers to pay for tax preparation services out of their refund.  One such product is QuickCollect from Santa Barbara Tax Products Group, which costs $15,[49] or about half as much as a RAC.  Another is the e-Collect system, which is essentially a RAC from EPS Financial.  The price for e-Collect varies according to whether the refund is deposited on the E1 Visa Prepaid Visa card ($5 plus another $5 for a state refund), direct deposited to the taxpayer’s own account ($10 plus another $10 for a state refund), or delivered by a check printed at the tax office ($20).[50] The E1 Prepaid Card is issued by Bancorp Bank.[51]

In addition to the RAC fee itself, many tax preparers charge add-on fees, such as “document processing” or e-filing fees, discussed further in Section I.I below.  Tax preparers charge these fees for both RACs and RALs.  This can significantly add to the expense of a RAC.

H.        Prepaid Cards

In order to take advantage of the speed of IRS’s typical eight- to fifteen-day refund, taxpayers must have a bank account into which the refund can be direct deposited.  Taxpayers without a bank account should be encouraged to open an account to receive their refund, but there are other options as well.  Taxpayers without a bank account can have their refund deposited to a prepaid card, including any existing payroll or reloadable prepaid card that the taxpayer already has.

In 2011, the U. S. Department of Treasury conducted a pilot project offering 600,000 low-cost prepaid cards to families who may not have had a bank account to receive their tax refunds.[52] Consumer advocates supported the Treasury pilot, and had hoped it would be expanded nationwide in 2012.  However, only 2,000 taxpayers signed up for the card, dashing hopes for its return.[53] The low signup rate may have been due to lack of promotion, as well as the fact that it was offered in mid-January, when tax season was already well underway.  Taxpayers had to sign up for the card, wait until Treasury mailed the card to them, and then use the card’s account number for direct deposit– a much more cumbersome process than if the taxpayers were able to check off a box on their tax forms to receive a card.

Indeed, some states have begun issuing state tax refunds on prepaid cards to taxpayers who do not use direct deposit.  These states include Connecticut,[54] New York,[55] and Oklahoma.[56] New York’s prepaid card appears to be optional, while Connecticut and Oklahoma appear to mandate issuance of a prepaid card (with some exceptions) if the taxpayer does not select direct deposit.

There are also a number of prepaid card options offered by private companies specifically targeted for delivery of tax refunds, some of which are discussed in Sections II.F and II.G, below.  A few of these cards permit taxpayers to have the costs of tax preparation deducted from their refunds.  There are similar prepaid debit cards available to taxpayers who use free VITA sites.

Regulations issued by Treasury’s Financial Management Service govern the deposit of federal payments, including tax refunds, to prepaid cards.[57] These regulations require that the deposit be subject to FDIC insurance, require compliance with the Regulation E protections for payroll cards, and prohibit deposit to a card that has an attached line of credit or loan feature for which payment is automatically triggered when the federal payment is delivered.[58]

When optional, taxpayers should be cautious if considering prepaid cards.  As with any financial product, taxpayers should compare costs and consumer protections when choosing among options.  Some types of prepaid cards have lower fees and better protections than others.

I.          Add-On Fees

Add-on fees are fees separately charged by tax preparers.  They are in addition to the RAL or RAC fees charged by the banks.  Add-on fees for RALs and RACs appear to be a large source of profits for some preparers.

All three of the major tax preparation chains—H&R Block, Jackson Hewitt, and Liberty Tax—had promised to stop charging add-on fees several years ago.[59] However, Jackson Hewitt started charging add-on fees again in 2010, specifically a “Data and Document Storage Fee” of up to $40.[60] Subsequently, Jackson Hewitt’s contract with Republic Bank & Trust permits Hewitt to charge an additional $30 as a “transmitter’s fee.”[61] Liberty may also be charging a $20 add-on fee.[62]

In addition, tax preparers not affiliated with one of the three big commercial tax preparation chains will often charge add-on fees.  There are multiple types of add-on fees.  Some of the names for add-on fees that we have observed include:

• Application fees;
• Data and document storage fees;
• Document processing fees;
• E-filing fees;
• Service bureau fees;
• Transmission/software fees;
• Technology fees.

Some preparers will charge several add-on fees.  The cumulative impact of add-on fees can be very expensive.  Mystery shopper testing by consumer groups found add-on fee totals ranging from $25 to $324 in 2008;[63] $19 to $85 in 2010;[64] and $35 in 2011.[65] Similar mystery shopper testing by First Nations Development Institute found significant add-on fees.[66] A New Jersey court decision documents how a local chain, Malqui Tax, charged a document preparation fee of $134, plus a service fee of $15, to RAL and RAC customers.[67]

In many cases, add-on fees are not actually determined by the tax preparer, but by the software or transmitter company that the preparer uses.[68] In other cases, the provider of the financial product builds in the capability to charge add-on fees, as well as capping them.  For example, EPS e-Collect (discussed in Section I.G above) permits preparers to deduct a transmitter fee; a Service Bureau fee (capped at $35); and up to $999.99 in preparation fees (although EPS will “monitor” fees over $400).[69]

J.          Lack of Transparency in Tax Preparation Fee

Another consumer- related problem faced by taxpayers is the lack of transparency around tax preparation fees.  Mystery shopper testing by consumer groups and others has found systemic problems in the ability of consumers to obtain information about how much tax preparation services will cost.  There are numerous examples of preparers giving low-ball estimates on preparation fees or even refusing to provide testers with a quote.  Some of these examples include:

• Several testers in 2010 mystery shopper testing reported that preparers did not provide much information about the cost of tax preparation.  Testers recounted how preparers “avoided the question,” “let her know up front that they fees were high, but couldn’t get me the exact amount,” or were told that a preparer couldn’t estimate fees because the “computer did it.”  One tester was quoted a price of $70 for tax preparation fees by a Jackson Hewitt outlet, but ended up paying over $400.  Another tester reported that she had to argue with a Liberty Tax Service outlet to obtain a 50% discount that the outlet had advertised outside its offices.  The preparer also conflated the tax preparation and RAL/RAC fees.  Several instances of extremely high tax preparation fees were observed, such as over $400.[70]

• A limited set of mystery shopper tests in 2011 found worse issues and even higher fees.  A tester was charged a $540 fee by Liberty Tax.  The Liberty Tax preparer informed the tester that she had filed too late for a 50% discount.  Later, the preparer refused to provide a breakdown of the fee, even when a consumer advocacy group called on the tester’s behalf.  The preparer stated that customers complained about this particular Liberty Tax store’s fees sometimes, but that the store was able to get customers more money back than other tax preparers.  In the case of the tester, it appears that “more money back” was due to the preparer erroneously claiming one of the tester’s daughters for the EITC.  Another notable fact was that four of the testers in the 2011 testing who were EITC recipients with larger refunds were charged fees of over $300, while testers with smaller refunds (or who owed money) were charged lesser amounts, in some cases because of significant discounts.  In fact, a Liberty Tax preparer informed one tester that the tax preparation fee “depends; and that if he didn’t get a refund they would charge him less.”[71]

• In the 2008 mystery shopper testing, most of the preparers did not give the testers price estimates for tax preparation.  Three testers specifically asked about the price of tax preparation, but were refused information.  The preparers claimed that they based their pricing by form, and thus could not provide an estimate before preparation.[72]

• In 2011, mystery shopper testing by First Nations Development Institute found that only 2 out of 12 received anything resembling an accurate, detailed estimate. Most of the testers, when they asked for an estimate, were told that the cost varied based on the number of forms filed, and were quoted a general amount for preparing a Federal Form 1040.  Testers were given vague estimates that were confusing and made it difficult for the tester to determine total estimated costs. For most preparers, the fees were much more than the vague estimate.  None of the testers were given a detailed, itemized receipt after they had paid for their services. Many receipts indicated lump sum amounts for the federal and state tax returns and a RAC.  Several companies indicated they were offering a discount on tax preparation fees, but could not clearly explain their discounts. [73]

• In 2011, H&R Block advertised free tax preparation, while Jackson Hewitt promoted a $38 fee.  However, these offers were only valid for preparation of a 1040EZ, which is a form that cannot be used if the taxpayer is claiming dependents or the EITC (unless it is for the smaller EITC without dependents).  One consumer recounted how she was attracted by Jackson Hewitt’s offer of $38 filing, only to end up paying $289 in fees (out of a $413 refund), including a $30 RAC fee and $20 transmittal (add-on) fee.[74]

• In 2008, Impact Alabama noted that its mystery shopper testing found that “[m]ost of the preparers did not give the testers price estimates for preparation ahead of time.  Most commercial tax preparers base their pricing by form, and thus claim they cannot provide an estimate before preparation begins. This failure to provide clear pricing makes comparison shopping difficult.” [75] In addition, the head of this group noted in press statements that “[a]t the end many [preparers] pull out a number and clearly charge more the bigger the refund is…”[76]

• Testing by the GAO in 2006 found that 8 out of 19 preparers either did not provide an estimate or gave an estimate with the qualifier that the fee would depend on the forms required.  Furthermore, the GAO found:  “The fees charged in our 19 visits varied widely, sometimes between offices affiliated with the same chain, and were sometimes significantly larger or smaller than the original estimate we were given.” [77]

The ability to deduct tax preparation fees from a RAC – or a RAL  – compounds this problem.  It enables commercial preparers to withhold information on the price of tax preparation.  They also make taxpayers less sensitive to the price of preparation.  Normally, a merchant’s refusal to provide price information might discourage a consumer from buying a product.  However, since the fee is deducted from the RAC, consumers may not be as sensitive to this lack of pricing information.

The ability to deduct fees from a RAC also enables independent preparers to pad the price with add-on fees.  In 2008, a trade newsletter published by a software provider bluntly advised:[78]

The most successful e-file shops in the U.S. do not use price lists and they “lowball” their tax preparation charges to get the customer in the door. (Note: In some markets it’s customary to throw in free e-file and charge a higher price for the tax return preparation). They then charge more for e-filing and bank products to make up for the “lowball” price. For instance, if the going price for 1040EZ’s in your area is $49 you might want to charge $29. Advertise the $29 price with a note at the bottom (the fine print) that says “1040EZ’s”. Get the customer in the door. Then charge more for the e-file and bank products to make up for the discounted $29 price.

(emphasis added).

An example of this type of “successful” tax preparer was a Jackson Hewitt franchisee with more than a dozen offices in New York and New Jersey.  This Hewitt franchisee allegedly advertised that its minimum fees were $27 for a New York State long form and $22 for a New York State short form.  However, the franchisee would automatically add various extra fees, including a 15% multiplier to its tax preparation fee and a $25 hidden RAL/RAC fee.  One customer was charged $50 in hidden RAL/RAC fees, a $75 RAL application fee, $57 for the Form 1040, $27 for a NYS Long form, $72 for a Child Care Credit form, and $6 for unemployment compensation – on top of the RAL fee of $150.  However, the customer was never given this itemized breakdown of fees.[79]

K.        Fallout from H&R Block’s Loss of RALs in 2011

In 2011, H&R Block was left without RALs when the OCC issued a directive prohibiting HSBC (Block’s RAL lending bank partner) from offering the loans.[80] HSBC had already shown indications that it wanted to leave the RAL market.  In fact Block had sued HSBC in October 2010 to force the bank to make preparations for RAL lending in the 2011 tax season.[81] Thus, the OCC order was seen as a “friendly” directive.

Perhaps surprisingly to some, Block’s business did not suffer from the loss of RALs.  Its retail stores saw a gain of 3.6% in 2011 as compared to 2010.[82] These results may have contributed to Block’s decision in September 2011 not to seek a new RAL lending bank for the 2012 tax season.[83]

In contrast, when Jackson Hewitt lost its RAL bank partner in 2010, it lost 15% of its retail customers, even though it found RAL coverage for about half of its offices.[84] Hewitt’s business declined by 8% even in markets where it had RALs available, and a whopping 21% in markets where it did not have RALs.[85]

L.         Fillable PDFs and Facilitated Self-Assistance

For years, consumer advocates have urged that the IRS provide the ability for taxpayers to electronically file their returns with that agency, without the need for a third party intermediary.  A few years ago, the IRS took an initial step by offering a “Fillable Form” option in the Free File program.  However, this program does not appear to be directly operated by the IRS, and therefore involves a third party intermediary. When a user clicks on the link to the Fillable Forms program, the IRS website directs the user to another page with the warning “Please note that by clicking on this link, you will leave the IRS web site and enter a privately owned web site created, operated and maintained by a private business.”[86]

This year, the IRS took another small step toward offering direct e-filing by offering Facilitated Self Assistance, an IRS program in which eligible low-income taxpayers can go to a Volunteer Income Tax Assistance (VITA) site to prepare their own taxes using software on the site’s computers.  Volunteers at the VITA site are available to help these taxpayers with the software.[87]

PART II.  INDUSTRY PLAYERS

This section provides basic information on the RAL activity of key industry players, an overview that we provide annually in our RAL reports.  We discuss certain other topics affecting these players, such as regulatory measures, law enforcement actions, and other events, in other parts of this report.

Historically, the RAL industry was made up of a handful of RAL lending banks, three commercial preparation chains, and thousands of independent preparers that offered and arranged for RALs.  The loans were made by banks because of the banks’ ability to avoid state interest rate caps and because IRS rules prohibit the tax preparer from being the RAL lender.[88]

A.        H&R Block

H&R Block is the nation’s largest tax preparation chain, accounting for 15.6% of all individual tax returns in 2010.[89] H&R Block stated that for 2010 “[w]e prepared 20.1 million U.S. returns [including software/online returns] in fiscal year 2010, and of those clients 16.8% also purchased a RAL.”[90] Thus, H&R Block appears to have made 3.4 million RALs in 2010, which is an increase of 15% from the 2.95 million RALs it made in 2009.

Previously, H&R Block also earned fees from RALs through its arrangement to have H&R Block Financial Corporation buy a 49.9% interest in RALs arranged by its tax preparation offices.  In 2010, H&R Block earned $146.2 million in this type of revenue, constituting about 4.9% of tax services revenue.[91]

In 2011, H&R Block did not have the ability to offer RALs because its bank partner, HSBC, was ordered by the OCC to stop making RALs.[92] The company did process 6 million RACs through its own bank, Block Bank.[93] Despite the lack of RALs, H&R Block did not experience a decrease in customers, and in fact gained 3.6% more customers in its retail stores.  Block announced in September 2011 that it would not seek a new RAL lending bank for the 2012 tax season.[94]

H&R Block offers the Emerald Card, a prepaid debit card, to its tax preparation customers.  H&R Block had about 2.5 million Emerald Cards users in 2010,[95] and 2.3 million in 2011.[96]

The Emerald Card also allows customers to access the Emerald Advance Line of Credit, which is a pre-season or “pay stub” product that provides loans of up to $1,000.  The Emerald Advance carries an annual fee of $45 for the first year with an interest rate of 36%.[97] Thus, for a $500 advance repaid in one month, the total fee would $60.  A one month, closed-end loan with the same loan amount and fee would have an APR of 158%, if the annual fee were to be included in the finance charge (which Truth in Lending does not require).  For returning customers, the annual fee is lowered to $30 for the next year.  If the customer secures the line of credit with a deposit in an Emerald savings account, the interest rate is reduced to 9%.[98] H&R Block earned about $78 million in interest from its Emerald Advance line of credit in 2010.[99] It earned about $94 million in interest from Emerald Advances in 2011.[100]

Even though Block itself did not offer RALs in 2011 or 2012, one of the companies that Block owns did offer a tax-time loan in 2012. TaxWorks, a division of RedGear, which is owned by Block, is promoting a “Tax Season Cash Advance” provided by Schear Lending Group and Atlas Financial Services.  As discussed in Section II.F below, Schear Lending Group appears to be affiliated with Ohio-based payday lenders.

B.        Jackson Hewitt

Jackson Hewitt is the second largest tax preparation chain in the country, preparing 2.53 million returns in 2010, or about a 3% share of the paid preparer market.[101] This is a decline of about 15% from the 2.96 million returns that it prepared in 2009.[102]

In 2010, Jackson Hewitt lost half of its RAL capacity when its main RAL bank partner, Santa Barbara Bank & Trust, was forced out of the RAL market.[103] That year, Jackson Hewitt sold a financial product to about 2.2 million (or 87%) of its customers.[104] The company stated that “our attachment rate of loan and non-loan refund-based products was 72.2% in 2010;”[105] thus, we can calculate that Jackson Hewitt made 1.8 million RALs and RACs in 2010.  Hewitt did not report the breakdown of RALs versus RACs.  However, based upon what we know about the RAL industry in 2010, we can estimate that Hewitt made about 500,000 to 600,000 RALs.[106]

Even with these declines, Jackson Hewitt continues to derive a large percentage of its profits from financial products.  In 2010, it earned $46.3 million in such fees, or 22% of revenues.[107] In 2010, Jackson Hewitt’s tax preparation volume declined 8% in markets where it had RALs available versus 21% in markets where it did not have RALs.[108]

Because of the loss of RALs in 2010, as well as other factors, Jackson Hewitt has struggled over the past few years.  In May 2011, Hewitt filed for bankruptcy protection from its creditors, from which it emerged a few months later.[109]

C.        Liberty Tax Service

Liberty Tax is the third significant commercial tax preparation chain in the country, with 3,900 locations.[110] Liberty Tax prepared 1.9 million returns in 2010 and 2 million in 2011.[111] The chain is well-known for hiring people to stand outside stores, dressed up in Statue of Liberty costumes as a form of advertisement during tax season.

Liberty earned $14.2 million in RAL and RAC fees in 2010 or 17% of its revenue.[112] It earned $16.5 million in RAL and RAC fees in 2011, again constituting 17% of net revenue.[113]

In 2010, Liberty sold about 783,000 financial products to its customers,[114] of which 300,000 were RALs.[115] Thus, Liberty sold a financial product to about 40% of its customers, and made a RAL to about 16%.  In 2011, Liberty sold financial products to 902,000 customers – nearly half of its customer base.[116] However, it only sold a RAL to 5.6% of its customers in 2011, or about 112,000.[117]

Liberty also appears to be making plans for the end of bank RALs.  The company is planning to go public, and filed a prospectus with the Securities and Exchange Commission in September 2011 (amended November 2011) revealing that it plans to partner with a non-bank lender to make RALs.[118] Subsequently, Liberty’s website showed that it has partnered with SGS Credit Services, Inc. as its lender in Arizona or Texas, and with a number of entities with similar names in Louisiana, Michigan, Missouri, and Washington State.[119] The president of SGS Credit Services is Eugene L. McKenzie, Jr., with a listed address of Arlington, TX.[120] Mr. McKenzie is connected to companies such as Infinity Specialty Finance, LLC, and MKS Financial Services, Inc.[121] He has served as the treasurer for the Texas Consumer Lenders PAC,[122] and both he and the PAC are top donors amongst payday lenders to Texas politicians.[123]

D.        Republic Bank & Trust

The only bank left in the RAL market is Republic Bank & Trust, a state-chartered bank located in Louisville, Kentucky.  Republic became the main lending partner for Jackson Hewitt and Liberty Tax Service after Santa Barbara Bank & Trust was forced to exit the RAL market.  In 2010, Jackson Hewitt represented about 34% of Republic’s RAL and RAC business; Liberty Tax represents another 29% of the business.[124] In 2011, Hewitt represented 40% of Republic’s RAL and RAC business, while Liberty Tax represented 20%.[125]

Republic made 837,000 RALs in 2010, which is a slight increase from 2009.[126] Republic did not report how many RALs it made in 2011; however, its CEO stated that Republic made 3.5 million RALs and RACs in 2011.[127] Since Republic earned $88 million in RAC fees in 2011,[128] at the cost of $30 per RAC, it made about 2.9 million RACs and thus about 600,000 RALs.

Republic earned $44.2 million in net income from RALs and RACs in 2010, or a whopping about 68% of the bank’s income.[129] This compares with $20 million in net income from RALs and RACs in 2009,[130] and thus represents a 121% increase.

E.         Small Chains

The tax preparation industry contains a number of smaller chains.  Two of the most notable are Mo’ Money Taxes and Instant Tax Service.  Both have been the subject of controversy, including incidents this year in which they were accused of failing to give customers their refunds.

MoneyCo USA, known as Mo’ Money Taxes, is a smaller chain of over 100 stores in 18 states.[131] Mo’ Money has been the subject of enforcement action by the North Carolina Commissioner of Banks[132] and the Arkansas Attorney General, whose settlement is discussed in Section III.B below.  Several years ago, Mo’ Money produced outlandish advertisements that could be considered to be racial stereotyping and offensive.[133]

This year, there have been numerous news reports and consumer complaints that Mo’ Money Taxes has not been delivering refunds owed to customers.[134] Refunds that the IRS stated had already been issued were allegedly not received by Mo’ Money customers.[135] Other customers claimed they received checks representing their refunds that bounced or were even drawn on nonexistent accounts.[136] In addition, some customers reported that they have gone to some Mo’ Money offices only to find them closed, while others reported that Mo’ Money did not answer its phones or return calls.[137] Two Congressmen have asked the U.S. Department of Justice for an immediate investigation of potentially fraudulent and criminal activity.[138]

Instant Tax Service, founded by Fesum Ogbazion, is another small chain with a history.  In 2010, when Instant Tax lost the ability to make RALs after Santa Barbara Bank & Trust was barred from making RALs by its regulators, some franchisees failed to inform their customers, leading to angry crowds for which one franchisee even called the police.[139]

This year, Instant Tax Service experienced problems similar to Mo’ Money Taxes.  Some consumers complained that Instant Tax had filed their returns without the consumers’ permission.[140] Others report that they were issued refund checks that bounced or that check cashers refused to honor.[141] Instant Tax Service defended itself by claiming that the checks were issued by Tax Tree, LLC, and had bad check sequencing numbers that were to blame for the cashing problems.[142] However, Tax Tree, LLC appears to be a related entity to Instant Tax Service.  Registrations with the Ohio Secretary of State’s office for both companies show Fesum Ogbazion’s signature as a representative or manager.[143]

F.         Other Banks and Financial Products Providers

Santa Barbara Tax Products Group is the former Pacific Capital Bancorp RAL unit that was spun off after that bank was ordered to cease making RALs by the Office of Comptroller of Currency.[144] SBTPG’s offerings for 2012 include a RAC product that it calls a “Refund Transfer,” as well as a state Refund Transfer program.

River City Bank in Louisville, Kentucky, was formerly a RAL lending bank but decided to exit the business last year when the FDIC notified the bank that making RALs without the Debt Indicator was “unsafe and unsound.”[145] River City still provides a RAC product.  River City Bank partners with several software providers, including ACA, ATX, Drake, efile Interchange, OLTPro, TaxACT, ProSystem fx Suite, TaxSlayer, Taxware Systems, TaxWise, Versicom Communications, and ProTaxPro.com.[146]

Taxpayers who use a River City RAC can get their money on a prepaid card issued at the preparer’s office, by direct deposit to their personal bank account, or via a check printed in the tax preparer’s office.[147] The prepaid card sold by River City Bank is from Futura Card Services, which pays a commission of up to $12 per customer to tax preparers who sell the card.[148] The Futura Card is issued by First California Bank.[149] In addition to the commissions for selling prepaid cards, tax preparers can earn up to $4 for every funded RAC.[150]

Refund Advantage is the tax products division of Ohio Valley Bank, another RAL lending bank that decided to exit the business last year when the FDIC notified the bank that making RALs without the Debt Indicator was “unsafe and unsound.”[151] Refund Advantage still offers RACs, and is integrated into tax software programs including Intuit, OLTPro, TaxSlayer, TaxWise, Taxware Systems, Thomson Reuters, www.pdptax.com, Profit Developers, Incl Service Bureau, ProTaxPro.com, QRTaxPro, SaxTax, and 1040Now.com.  Refund Advantage claims that it can be used with any tax software and permits the refund to be delivered via a prepaid card product.[152] The program claims that there are “no hidden monthly or setup charges for the card.”[153]

Advent sells the “Refund Deposit,” a RAC for federal and state refunds, with tax preparation and other fees deducted from the refund proceeds.  Net refunds are disbursed on a “Get It” prepaid debit card issued at the time of tax preparation, an ACH deposit to the taxpayer’s existing bank account, or a check printed at the tax office.  AdventFinancial’s Settlement Products are integrated into many software providers, including CrossLink Software (Petz), DRAKE Software, OLT, Pro Tax Ware, TaxACT, TaxSlayer, Taxware Systems, and TaxWise.

Another prepaid card that pitches tax time offerings is the RushCard offered by Russell Simmons, founder of a prominent hip-hop music label.[154] The RushCard website urges consumers to take the card’s routing number, account number, and account type for the card when having taxes prepared.  It even notes which lines on the tax form to use in entering the information.  While there is a maximum $5,000 load amount for direct deposit to the card, that does not apply to tax refunds.  The RushCard is issued by Bancorp Bank.[155]

Atlas Financial Services is partnering with Schear Lending Group in 2012 to make “Tax Season Cash Advances,” which appear to be essentially non-bank RALs.  These RALs are offered to preparers using RedGear tax software, marketed as “TaxWorks” and “1040Works.”[156] Red Gear is owned by H&R Block, see Section II.A above.  Tax refund amounts after the RAL and loan fees are repaid are distributed by Citizens Bank or New Capital Bank using their QIK Funds product, which is a RAC described below.

Schear Lending appears to be linked to a number of payday lending operations.  Schear Lending claims to be the leading non-bank provider of small dollar consumer credit in the country, making over $8.5 billion in consumer loans to more than 15.8 million customers.[157] The company seems to be related to Schear Financial Services,[158] which is headed by Lee Schear.[159] Lee Schear founded Cashland, the payday loan store,[160] and is the President of NCP Finance,[161] which promotes the “credit services organization” model of payday lending.[162] Among NCP Finance’s clients are payday lenders ACE Cash Express, CashAmerica, Check ‘N Go, and Advance America.[163]

While it appears that a few non-bank lenders, such as Schear Lending and SGS Credit Services, see Section II.C above, are making RALs, these loans will most likely not be as widespread as bank RALs. Nonbank lenders do not have the legal ability, unlike banks, to flout state laws that cap interest rates, i.e., usury laws.[164] Tax-time loans from payday lenders and other storefront outlets that offer to prepare taxes and make loans may be subject to state loan laws, usury caps, or loan broker requirements in states that have them.  Seventeen states (and District of Columbia) do not authorize extremely high-cost payday lending at all.[165]

G.        Software Companies

As RALs disappeared from the market for the 2012 tax season, providers of professional tax preparation software are promoting non-loan methods of delivering tax refunds to consumers. A scan of websites in mid-February 2012 found heavy emphasis on refunds delivered via prepaid debit cards and direct deposit to taxpayers’ accounts.

Drake Software’s website still offers a RAL option, and lists Republic Bank Tax Refund Solutions as one of its “banking partners.”  Drake also offers a “Direct Deposit Check” (DDC), which appears to be a RAC.[166] Drake’s other banking partners include AdventFinancial, EPS Financial, River City Bank, and Santa Barbara Tax Products Group.  Taxpayers who select the SBTPG’s Refund Transfer can receive their funds by direct deposit into their own accounts, in the form of a cashier’s check printed by the tax preparer through Drake’s software, or via a pre-paid card, the Diamond Plus Card.[167] The Diamond Plus Card is issued by First California Bank.[168]

TaxWise lists Santa Barbara Tax Products Group, Refund Advantage, Republic Bank, River City, Advent Financial, and 3Fund as its bank product options.  Its website still offers RALs, as well as electronic refund checks (RACs) and a Direct Deposit Refund (RACs) with no checks to print.[169]

One of the products offered by TaxWise is the 3Fund payment solution.  3Fund permits the preparer to deduct tax preparation fees from the tax refund which can then be delivered either on a prepaid debit card, by a printed check, or via direct deposit for a cost of $14.95 or more to the taxpayer.[170] CCH Small Firm Services (SFS) announced the  3Fund feature in October 2011 and provides this option for both ATX and TaxWise software products.[171] CCH SFS also permits preparers who use the TaxWise and ATX software programs to offer taxpayers the reloadable prepaid Western Union MoneyWise MasterCard.  The Western Union prepaid card is issued by MetaBank.[172] For returns where no bank product is selected, TaxWise offers FeeCollect, which costs $15.[173]

NTS Services Corp., makers of Tax Vision software, offers QIK Funds, a RAC that is offered by New Capital Bank (NCB) and Citizens Bank (which offers the Atlas system).  NTS offers two models to tax preparers: the “low cost” model and the “incentive” model.  The low-cost model offers a RAC, called a federal QIK Fund, at $30, with the state refund an additional $13.  The preparer receives rebates based on volume, and refunds are disbursed minus fees using direct deposit or paper checks.  The incentive model appears to offer the same products, just a different pricing structure.  Under the incentive model, the QIK Fund product costs $44 and preparers can earn up to $14 in rebates per funded bank product.  The incentive model permits an “upcharge” of the Refund Account Fee up to $75.[174] The additional charge appears to be added to the RAC fee paid by the consumer, and then kicked back to the preparer.

OLTPro is another major software provider.  It partners with RefundAdvantage, Santa Barbara Tax Products Group, River City Bank, EPS Financial, LLC, and AdventFinancial as “bank partners” for the 2012 tax season.[175]

G.        Tax-Time Products at Fringe Financial Outlets

Storefront financial services outlets, including check cashers, payday lenders, rent-to-own stores, retailers, car dealers, and other fee-based providers, have long participated in the frenzy to make money during tax season, when low- to moderate- income consumers receive the largest single infusion of funds at any point in the year.  With the near demise of RAL products, the ability to sell “fast” money is changing.

Some fringe outlets offer tax preparation services without selling RALs or other loans labeled as tax-time credit.  For example, PLS Loan Stores, a chain that offers check cashing, payday lending, and auto title loans, also offers in-store tax return preparation for federal and state returns at its stores in Arizona, California, Indiana, Mississippi, and Texas.  To get refunds faster, PLS urges filing as soon as possible and use of direct deposit to the taxpayer’s bank account or a RAC as speedier options.[176] The in-store tax preparer at an Arizona store we visited stated that she was not authorized to answer questions but did note that preparation of the 1040EZ form was free.  PLS in-store brochures in Arizona disclose check cashing fees at one percent plus $1 and offer a $5 off coupon to cash income tax refund checks over $1,000.  PLS sells a prepaid debit card, issued by The Bancorp Bank, as a means of getting direct deposit of tax refunds, and consumers are told that they can load the tax refund onto their own cards or one sold by the store.[177]

Cash America, the large pawn/payday loan national chain, promotes its tax filing services but notes on its website that “Cash America does not provide nor offer Refund Anticipation Loans.” Cash America does offer an estimate on the size of tax refunds and acts as a sales representative for e-Tax, described below. [178] The options offered to handle refunds are RACs received in one to two weeks and IRS e-file with the refund sent by check in four to six weeks, as well as check cashing at Cash America for an additional fee.

eTax Partners, Inc., located in Alpharetta, Georgia, is a remote tax preparation program that promotes itself as a “direct to business” tax preparer.  Clerks at retail outlets enter data into the online form, then the tax returns are prepared at eTax.  An eTax Partners handout listed the cost of federal tax preparation starting at $59, and claims that “eTax has developed the easiest system to earn huge revenue in a short period of time.  Prepare returns in under 10 minutes, making over $100 each, utilizing only a location’s existing customer base.”[179] Promotional material for eTax for a Rent To Own tradeshow claimed that most companies make over $10,000 per location in their first year and double the business in their second year.[180]

National Cash Advance, a payday lender, offers to estimate taxes with actual tax preparation provided by eTax.  National Cash Advance also offers a $20 coupon for tax preparation fee.[181] This same offer is made by National Cash Advance’s parent, Advance America, the large national chain of payday lenders.

Advance America is offering tax preparation services from e-Tax and RACs from e-Collect/EPS Financial.  Advance America does not appear to be offering RALs.  This year, we conducted a mystery shopper test of an Advance America store in Columbia, Missouri (see Appendix A for details).  The tester was charged a tax preparation fee of $115 (originally $135 but with a $20 coupon) and a “bank/transmit” fee of $92.  Since EPS Financial charges at most $20 for a RAC, see Section I.I above, it appears that Advance America or e-Tax is charging a $72 transmitter fee.

Some fringe outlets are just promoting tax check cashing services.  Money Mart promotes its tax refund check cashing for any amount, no ID required, no holds on refunds, and no bank account necessary.  Money Mart partners with Liberty Tax Service to cash tax refund checks.[182] ACE Cash Express promotes check cashing for tax refund checks but is not promoting tax preparation.  A clerk at an Arizona ACE store quoted three percent as the tax refund check cashing fee, but urged a caller to bring in the check to “run through” the system to see exactly what the fee would be.[183] A $3,000 tax refund check would cost $90 to cash at that rate, but ACE offers a 20% off coupon for check cashing fees on its website.[184] ACE also promotes loading federal tax refunds onto an ACE Elite Visa prepaid card, issued by NetSpend.  Consumers who do so get a chance to win a $10,000 prize.  Check into Cash does not promote tax preparation for 2012, but does cash checks.

CheckSmart outlets in Arizona offered title loans as tax-time loans during the first few weeks of the tax filing season.  These outlets had posters promoting the “Tax Xpress Loan,” which is actually the Buckeye Title loan, available to any consumer who has registration to a vehicle.  The poster stated that returns were prepared using eTax Partners software.  A clerk at a CheckSmart store explained that refunds are delivered in seven to fourteen days if loaded onto the Insight prepaid card, a requirement if the title loan was extended.

The Insight Card offered by CheckSmart is issued by Urban Trust Bank.[185] Insight Card Services promoted its Tax Solutions for retailers as “lucrative opportunities for you to increase revenues, while providing your customers the most options available at tax time.”[186] The Tax Solution website claimed that users would generate additional revenue, compete head-to-head with large national chains, deliver more value with flexible, innovative products, and need not charge “upfront fees” for tax preparation.[187] The Insight Card appears costly, with a $9.95 issuance fee, a fee of $1 or $2 for PIN debit card purchases, and a” Convenience Transfer Fee” of $3.50 per $28.50 for account to account transfers.[188] This last fee could potentially apply to title loans from CheckSmart, and thus would mean $140 in fees to transfer loan proceeds of $1,000.  Advocates have alleged that the “Convenience Transfer Fee” is actually a disguised loan fee.[189]

RepubliCash, a chain of check cashers/payday lenders in Maine, advertises a “same day cash” tax refund up to $1,000.  During a phone call to the RepubliCash Portland store, a clerk explained that the loan is made by the payday lender, not a separate RAL bank, and that the loan is repaid when the taxpayer’s refund check is printed at the store.  A $1,000 loan would cost $70, according to the clerk.[190]

Subsequently, we sent a tester to the RepubliCash store in Windham, Maine.  The RepubliCash employee stated that the fee was $99 to prepare “basic taxes” and there was another $19 fee for each additional form.  RepubliCash apparently uses the Drake software program and they do the taxes in the store at a computer.  The employee stated that it cost $10 for customers to select direct deposit for their refund and $30 for the refund to be deposited on a check ($20 for the federal refund, $10 for the state refund for a combined $30).  The employee referred to these fees as fees for the loan, but she wasn’t too clear on the details.  RepubliCash also offers a prepaid card called an “ICE” card, costing $4.95.[191]

According the employee, RepubliCash prints the refund check (probably a RAC check) at the store, and that is the store’s form of security.  The employee stated that RepubliCash has different guidelines for whether borrowers can get a loan or not, and the amount of the loan is dependent on the store.  Generally, the Windham store will lend up to half of the total refund amount (up to $1,000).  The employee also mentioned that the store would usually not give a loan if there was no earned income, because these taxpayers typically rely on claiming dependent children for the bulk of the refund; if a family is split, the employee stated it could be contentious over who actually is eligible to claim the dependent.  The tester asked if RepubliCash’s tax loan was similar to its payday loan, and the employee said yes.

TRS Refund Services is once again advertising its TaxMax program to auto dealers and retailers, promoting tax preparation and refunds as a way to bolster purchases for autos and big-ticket items.  The auto dealer earns up to $99 for preparing tax returns for customers, which is in addition to the tax preparation fee paid by the consumer.[192] TaxMax also offers a pre-tax season program, in which auto dealers can offer an estimate of the consumer’s 2011 tax refund, negotiate the future down payment on a car when the consumer’s W-2 and 1099 forms arrive, and require buyers to sign a promissory note.[193] The $139 tax refund service fees are deducted directly from the client’s refund check.[194] One selling point for auto dealers is that the refund can be used to pay past debts owed to the dealer.  The TRS FAQs note that the tax refund check will be made payable to the taxpayer but the check will be sent to the dealership.  The customer just needs to endorse the check over to the dealership for the refund to be used to buy a car or pay past due debt.[195] The FAQs also note that “when sent electronically, the funds are sent directly to the dealer’s account.”[196] While the TaxMax website still promotes RALs, a phone call to TRS Tax Refund Services revealed the loans are no longer available.[197]

PART III.  REGULATION, ENFORCEMENT,

LITIGATION AND ADVOCACY

A.        RAL Legislation

There was no new RAL legislation in 2011.  In 2009, Minnesota amended its tax RAL law to prohibit including in a RAL/RAC agreement any provision that directly or indirectly arranges for payment of a fee other than the RAL/RAC fee, repayment of a RAL, or the tax preparation fee.[198] This provision appears to prohibit add-on fees.  Minnesota also added to its law RAC disclosures and a requirement that tax preparers act in the best interests of the client.[199]

There are currently a total of twenty states regulating RALs: Arkansas, California, Colorado, Connecticut, Illinois, Louisiana, Maine, Maryland, Michigan, Minnesota, Nevada, New Jersey, New York, North Carolina, Oregon, Tennessee, Texas, Virginia, Washington State, and Wisconsin.  The laws for thirteen of these states are summarized in Appendix A to NCLC’s model state RAL law.[200]

Most of these laws rely on disclosures to protect consumers from RAL abuses, which are limited in their effectiveness.  However, RAL laws in Arkansas, Maine, Maryland, Minnesota, and New York provide substantive protection by prohibiting add-on fees.  The Connecticut law prohibits RAL facilitators from facilitating a RAL costing over 60% APR; however, the federal Court of Appeals for the Second Circuit struck down this provision, holding that it was preempted by federal banking law.[201]

B.        Regulation and Enforcement

The most important regulatory action, of course, was the FDIC’s settlement with Republic Bank & Trust, discussed in Section I.B above.  In the settlement, Republic agreed to: [202]

• Cease offering RALs after April 30, 2012.
• Pay a $900,000 civil money penalty.
• Implement a system of verifications in place to ensure that its partner tax preparers operate their future tax settlement activities with appropriate safeguards.
• Review all advertising for tax settlement products at preparer’s offices.
• Conduct audits, including surprise on-site visits and mystery shopper surveys, at 10% of preparer locations.

Prior to the settlement, the FDIC had issued an “Amended Notice of Charges for an Order to Cease and Desist,” which detailed widespread legal violations in Republic’s RAL program, including:[203]

• Truth-in-Lending Act (TILA) – The FDIC found that copies of the written disclosures required by TILA were regularly absent from loan files. Nearly 88% of the tax preparers that FDIC investigators called failed to make an oral disclosure of the APR when requested.
• Gramm-Leach-Bliley Act – Tax preparers did not have proper physical and electronic safeguards for the protection of confidential consumer information, such as shredders or locked dumpsters. Half of the tax preparer offices had no alarm system, even though the stores had bank checks inside.
• Federal Trade Commission Act – The FDIC alleged that Republic engaged in unfair and deceptive actions, such as implying that customers would receive the full amount of their refunds minus fees in one or two days by getting a RAL, despite the fact that the RAL amounts were limited by Republic to $1,500.
• Equal Credit Opportunity Act (ECOA): The FDIC found tax preparers refused to process a RAL application when only one spouse applied for the loan, in violation of the ECOA.

According to the FDIC, 46.5% of tax preparers who made Republic RALs were in violation of at least three different laws.  The FDIC found that Republic failed to properly train tax preparers to comply with consumer protection laws. In particular, Republic tested preparers’ knowledge of consumer laws by giving them an online quiz that permitted the preparers to keep guessing until they passed the test. In addition, the FDIC alleged that Republic attempted to interfere with its investigation by setting up an Internet webpage of Frequently Asked Questions to coach tax preparers during the day when the FDIC tested the preparers.

In addition to the FDIC’s action, the Arkansas Attorney General obtained a consent Judgment against Mo’ Money for violation of the Arkansas RAL Act and the Arkansas Deceptive Trade Practices Act.  The Arkansas Attorney General had alleged that Mo’ Money failed to provide the disclosures required by that state’s RAL Act, and charged add-on fees prohibited by the Act.  Mo’ Money agreed to comply with the Arkansas RAL Act and to pay a fine of $25,000.[204]

C.        Litigation

Credit Services Organization Cases

As discussed in prior reports, several cases had been filed against Jackson Hewitt and H&R Block for violation of state Credit Services Organization Act laws.[205] These laws regulate both credit repair organizations and “any person or organization who assists or offers to assist consumers in obtaining an extension of credit,”[206] which should include tax preparers who offer to arrange RALs.  Three of these cases include:

• Thomas v. Jackson Hewitt, Inc., 950 N.E.2d 578 (Ohio Ct. App. 2011) (affirming dismissal based on failure to sufficiently allege damages from Hewitt’s violation of state credit services organization act).
• Fugate v. Jackson Hewitt, Inc., 347 S.W.3d 81 (Mo. Ct. App. 2011) (reversing dismissal, tax preparer could be credit services organization even though consumer did not make payment directly to preparer).
• Gomez v. Jackson Hewitt, Inc., 16 A.3d 261 (Md. Ct. Spec. App.  2011) (tax preparer that facilitated RALs was not a credit service organization because customer paid preparer for RAL facilitation only indirectly; court relied, ironically, in part on the fact that Maryland specifically passed a law governing RAL facilitators).

The plaintiffs in Gomez v. Jackson Hewitt had been planning to appeal that decision to the highest court in Maryland.[207] However, as a result of Jackson Hewitt’s bankruptcy filing, all of the RAL lawsuits against the company were apparently snuffed out.[208]

RAC Lawsuits

A number of class action lawsuits in different states have been brought against H&R Block and Liberty Tax Service over their RAL and RAC programs.[209] One of the primary allegations in these lawsuits is that the RACs offered by these companies are in fact disguised loans of the tax preparation fees.  The lawsuits bring claims for violations of state RAL Act and/or consumer protection laws.

Martin v. JTH Tax, Inc.[210]

This class action was filed by Liberty Tax customers who alleged that Liberty preparers included false information in the customers’ returns without the customers’ knowledge. The lawsuit alleges violation of state consumer protection laws and the Racketeer Influenced and Corrupt Organizations Act.

CONCLUSION

This year, we are pleased to report the end of RALs as big business.  This is the last year in which tax preparers and their partner banks are able to offer high-cost, high-risk loans that skim hundreds of millions of dollars from tax refunds.

Unfortunately, the end of RALs does not mean the end of the exploitation of low-income taxpayers.  Banks and tax preparers will continue to offer RACs, which can be subject to significant add-on fees and may represent a high-cost loan of the tax preparation fee.  The tax preparation fee itself is also a source of potential consumer confusion, with high fees and the inability for consumers to obtain estimates to comparison shop. The use of prepaid debit cards to deliver RACs and collect payment for loans made by fringe providers adds to the importance of comprehensive federal protections for prepaid cards. There are many challenges remaining to protect low-income taxpayers from profiteering and abuse.

APPENDIX A: SUMMARY OF MYSTERY SHOPPER TEST

Taxes prepared at Advance America

Columbia, MO 65201

On February 10, 2012 I accompanied [the tester] to an Advance America store to have his taxes filed.

Documentation and Forms Given

I’ve attached all the documentation I was able to get. I think it’s important to note that it’s my perception that this documentation is not always given to customers- for example, the first page is absolutely not given out. This is a screen print from their own internal e-tax screen that shows the fees [the tester] was charged. I actually came back to the store after our initial visit and asked for documentation of the fees charged, explaining that I thought it may be needed for doing taxes next year. The staff told me they don’t have anything for customers with this information (fees charged), but I was persistent (and nice) and one of the employees told the other “just print that out for him.”

I was able to get a copy the consent forms of what [the tester] signed by asking for one, although it was not offered. My perception is that the only paperwork one would get back without asking for it would be the IRS form 8879 (pages 2-3). I told the staff that I wanted to get a copy of the actual 1040 that was filed, and they told me they don’t have it. So, the AA staff just enter information into an e-file interface, and the e-file staff actually transmit the 1040, but this isn’t something that taxpayers have access to. I told the staff we wanted the 1040 for use with filling out [the tester]’s FAFSA, and they told me to just use the information on the front page of the 8879.

Fees Charged

You will see that the total fees charged were $207. $115 of this is the fee for filing his federal return. The option to file his Missouri return was not presented. You’ll also notice that the $115 includes a $20 discount (from a coupon they had), so the fee was really $135. There doesn’t seem to be a flat fee, because the staff was unable to tell us ahead of time what the fee would be or quote me a fee for my taxes. They explained the fee was based on what your tax return involved and they would not know the fee until they put in all the information. [The tester] only had one job last year and his only other forms/credits was an American Opportunity Credit that was derived from two 1098-Ts he had. So I’d imagine the $135 filing fee is probably one of their cheaper fees. Also, this fee was only to file his federal taxes. There was no mention of filing his state return. I’ve called the store several times to figure out what is going on with the state return (i.e., if the fee paid should have included the filing of a state return) but have not heard back yet. Last I heard, the manager was out but would call me back. However, the person I talked with did say the manager had talked with the “tax experts” about it.

Bank Transmittal Fee and Process

The rest of the fee came from the $92 “bank transmittal fee” (which, I was told, is something anyone doing taxes is going to charge you). This is the fee for The Bancorp Group (a third party) to create a bank account for the IRS refund to be directly deposited in. After the funds hit this account, the e-file group/Advance America take out their fees (in this case, $207) and then deposit the rest of the return into [the tester]’s regular checking account. More information about this process can be found on pages 7-9 of the attachment. I don’t understand exactly how the $92 figure was derived, given that “e-direct” box on page 9 seems to imply these fees are lower. One interesting thing about the whole process is that none of the fees seem to be flat fees and the staff was unable to tell us what any fees would be until the end. They kept saying it was all based on your tax return, and they seemed surprised themselves at the fees charged (they thought they were pretty low).

When [the tester] was given this form to sign the box was already checked on page 9 for him to have the e-direct option. It’s interesting to see that the form outlines he could get direct deposit for free from the IRS. This was not explained explicitly. In fact, when given the forms to sign the only explanation was “I just need you to read and sign this.” I was scanning these forms with [the tester] and really wish I’d done a better job, as the first page he signed allowed his personal information to be shared. Also, I am unsure how well, if at all, the no charge direct deposit option from the IRS is explained to customers. I called ahead to see what we needed to bring into the store, and at this time asked about the fees and if I needed to bring money in to pay the filing fee. The AA staff member told me I could do it either way (i.e., pay the fee in cash or have it taken out of the refund) and that we could talk about this when I came in. The person I talked with on the phone was the same person preparing our taxes later that same day, so she remembered this conversation. She said “it’d cost a little bit more” if we had the fee taken out of the refund, but also said this (direct deposit) method was the fastest way to get the refund back. From this point on, using the e-direct method was just referred to as “direct deposit.” I am unsure how this more costly method would have been marketed had I not inquired about paying the filing fee upfront, but it is my perception that the more costly options are marketed to customers as the easier options, and there is likely no mention of being able to get free direct deposits from the IRS.

Overall Conclusions

Fees are not discussed up front, and are fairly costly. An additional fee that we declined was for “audit protection,” which the staff explained would protect us if the IRS decided to audit [the tester]’s return.

Taxpayers are not given copies of their 1040 or any related schedules. They are also not told what credits were taken or how their refund was computed.

Very little documentation is given to taxpayers, including no documentation listing the fees charged (my perception is that the printout I got with the fees is not something regularly shared with customers).

Advance America is not making RALs, but is still making loans. For example, if customers pay their filing fee upfront, they are able to get refunds direct deposited into their accounts for no cost (through the IRS’ direct deposit/e-file program). However, if customers aren’t able to pay their filing fee upfront, they can elect to have it taken out of their refund through the e-direct method. This requires a “bank transmittal fee,” which is really a fee/interest charged to the customer to loan him or her their filing fee. In [the tester]’s case, his APR would have been 2092%, if you consider he was charged $92 to borrow $115 (the filing fee) for roughly 10 days (the staff explained he could have gotten his refund in about 5 days…but did say it could be up to 2 weeks).

Issues as to who is the actual tax preparer and who is IRS certified-You’ll notice that the 8879 lists Advance America as the tax preparer/ERO firm, yet the consent forms [the tester] signed lists “e-Tax, Inc” as the ERO/preparers. If AA staff are doing returns (which is absolutely how the process was presented to [the tester] and me), then are they IRS certified?

AA staff are not that knowledgeable about the process. For instance, it remain unclear the protocol for filing state returns and whether or not [the tester] should have has his filed. Also, they seem unclear on the timeline for receiving a refund- they initially said it’d be about 5 days, and then when I called them at the 14 day mark they said the IRS had been “really phony” lately and refunds were taking longer.

The National Consumer Law Center is a non-profit organization specializing in consumer issues on behalf of low-income people.  NCLC works with thousands of legal services, government and private attorneys, as well as community groups and organizations, who represent low-income and elderly individuals on consumer issues.  National Consumer Law Center® and NCLC® are trademarks of National Consumer Law Center, Inc.

The Consumer Federation of America is an association of nearly 300 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education.

The authors would like to thank Carolyn Carter for editorial review and Jillian McLaughlin and Graham McCaulley for investigative assistance.

This research was funded by the Annie E. Casey Foundation.  We thank the Foundation for its support but acknowledge that the findings and conclusions presented in this report are those of the authors alone, and do not necessarily reflect the opinions of the Foundation.

[1] Data from IRS Stakeholder Partnerships, Education & Communication (SPEC) Return Information Database for Tax Year 2009 (Returns Filed in 2010) (Jan. 2012).

[2] Chi Chi Wu, Jean Ann Fox, and Elizabeth Renuart, National Consumer Law Center and Consumer Federation of America, Tax Preparers Peddle High Priced Tax Refund Loans: Millions Skimmed from the Working Poor and the U. S. Treasury (Jan. 31, 2002), available at http://www.nclc.org/images/pdf/high_cost_small_loans/ral/2002-ral-report.pdf [hereinafter NCLC/CFA 2002 RAL Report].

[3] Chi Chi Wu, National Consumer Law Center, Corporate Welfare for the RAL Industry: the Debt Indicator, IRS Subsidy, and Tax Fraud (July 2005), available at http://www.nclc.org/images/pdf/high_cost_small_loans/ral/debt_indicator_white_paper.pdf.

[4] Chi Chi Wu and Jean Ann Fox, National Consumer Law Center and Consumer Federation of America, Pay Stub and Holiday RALs: Faster, Costlier, Riskier in the Race to the Bottom (Nov. 2008), available at http://www.nclc.org/images/pdf/high_cost_small_loans/ral/paystub_ral_report.pdf.

[5] Appendix A to Chi Chi Wu, Jean Ann Fox, and Patrick Woodall, National Consumer Law Center and Consumer Federation of America, Another Year of Losses: High-Priced Refund Anticipation Loans Continue to Take a Chunk Out of Americans’ Tax Refunds 4 (Jan. 2006).

[6] Chi Chi Wu, National Consumer Law Center, RALs, Tax Fraud, and Fringe Preparers (Feb. 2009).  This report is Appendix A to Chi Chi Wu and Jean Ann Fox, National Consumer Law Center and Consumer Federation of America, Big Business, Big Bucks: Quickie Tax Loans Generate Profits for Banks and Tax Preparers While Putting Low-Income Taxpayers At Risk (Feb. 2009) [hereinafter NCLC/CFA 2009 RAL Report].

[7] Chi Chi Wu, Deyanira Del Rio, Alexis Iwanisziw, Peter Skillern, National Consumer Law Center, NEDAP, Community Reinvestment Association of North Carolina, Tax Time 2011: Mystery Shopper Testing In New York And North Carolina Finds Continuing Problems With Tax Preparers (Apr. 2011) [hereinafter 2011 RAL Mystery Shopper Report]; Chi Chi Wu, Michael Rowett, Peter Skillern, Deyanira Del Rio, Alexis Iwanisziw and Josh Zinner, National Consumer Law Center, Arkansans Against Abusive Payday Lending, NEDAP, Community Reinvestment Association of North Carolina, Tax Preparers Out of Compliance:  Mystery Shopper Testing Exposes Violations of Refund Anticipation Loan Laws in Arkansas, New York and North Carolina (Apr. 2010) [hereinafter 2010 RAL Mystery Shopper Report]; Chi Chi Wu, Kerry Smith, Peter Skillern, Adam Rust, and Stella Adams, National Consumer Law Center, Community Reinvestment Association of North Carolina, Community Legal Services of Philadelphia, Tax Preparers Take a Bite Out of Refunds: Mystery Shopper Test Exposes Refund Anticipation Loan Abuses in Durham and Philadelphia (Apr. 2008) [hereinafter 2008 RAL Mystery Shopper Report].

[8] Amended Notice of Charges for an Order to Cease and Desist, In the Matter of Republic Bank & Trust Co., FDIC-10-079b and FDIC-10-216k, May 3, 2011.  See Section III.B below for discussion of details of the Amended Notice.

[9] Consent Order, In the Matter of Republic Bank & Trust Co., FDIC-10-079b and FDIC-10-216k, Dec. 8, 2011.  See Section III.B. below for discussion of details of the Consent Order.

[10] There were 128 million returns filed in the 2010 filing season, which was for Tax Year 2009.  Data from IRS SPEC, Return Information Database for Tax Year 2009 (Returns Filed in 2010) (Jan. 2012).

[11] Id.

[12] See Chi Chi Wu and Jean Ann Fox, National Consumer Law Center and Consumer Federation of America, End of the Rapid Rip-Off: An Epilogue for Quickie Tax Loans 7-8 (Feb. 2011) [hereinafter NCLC/CFA 2011 RAL Report].

[13] Liberty Tax Reports Filing Growth, Low RAL Approval, The Progressive Accountant, Feb. 9, 2010.

[14] This chart is based on data from IRS SPEC and the annual RAL reports issued by NCLC and CFA.

[15] Chi Chi Wu and Jean Ann Fox, Major Changes in the Quick Tax Refund Loan Industry 14 (Feb. 2010) [hereinafter NCLC/CFA 2010 RAL Report].

[16] Robert Barba, A Challenging Question, American Banker, Feb. 1, 2012 (noting that Republic Bank & Trust’s average RAL was around $3,700 in 2010).

[17] See NCLC/CFA 2010 RAL Report at 8.

[18] See Section II.A below.

[19] See NCLC/CFA 2010 RAL Report at 9.

[20] Id.

[21] See Section II.C below.

[22] See NCLC/CFA 2011 RAL Report at 9.

[23] Id.

[24] See NCLC/CFA 2010 RAL Report at 10.

[25] We know that Block made 1.5 million “Instant Money RALs” in 2004.  Peter Tufano and Daniel Schneider, Harvard Business School, H&R Block and “Everyday Financial Services” 7 (Oct. 2004).

[26] 2010 RAL Mystery Shopper Report, Appendix B.  See also Jackson Hewitt, Inc., Ask Jackson Hewitt, What is the Data and Document Storage Fee? (Dec. 10, 2009) (on file with authors).

[27] Ragan Robinson, Tax Refund Loans in Installments This Year, Gaston Gazette, Jan. 3, 2011 (reporting that a RAL at Liberty Tax Service costs $110, which is $20 more than Republic’s published price); Susan Tompor, Tax-Refund Loans Harder to Come By, Detroit Free Press, Feb. 7, 2011 (reporting that a RAC at Liberty Tax Service costs $49.95, which is $20 more than Republic’s published price).

[28] JTH Holding, Inc., Form S-1: Registration Statement under the Securities Act of 1933 (amended version Nov. 7, 2011), at 2.

[29] There were 5 million RALs, of which Block made 3.4 million and Jackson Hewitt and Liberty made 837,000, so 763,000 of the 5 million RALs (15%) were made by others..

[30] See Section I.I below.

[31] Data from IRS SPEC, Return Information Database for Tax Year 2009 (Returns Filed in 2010) (Jan. 2012).

[32] Brett Theodos, et al., Who Need Credit at Tax Time and Why: A Look at Refund Anticipation Loans and Refund Anticipation Checks 18 (Nov. 2010), available at http://www.urban.org/publications/412304.html [hereinafter Urban Institute RAL Report].

[33] Id. at 28 (emphasis added).

[34] Id. at 19, 27.

[35] IRS data reports that 4.5 million EITC returns were associated with a RAL application in 2009.  Data from IRS SPEC, Return Information Database for Tax Year 2009 (Returns Filed in 2010) (Jan. 2012).  Using the 75% approval rate, see Section I.C above, the number of approved RALs is 3.4 million.

[36] There were 24.1 million EITC returns and 139 million individual tax returns in 2009.  Data from IRS SPEC, Return Information Database for Tax Year 2009 (Returns Filed in 2010) (Jan. 2012).

[37] Id.

[38] Karen Masken, Mark Mazur, Joanne Meikle, and Roy Nord, Office of Research, Analysis and Statistics, Internal Revenue Service, Do Products Offering Expedited Refunds Increase Income Tax Non-Compliance 3 (2008) (on file with authors).

[39] Urban Institute RAL Report at 23.

[40] This is 66% of the $338 million total paid for RALs in 2010.  See Section I.D, above.

[41] Based on the estimate that 25% of RAL borrowers were also charged add-on fees.  See id.

[42] H&R Block Inc., 2010 Form 10-K: Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, at 19 [hereinafter H&R Block 2010 Form 10-K].

[43] Tax preparation fees were as high as $540 in mystery shopping conducted in Arkansas and New York.  2011 RAL Mystery Shopper Report, Appendix A.

[44] Republic Bank & Trust, What You Need to Know Before Selecting a Bank Product, obtained January 14, 2012 from a Jackson Hewitt store, on file with authors.

[45] See Section I.I below.

[46] H&R Block, Refund Anticipation Check Instructions, 2011, on file with authors.

[47] According to the IRS data, 12.8 million taxpayers applied for a RAC in 2010.  In addition, there were 1.8 million RAL applicants who were denied a loan, then converted to a RAC.  Data from IRS SPEC, Return Information Database for Tax Year 2009 (Returns Filed in 2010) (Jan. 2012).

[48] See NCLC/CFA RAL 2011 Report, at 13.

[49] Intuit ProLine Quick Collect, at http://proseries.intuit.com/products/offers/quick-collect.jsp (viewed Feb. 21, 2012).

[50] E-Collect, EPS Financial, at (viewed Feb. 21, 2012).

[51] Press Release, The Bancorp Bank Teams Up with EPS Financial and Drake Software, Mar. 20, 2010.

[52] See NCLC/CFA 2011 RAL Report at 14.

[53] Michelle Crouch, Pros and Cons of Tax Refund Prepaid Cards, www.creditcards.com, Jan. 30, 2012, at www.creditcards.com/credit-card-news/tax-refund-prepaid-cards-fees-1271.php.

[54] Mara Lee, State Moving Toward Debit Cards for Income Tax Refunds, Hartford Courant, Feb. 1, 2012, available at www.courant.com/business/hc-state-tax-debit-card-20120131,0,6362810.story(last viewed Feb. 21, 2012).

[55] Press Release, New York State Tax Department Introduces Prepaid Card Option for Personal Income Tax Returns, Dec. 2, 2011, available at www.tax.ny.gov/press/rel/2011/prepaidcard120211.htm(last viewed Feb. 21, 2012).

[56] Ed Doney, Why You May Not Get All of Your Tax Refund, KFOR, Jan. 24, 2012, available at (last viewed Feb. 21, 2012).

[57] 31 C.F.R. § 210.5(b)(5).

[58] Id.

[59] Chi Chi Wu and Jean Ann Fox, Coming Down:  Fewer Refund Anticipation Loans, Lower Prices from Some Providers, But Quickie Tax Refund Loans Still Burden the Working Poor, National Consumer Law Center and Consumer Federation of America, Mar. 2008, at 7.

[60] 2010 RAL Mystery Shopper Report, Appendix B.  See also Jackson Hewitt, Inc., Ask Jackson Hewitt, What is the Data and Document Storage Fee? (Dec. 10, 2009) (on file with authors).

[61] Fifth Amendment to Program Agreement Between Jackson Hewitt and Republic Bank & Trust (Sept. 30, 2010).  See also Margaret Collins, Taxpayers File for Refund Loans in Shadow of Stadium, Bloomberg News, Feb. 7, 2011 (reporting that a RAL at Jackson Hewitt costs $61.22 plus $49.95 for the RAC and for “Jackson Hewitt’s transmission”).

[62] Ragan Robinson, Tax Refund Loans in Installments This Year, Gaston Gazette, Jan. 3, 2011 (reporting that a RAL at Liberty Tax Service costs $110, which is $20 more than Republic’s published price); Susan Tompor, Tax-Refund Loans Harder to Come By, Detroit Free Press, Feb. 7, 2011 (reporting that a RAC at Liberty Tax Service costs $49.95, which is $20 more than Republic’s published price).

[63] 2008 RAL Mystery Shopper Report, Attachment 2.

[64] 2010 RAL Mystery Shopper Report, Appendix B.

[65] 2011 RAL Mystery Shopper Report, Appendix B.

[66] Sara Dewees, First Nations Development Institute, Tax Time Troubles:  Mystery Shopper Testing Exposes Poor Quality Tax Preparation and Refund Anticipation Check Abuses, Apr. 15, 2011, at 14.

[67] Press Release, Office of the New Jersey Attorney General, Tax Preparation Firm Ordered to Pay $3.5 Million for Deceptive Sales of “Refund Anticipation Loans” (Apr. 14, 2009), available at http://www.nj.gov/oag/newsreleases09/pr20090414a.html.

[68] See NCLC/CFA 2010 Report at 18.

[69] EPS Financial, ERO e-Collect Program Handbook 2012, on file with authors.

[70] 2010 RAL Mystery Shopper Report at 9.

[71] 2011 RAL Mystery Shopper Report at 5-6.

[72] 2008 RAL Mystery Shopper Report at 9.

[73] Sara Dewees, First Nations Development Institute, Tax Time Troubles:  Mystery Shopper Testing Exposes Poor Quality Tax Preparation and Refund Anticipation Check Abuses, Apr. 15, 2011, at 14.

[74] Dave Lieber, Beware of Jackson Hewitt’s $38 fee, Connecticut Watchdog, May 5, 2011, at http://ctwatchdog.com/misc/beware-of-jackson-hewitts-38-fee.

[75] Impact Alabama, Impact Alabama Undercover Investigation of Commercial Tax Preparers in Alabama Results and Analysis, Jan. 2009, on file with authors.

[76] Nick Cenegy, Group Finds Errors in Alabama Tax Returns Probe; Aniston Business Named in Study, Anniston Star, Jan. 23, 2009.

[77] U.S. Government Accountability Office, Paid Tax Preparers: In a Limited Study, Chain Preparers Made Serious Errors, GAO-06-563T, April 4, 2006, at 24, available at .

[78] WorldWideWeb Tax, Tax Return Pricing, The Tax Time News, Oct. 2008, on file with authors.

[79] Watts v. Jackson Hewitt Tax Service, 579 F. Supp.2d 334 (E.D.N.Y. 2008).

[80] Press Release, H&R Block, HSBC Terminates Agreement to Provide RALs at Direction of OCC (Dec. 24, 2010).

[81] See Complaint, HRB Tax Group, Inc. v. HSBC Bank USA, N.A., Case 4:10-cv-01946 (E.D. Mo. Oct. 15, 2010).

[82] H&R Block had 14,756,000 retail customers in 2011, versus 14,246,000 in 2010.  H&R Block Inc., 2011 Form 10-K: Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, at 19. [hereinafter H&R Block 2011 Form 10-K]

[83] Press Release, H&R Block Decides Not to Offer Refund Anticipation Loan in 2012, Sept. 13, 2011, available at http://www.hrblock.com/press/Article.jsp?articleid=52784.

[84] NCLC/CFA 2011 RAL Report at 21-22.

[85] Id.

[86] See http://www.irs.gov/app/scripts/exit.jsp?dest=https%3A%2F%2Fwww.freefilefillableforms.com (visited Feb. 21, 2012).

[87] IRS Publication 4972, Jan. 2012, available at http://www.mchc.net/pdfs/P%204972_final12%20self%20assist%20fill.pdf.  See also IRS, Free Tax Return Preparation for You by Volunteers, Feb. 2012, at https://web.archive.org/web/20120804121020/http://www.irs.gov:80/individuals/article/0,,id=107626,00.html (visited Feb. 22, 2012).

[88] See NCLC/CFA 2002 RAL Report, at 18–19.

[89] H&R Block Inc., 2010 Form 10-K: Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, at 2. [hereinafter H&R Block 2010 Form 10-K].

[90] Id. at 10.

[91] H&R Block 2010 Form 10-K, at 19.

[92] See Section  I.K, above.

[93] H&R Block, Inc., H&R Block’s CEO Discusses Q4 2011 Results—Earnings Call Transcript, June 23, 2011, available at

[94] See Section  I.K, above.

[95] H&R Block, Inc., H&R Block CEO Discusses F1Q2011 Results—Earnings Call Transcript, Sept 2, 2010, available at .

[96] H&R Block, Inc., H&R Block’s CEO Discusses Q4 2011 Results—Earnings Call Transcript, June 23, 2011, available at

[97] H&R Block, Emerald Advance Term Sheet, undated, on file with authors.

[98] H&R Block, Emerald Advance Term Sheet, undated, on file with authors.

[99] H&R Block 2010 Form 10-K, at 19.

[100] H&R Block Inc., 2011 Form 10-K: Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, at 19. [hereinafter H&R Block 2011 Form 10-K].

[101] Jackson Hewitt Tax Service Inc., 2010 Form 10-K: Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, at 2 [hereinafter Jackson Hewitt 2010 Form 10-K].

[102] Jackson Hewitt Tax Service Inc., 2009 Form 10-K: Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, at 2.

[103] NCLC/CFA 2010 RAL Report, at 23.

[104] Jackson Hewitt 2010 Form 10-K at 35.

[105] Jackson Hewitt Tax Service Inc., Q4 2010 Jackson Hewitt Tax Service Inc. Earnings Conference Call—Final, Fair Disclosure Wire, July 14, 2010.

[106] Republic Bank & Trust, which was Hewitt’s 2010 lending bank, reported that it made 837,000 RALs. See Section II.D below.  We know that Liberty Tax Service reported that it made 300,000 RALs.   See Section II.C below.  Thus, Hewitt made about 500,000 to 600,000 RALs.

[107] Jackson Hewitt 2010 Form 10-K, at 34.

[108] Id. at 36.

[109] Peg Brickley, Jackson Hewitt Set to Leave Chapter 11, Wall St. J., Aug. 8, 2011.

[110] JTH Holding, Inc., Form S-1: Registration Statement under the Securities Act of 1933 (amended version Nov. 7, 2011), at 1 [hereinafter “Liberty Tax Service Prospectus”].

[111] Id. at 41.

[112] Id. at 8.

[113] Id.

[114] Id. at 41.

[115] Eileen AJ Connelly, H&R Block Suit May Signal Sunset of Refund Loans, Associated Press, Oct. 20, 2010.

[116] Liberty Tax Service Prospectus at 41.

[117] Id. at 43.

[118] Id. at 21.

[119] See www.libertytax.com/refund-and-loan-options.html (visited Feb. 23, 2012).

[120] Arizona Corporation Commission, Application For Authority to Transact Business in Arizona for SGS Credit Services, July 6, 2011.

[121] http://www.corporationwiki.com/Texas/Arlington/eugene-l-mckenzie/36976178.aspx (visited Feb. 23, 2012).

[122] Texas Consumer Lenders PAC, General-Purpose Committee Campaign Finance Report, Dec. 2011.

[123] Texans for Public Justice, Loan-Shark-Financed Campaigns Threaten Payday-Loan Reform, March 2011, available at http://info.tpj.org/reports/pdf/PaydayReport.mar2011.pdf.

[124] Republic Bancorp, Form 10-Q: Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2010, at 55 [hereinafter Republic September 2011 Form 10-Q].

[125] Id.

[126] Steve Trager, Rodman Renshaw Annual Global Investment Conference, Republic Bancorp 29 (Sept. 13, 2010).

[127] Bloomberg News, Pre-Refund Loans Fading into Past, Portland Press Herald, Dec 20. 2011.

[128] Republic September 2011 Form 10-Q at 4.

[129] Republic Bancorp, 2010 Form 10-K: Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, at 6.

[130] Republic Bancorp, 2009 Form 10-K: Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, at 4.

[131] See (visited Feb. 23, 2011).

[132] See NCLC/CFA 2011 RAL Report at 33.

[133] Adam Rust, Mo’ Money Taxes Gets a Slap Down, Bank Talk Blog, Feb. 12, 2010 at http://banktalk.org/2010/02/12/mo-money-taxes-gets-a-slap-down/ (visited Feb. 18, 2010).

[134] See, e.g., Robert Jordan, Angry Taxpayers Demand Refunds from ‘Mo Money’, WTKR, Feb. 7, 2012 (Chicago); Mo’ Money Offices Closed, IRS and Norfolk PD Investigating Complaints, WVEC.com, Feb. 7, 2012; Mo Money Customers Complain Across US, IRS Responds to Delays, WREG-TV, Feb. 6, 2012.

[135] Natasha Chen, Previously Sued Mo’ Money Taxes Keeps Customers Waiting, WREG-TV, Feb. 1, 2012, available at www.wreg.com/news/wreg-previously-sued-mo-money-taxes-keeps-customers-waiting-20120201,0,6735023.story (visited Feb. 23, 2012).

[136] Nick Kenney, Customer: Mo’ Money Taxes Wrote Bad Refund Check, WMC-TV, Feb. 7, 2012, available at www.wmctv.com/story/16697978/customer-momoney-taxes-wrote-bad-refund-check (visited Feb. 23, 2012).

[137] Maggie Shader, Beware of Tax Preparation Company Mo Money Taxes, BBB Says, ConsumerReports.org, Feb 8, 2012, available at http://news.consumerreports.org/money/2012/02/beware-of-tax-preparation-company-mo-money-taxes-bbb-says.html (visited Feb. 23, 2012).

[138] Press Release, Cohen & Scott Call for Investigation of Tax Preparation Scams, Feb 8, 2012, available at http://cohen.house.gov/press-release/cohen-scott-call-investigation-tax-preparation-scams (visited Feb. 23, 2012).

[139] Linda Wagar, Angry Customers Demand Money Back After Quick Tax Refund Offer Falls Through, WDAF-Fox TV, Jan. 20, 2010.  See also Katie Byard, Tax Service Promoting Fast Loans Can’t Keep Promise, Akron Beacon Journal, Jan. 18, 2010.

[140] Chris Dyches, Crowd Outside Charlotte Tax Agencies Want Reportedly Promised Money, WBTV, Jan. 27, 2012.

[141] Melanie Alnwick, Tax Refund Check Cashing Issues Arise For Some Instant Tax Service Customers in DC, www.myfoxdc.com, Feb. 9, 2012, at www.myfoxdc.com/dpp/news/local/tax-refund-check-cashing-issues-arise-for-some-instant-tax-service-customers-in-dc-020812 (visited Feb. 23, 2012); Ragan Robinson, Angry Customers, Police Presence at Tax Prep Office, Gaston Gazette, Jan. 27, 2012.

[142] Melanie Alnwick, Tax Refund Check Cashing Issues Arise For Some Instant Tax Service Customers in DC, www.myfoxdc.com, Feb. 9, 2012, at www.myfoxdc.com/dpp/news/local/tax-refund-check-cashing-issues-arise-for-some-instant-tax-service-customers-in-dc-020812 (visited Feb. 23, 2012).

[143] Ohio Secretary of State, Registration of Foreign Limited Liability Co. for Tax Tree LLC, June 29, 2011; Ohio Secretary of State, Registration of Trade Name/Original Filing for TCA Financial, LLC, Mar. 16, 2004, both on file with the authors.

[144] See NCLC/CFA 2010 RAL Report at 14-15.

[145] See NCLC/CFA 2011 RAL Report at 6.

[146] (visited Feb. 20, 2012).

[147] (visited Feb. 20, 2012).

[148] The preparer receives $4 for each customer that has one tax refund deposited to the Futura card, plus an additional $8 for customers that enroll in payroll or government benefits direct deposit to the card.  River City Bank, Earn Additional Revenue by Offering the FCS Refund Access Prepaid MasterCard, at www.rcbral.com/river-city-bank-prepaid-card-solution.html (visited Feb. 20, 2012).

[149] www.rcbral.com/river-city-bank-prepaid-card-solution.html (visited Feb. 20, 2012).

[150] (visited Feb. 20, 2012).

[151] NCLC/CFA 2011 RAL Report at 6.

[152] www.refund-advantage.com/howitworks.aspx (visited Feb. 20, 2012).

[153] (visited Feb. 20, 2012).

[154] www.rushcard.com/taxtime/DDHowTo.aspx (visited Feb. 13, 2012).  See NCLC/CFA 2004 RAL Report at 11 for a critique of the RushCard’s high fees.

[155] www.rushcard.com/DD/Default.aspx (visited January 11, 2012).

[156] http://www.taxworks.com/cash_advance.aspx.  See also Press Release, Schear Lending Group Announces Tax Season Cash Advance in Partnership with RedGear Technologies and Atlas Financial Services for 2012 Tax Season, September 13, 2011.

[157] www.taxworks.com/cash_advance.aspx (visited January 5, 2012).

[158] The corporate filings for both businesses list Philip Zukowsky as a signatory.  Ohio Secretary of State, Articles of Organization for Schear Lending Activity, Dec. 28, 2010; Ohio Secretary of State, Articles of Organization for Schear Financial Services, LLC, Sep. 22, 2003, both on file with authors.

[159] Caleb Stephens, Schear Deal to Add Jobs, Dayton Business Journal, Apr. 14, 2003.

[160] Id.

[161] See http://ncpfinance.com/company/ (visited Feb. 23, 2012).

[162] For a description of the CSO model of payday lending, see National Consumer Law Center, The Cost of Credit:  Regulation, Preemption, and Industry Abuses § 7.5.5.8 (4th ed. 2009 and Supp.).

[163] See http://ncpfinance.com/clients/ (visited Feb. 23, 2012).

[164] National Consumer Law Center, The Cost of Credit:  Regulation, Preemption, and Industry Abuses §§ 7.5.5 and 7.5.5.8 (4th ed. 2009 and Supp.).

[165] See Consumer Federation of America, Legal Status of Payday Lending by State, at http://www.paydayloaninfo.org/legal-status;  National Consumer Law Center, Consumer Federation of America, and Consumers Union, Small Dollar Loan Products Scorecard—Updated, available at www.nclc.org/images/

pdf/high_cost_small_loans/payday_loans/cu-small-dollar-scorecard-2010.pdf .

[166] www.drakesolftware.com/site/Products?BankProducts.aspx (visited Feb. 20, 2012).

[167] (visited Feb. 20, 2012).

[168] (visited Feb. 20, 2012).

[169] www.taxwise.com/products/o-bank.html (visited Feb. 20, 2012).

[170] www.taxwise.com/products/3fund.aspx (visited Feb. 20, 2012).

[171] Press Release, Tax Professionals Gain More Flexibility with 3Fund, CCH Small Firm Services, October 29, 2011, available at www.cchsfs.com/default.htm (visited Feb. 20, 2012).

[172] www.cchsfs.com/press/press_18.html (visited Feb. 20, 2012).

[173] www.taxwise.com/products/o-feecollect.html (visited Feb. 20, 2012).

[174] www.ntslink.com/banks.aspx (visited Feb. 20, 2012).

[175] www.oltpro.com/main/pro/bank.asp (visited Feb. 20, 2012).

[176] www.plshome.com/tax-preparation/ (visited Feb. 17, 2012).

[177] PLS sells an Xpectations! Visa Prepaid Card for payroll or government check direct deposit, the PL$Xpress Benefit$ prepaid card to receive SSI or VA or Social Security Benefits, and the PL$ payroll Direct card.  Brochures on file with CFA, collected in Phoenix, AZ, Feb. 18, 2012.

[178] www.cashamerica.com/FinancialServices/TaxFilingServices.aspx (visited Feb. 20, 2012).

[179] “eTax Partners , Sign Up/ Log On /Make Money, on file with the authors.

[180] eTax Partners Pavilion D Booth @1099, RTO Tradeshow Exhibitor Detail, www.rtoonline.com/epages/linkdetailpop.asp?link_id=1099 (visited Feb. 15, 2012).

[181] www.nationalcashadvance.com/ourservices_tax.php (visited Feb. 15, 2012).

[182] www.moneymart.com/MM/tax.asp (visited Feb. 17, 2012).

[183] CFA visited an ACE Cash Express store  Prescott, AZ, and called the clerk to verify the fee, Feb. 17 and 20, 2012.

[184] https://www.acecashexpress.com/store-services/tax-checks (visited Feb. 20, 2012).

[185] Urban Trust Bank has had a history of offering high-cost credit products, such as a fee-harvester credit card called the “My Salute Card.”  See Rick Jurgens & Chi Chi Wu, National Consumer Law Center, Fee-Harvesters: Low-Credit, High-Cost Cards Bleed Consumers 3 (Nov. 2007), at 19-20, available at www.consumerlaw.org/issues/credit_cards/content/FEE-HarvesterFinal.pdf.

[186] www.insightcards.com/tax-solutions (visited December 20, 2011).

[187] Id.

[188] Urban Trust Bank, Insight Prepaid MasterCard® Cardholder Agreement, on file with authors.

[189] Adam Rust, CheckSmart Puts Credit on Its Prepaid Card, BankTalk.org, Nov. 30, 2011, at http://banktalk.org/2011/11/30/checksmart-puts-credit-on-its-prepaid-card/.

[190] www.republicash.com/services.html (visited January 29, 2012).  Phone call to Portland, Maine RepubliCash store on Feb. 21, 2012.

[191].

[192] https://www.taxmax.com/TRSTaxMax/FinancialServiceCenters.aspx (visited Feb. 17, 2012).

[193] https://www.taxmax.com/TRSTaxMas/HowItWorks.aspx (visited Feb. 17, 2012).

[194] Id.

[195] www.taxmax.com/TRSTaxMax/FAQ.aspx (visited Feb. 17, 2012).

[196] Id.

[197] Telephone call to TRS on Feb. 21, 2012.

[198] Minn. Stat. § 270C.445, subd. 3a.

[199] Id. at subd. 3(14) and 4b.

[200] Available at http://www.nclc.org/images/pdf/high_cost_small_loans/ral/model-refund-anticipation-loan-act.pdf.

[201] Pacific Capital Bank, N.A., v. Conn., 542 F.3d 341 (2d Cir. 2008).

[202] Republic Bancorp, Form 8-K: Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, Dec. 8, 2011.

[203] Amended Notice of Charges for an Order to Cease and Desist, In the Matter of Republic Bank & Trust Co., FDIC-10-079b and FDIC-10-216k, May 3, 2011.  See Section III.B below for discussion of details of the Amended Notice.

[204] Consent Judgment, State v. Mo’ Money Tax Serv., Case No. 10-6958 (Ark Cir. Ct. Pulaski Cty. Nov. 22, 2011).

[205] NCLC/CFA 2008 RAL Report at 38-39; NCLC/CFA 2006 RAL Report at 25-26; NCLC/CFA 2005 RAL Report at 26.

[206] A full explanation of these laws and their remedies is discussed in NCLC, Fair Credit Reporting, § 15.3 (7th ed. 2010 and Supp.).

[207] 30 A.3d 193 (Md. 2011)(table).

[208] Peg Brickley, Jackson Hewitt Set to Leave Chapter 11, Wall St. J., Aug. 8, 2011.

[209] See, e.g., Complaints in Houston v. JTH Tax Inc., C.A. No. 4:11-00858 (E.D. Ark.); Morton v. H&R Block Inc., C.A. No. 4:11-00859(E.D. Ark.); Johnson v. H&R Block Inc., C.A. No. 2:11-09577 (C.D. Cal.); Madubuike v. JTH Tax Inc., C.A. No. 2:11-09580 (C.D. Cal.); Patterson v. JTH Tax, C.A. No. 0:11-62472 (S.D. Fla); Wimbley v. H&R Block, Inc., C.A. No. 1:11-24159 (S.D. Fla); Rowden v. JTH Tax, Inc., C.A. No. 1:11-08233 (N.D. Ill.); Molina-Servin v. H&R Block, Inc., C.A. No. 1:11-08244 (N.D. Ill.)

[210] Complaint, Martin v. JTH Tax, Inc., C.A. No. 9:10-3016 (Nov 22, 2010).

The post 2012 CFA/NCLC Refund Anticipation Loan Report appeared first on Consumer Federation of America.

The report also looks back at RAL lending in prior years, finding that the loans drained the refunds of about 5 million American taxpayers in 2010, costing them in the neighborhood of $338 million in loan fees, plus over $48 million in other fees. In addition, another 14.6 million taxpayers spent $438 million on related financial products to receive their refunds.

“It’s good riddance to RALs as big business,” says Chi Chi Wu, staff attorney at the National Consumer Law Center (NCLC). “Millions of hard-working families will save money and face less risk as RALs made by banks disappear from tax time.”

Latest RAL Data

RALs are bank loans secured by the taxpayer’s expected refund─loans that last about 7 to 14 days until the actual IRS refund repays the loan. RALs are expensive. This year, for Jackson Hewitt and Liberty Tax customers, Republic Bank is charging $61.22 for a RAL of $1,500, which translates into an APR of 149%. If the refund exceeds $1561.22, the taxpayer is charged another $29.95 when the remainder of the refund arrives in the form of a RAC, for a total of $91.17 in fees. In fact, RALs are so expensive that the Military Lending Act bans them for servicemembers.

RALs were also big business. Using the most recent data available from the IRS, about 6.85 million taxpayers applied for a RAL in the 2010 tax filing season (for tax year 2009), and NCLC and CFA estimate that about 5 million received them. This represents a significant drop from the 8.4 million taxpayers who applied for RALs and the estimate of 7.2 million who received them in 2009.

In contrast, the number of taxpayers receiving refund anticipation checks (RACs) has increased to an estimated 14.6 million taxpayers in 2010, up from the 12.9 million in 2009. With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund check. After the refund is deposited, the bank issues the consumer a check or prepaid card, or deposits the funds to the taxpayer’s bank account, and closes the temporary RAC account.

RALs are mostly marketed to low-income taxpayers, including recipients of the Earned Income Tax Credit (EITC), the nation’s largest federal anti-poverty program. According to IRS data, 92% of taxpayers who applied for a RAL in 2010 were low-income, and two-thirds (66%) were EITC recipients.

Lack of Transparency in Tax Preparation Fees

Another problem faced by taxpayers is the lack of transparency around tax preparation fees. Mystery shopper testing by consumer groups and others has found systemic problems in the ability of consumers to obtain information about how much tax preparation services will cost. The NCLC/CFA report describes numerous examples of tax preparers refusing to provide estimates for tax preparation fees or giving low-ball estimates.

The ability to deduct tax preparation fees from a RAC or RAL compounds this problem by making taxpayers less sensitive to the price of preparation, since they do not pay the fees out-of-pocket. It also enables preparers to pad the price with add-on fees.

Last of the Banks Forced Out of RAL Lending in 2011

During the past few years, there have been a number of major developments in the RAL industry. The three biggest banks in RAL lending -JPMorgan Chase, HSBC and Santa Barbara Bank & Trust – left or were forced out of the business by December 2010. As a result of these actions, there were only three small, state-chartered banks making RALs in 2011– Republic Bank & Trust, River City Bank and Ohio Valley Bank, all based in Louisville, Kentucky.

In February 2011, the FDIC notified these banks that the practice of originating RALs without the benefit of the IRS Debt Indicator was unsafe and unsound. River City Bank and Ohio Valley Bank accepted the FDIC’s decision, but Republic Bank & Trust decided to fight. Republic appealed the decision to an administrative law judge, and sued the FDIC in federal court. In May 2011, the FDIC issued an “Amended Notice of Charges for an Order to Cease and Desist,” which detailed widespread legal violations in Republic’s RAL program and proposed a $2 million civil penalty.

In December 2011, the FDIC reached a settlement with Republic in which the bank agreed to cease making RALs after April 2012, and to pay a $900,000 civil penalty. Thus, after this tax season, there will be no banks left that make RALs.

Life after RALs: Refund Anticipation Checks

Even after the end of RALs, tax preparers and banks will continue to offer refund anticipation checks (RACs). A RAC allows the consumer to pay for tax preparation fees out of the refund and provides the speed of direct deposit of tax refunds for unbanked taxpayers, but generally at an additional cost, for which the banks generally charge about $30 – $35. Tax preparers may also charge their own “add-on” fees, which can range from $25 to several hundred dollars. This year H&R Block offered a free RAC for the first three weeks of the 2012 tax season, if the taxpayer used the Block Emerald Card to receive the refund.

Since one of their main purposes is to defer payment of the tax preparation fee until the refund arrives, RACs may represent a high-cost loan of that fee. If considered as a finance charge, a RAC fee of $30 to borrow a typical tax preparation fee of $189 for two weeks equates to an APR of 414%.

Prepaid cards are one alternative to allow taxpayers without a bank account to receive a fast refund. Taxpayers, however, should be cautious when selecting a prepaid card. “As with any financial product, taxpayers should compare costs and consumer protections,” recommends Wu.

Taxpayers without a bank account should also consider opening a bank account to receive their refund. “Getting a big refund is the perfect time to open a savings account and start a nest egg,” advises Jean Ann Fox, director of financial services for Consumer Federation of America.

Enter the Payday Lenders

With the end of RALs made by banks, a few high cost fringe lenders have stepped into the fray. Liberty Tax Service, which is planning an initial public offering, revealed in its prospectus that the tax preparation chain plans to partner with an unnamed non-bank lender to make RALs. Liberty’s website shows that it has partnered with SGS Credit Services, Inc. The president of SGS Credit Services also appears to serve as the treasurer for the Texas Consumer Lenders PAC.

The website for TaxWorks, a division of RedGear, which is owned by H&R Block, is promoting a “Tax Season Cash Advance” provided by Schear Lending Group and Atlas Financial Services. Schear Lending Group appears to be affiliated with an Ohio businessman who founded the payday loan chain Cashland.

A few storefront payday lenders appear to be pitching variations of their payday or auto title loan products as RALs. Others are promoting tax preparation or check cashing for tax refunds, but not offering RALs.

“Consumers should avoid any loans offered along with tax preparation services by financial outlets,” says Jean Ann Fox. “Beware of lenders that try to divert your hard-earned tax refund dollars to repay high-cost loans or make down-payments on bad deals.”

RALs made by nonbank lenders will most likely not be as widespread as bank RALs. Nonbank lenders do not have the legal ability, unlike banks, to flout state laws that cap interest rates, i.e., usury laws. Tax-time loans from payday lenders and other storefront outlets that offer to prepare taxes and make loans may be subject to state loan laws, usury caps, or loan broker requirements in states that have them. Seventeen states (and District of Columbia) do not authorize extremely high-cost payday lending at all.

The National Consumer Law Center^® (NCLC^®) is a non-profit organization specializing in consumer issues on behalf of low-income and other vulnerable people. Since 1969, NCLC has worked with legal services and nonprofit organizations as well as government and private attorneys across the United States, to create sound public policy for low-income and elderly individuals on consumer issues. NCLC also publishes a series of eighteen consumer law treatises and annual supplements.

The Consumer Federation of America is an association of nearly 300 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education.

The post New CFA/NCLC Report Documents Twilight of RALs as Big Business appeared first on Consumer Federation of America.

Contacts:

NCLC: Jan Kruse or Chi Chi Wu, 617-542-8010

CFA: Jean Ann Fox, 928-772-0674

ONE LAST BITE: FINAL YEAR FOR BANK TAX REFUND ANTICIPATION LOANS

Consumer Advocates Recommend Cheaper Alternatives for Getting Refund Fast

BOSTON, Mass.─A bright note for consumers as this tax season begins: This is the final year in which refund anticipation loans (RALs) will be available from banks on a large scale, nationwide basis. After this season, there will be an end to the hundreds of millions drained from taxpayer refunds by these high-cost, high-risk loans. “We will be glad to see the last of RALs, which were both high-cost and high-risk,” says Chi Chi Wu, staff attorney at the National Consumer Law Center (NCLC). “It’s not a moment too soon to stop multi-million dollar corporations from skimming off the tax refunds of hard-working families.”

Consumer advocates suggest that taxpayers looking for quick refund cash should consider these lower-cost or free alternatives

• Taxpayers with a bank account can get their tax refunds in 8 to 15 days with e-filing and direct deposit.

• Taxpayers without a bank account can get a fast refund by e-filing and having their refund deposited to a prepaid card, including any existing payroll or prepaid card that the taxpayer already has.

• H&R Block is even offering free refund anticipation checks (RACs) until early February if the customer uses its prepaid Block Emerald Card to receive the refund.

With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund check. After the refund is deposited, the bank issues the consumer a check or prepaid card and closes the temporary account. A RAC allows the consumer to pay for tax preparation fees out of the refund and provides the speed of direct deposit of tax refunds for unbanked taxpayers, but generally at an additional cost.

Life after Refund Anticipation Loans (RALs)

Even after the end of RALs, tax preparers and banks will continue to offer RACs, for which the banks generally charge about $30 – $32. Tax preparers may also charge their own “add-on” fees, which can range from $25 to several hundred dollars.  Since of their main purposes is to defer payment of the tax preparation until the refund arrives, RACs may represent a high-cost loan of that fee. With the exception of free RACs, consumer advocates recommend taxpayers consider alternatives.

Prepaid cards are one alternative to allow taxpayers without a bank account to receive a fast refund. Taxpayers, however, should be cautious when selecting a prepaid card. “As with any financial product, taxpayers should compare costs and consumer protections,” recommends Wu.

Taxpayers without a bank account should also consider opening a bank account to receive their refund. “Getting a big refund is the perfect time to open a savings account and start a nest egg,” advises Jean Ann Fox, director of financial services for Consumer Federation of America.

Low-income taxpayers have a number of options for free tax preparation, including Volunteer Income Tax Assistance (VITA) (1-800-906-9887 or www.irs.gov) and AARP Tax-Aide sites ). Choosing a VITA or AARP Tax-Aide site saves taxpayers the cost of a tax preparation fee. Many VITA sites also offer services to help open a bank account or get a low-cost prepaid card, which enables taxpayers to get fast refunds without pay a fee. Free tax preparation may be available on bases, and since servicemembers are required to have bank accounts, they are able to benefit from the speed of electronic delivery of their tax refunds

There are also a number of websites that allow taxpayers to prepare and file their taxes online for free, such as the IRS Free File program (www.irs.gov) and the I-CAN! E-file site (www.icanefile.org).

Latest RAL Data

RALs are bank loans secured by the taxpayer’s expected refund─loans that last about 7 to 14 days until the actual IRS refund repays the loan. RALs are expensive. This year for Jackson Hewitt customers, Republic Bank is charging $61.22 for a RAL of $1,500, which translates into an APR of 149%. If the refund exceeds $1561.22, the taxpayer is charged another $29.95 when the remainder of the refund arrives in the form of a RAC, for a total of $91.17 in fees. In fact, RALs are so expensive that the Military Lending Act bans them for servicemembers.

RALs were also big business. Using the most recent data available from the IRS, about 6.85 million taxpayers applied for a RAL in the 2010 tax filing season (for tax year 2009), and NCLC and CFA estimate that about 5 million received them. This represents a significant drop from the 8.4 million taxpayers who applied for RALs and the estimate of 7.2 million who received them in 2009. In contrast, the number of taxpayers receiving RACs has increased to an estimated 14.6 million taxpayers in 2010, up from the 12.9 million in 2009.

Last of the Banks Forced Out of RAL Lending in 2011

During the past few years, there have been a number of major developments in the RAL industry. The three biggest banks in RAL lending -JPMorgan Chase, HSBC and Santa Barbara Bank & Trust – left or were forced out of the business by December 2010. As a result of these actions, there were only three small, state-chartered banks making RALs in 2011– Republic Bank & Trust, River City Bank and Ohio Valley Bank, all based in Louisville, Kentucky.

In February 2011, the FDIC notified these banks that the practice of originating RALs without the benefit of the IRS Debt Indicator was unsafe and unsound. River City Bank and Ohio Valley Bank accepted the FDIC’s decision, but Republic Bank & Trust decided to fight. Republic appealed the decision to an administrative law judge, and sued the FDIC in federal court. In May 2011, the FDIC issued an “Amended Notice of Charges for an Order to Cease and Desist,” which detailed widespread legal violations in Republic’s RAL program and proposed a $2 million civil penalty.

In December 2011, the FDIC reached a settlement with Republic in which the bank agreed to cease making RALs after April 2012, and to pay a $900,000 civil penalty. Thus, after this tax season, there will be no banks left that make RALs.

Enter the Payday Lenders

With the end of RALs made by banks, a few high cost fringe lenders have stepped into the fray. Liberty Tax Service, which is planning an initial public offering, revealed in its prospectus that the tax preparation chain plans to partner with an unnamed non-bank lender to make RALs. Liberty’s website shows that it has partnered with SGS Credit Services, Inc., which appears to be linked with Texas payday lenders.

A prominent payday lender, Advance America, is offering “fast” refunds though its storefronts, although it is unclear whether the product is a RAL, a regular payday loan, or a RAC in actuality. The website for TaxWorks, a division of RedGear, which is owned by H&R Block, is promoting a “Tax Season Cash Advance” provided by Schear Lending Group and Atlas Financial Services. Schear Lending Group appears to be somehow affiliated with Ohio-based payday lenders.

“Consumers have even more reason to avoid RALs made by payday lenders,” advises Jean Ann Fox, “These RALs are likely to be more expensive and riskier.”

RALs made by nonbank lenders will most likely not be as widespread as bank RALs. Nonbank lenders do not have the legal ability, unlike banks, to flout state laws that cap interest rates, i.e., usury laws. Tax-time loans from payday lenders and other storefront outlets that offer to prepare taxes and make loans may be subject to state loan laws, usury caps, or loan broker requirements in states that have them. Seventeen states (and District of Columbia) do not permit payday lending at all.

Upcoming Report Available in February 2012

NCLC and CFA will publish their annual comprehensive report on the RAL industry, regulation, and litigation in February 2012. The report will be available on NCLC’s website at www.nclc.org and on CFA’s website at www.consumerfed.org.

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National Consumer Law Center® is a non-profit organization specializing in consumer issues on behalf of low-income people. NCLC works with thousands of legal services, government and private attorneys, as well as organizations, who represent low-income and elderly individuals on consumer issues.

The Consumer Federation of America is an association of nearly 300 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education.

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The FDIC’s agreement imposes a $900,000 civil money penalty on Republic.  It also incorporates a plan for Republic to implement a system of verifications in place to ensure that its partner tax preparers operate their future tax settlement activities with appropriate safeguards.   Republic will review all advertising for tax settlement products at the partner preparer’s offices, and conduct audits, including surprise on-site visits and mystery shopper surveys, at ten percent of preparer locations.

“Mark Pearce and his team at the FDIC have delivered a big win for low-income tax payers today. Their determined efforts to finish the job reflect a commitment to protecting consumers from predatory loan products,” said Peter Skillern of the Community Reinvestment Association of North Carolina.

“The FDIC action is an important step toward protecting families who struggle to make ends meet from unfair bank credit products and practices,” said Jean Ann Fox of the Consumer Federation of America.  “With a confirmed director, the Consumer Financial Protection Bureau will be empowered to protect consumers from similar loans sold by nonbank lenders.”

RALs are one to two week loans made by banks and offered by tax preparers, secured by the taxpayer’s refund.  RALs can be expensive; this year, Republic Bank is charging $61.22 for a RAL of $1,500, which translates into an APR of 149%.  RALs target low-income taxpayers, especially recipients of the Earned Income Tax Credit, a special tax break for working poor families.  In 2009, RALs skimmed over $600 million from the refunds of 7.2 million American taxpayers.

“We are pleased see the last of the RAL banks forced out of the business,” said Chi Chi Wu of the National Consumer Law Center. “We also commend the FDIC for a settlement that includes a plan for Republic to institute safeguards for its remaining refund anticipation check program.”

Going forward, consumer advocates expressed a desire for the FDIC to develop a regulatory standard for the sale of refund anticipation checks (RACs), particularly that the FDIC should be vigilant to make sure that pricing of RACs remains appropriate and consumers are not charged abusive extra fees by partner tax preparers. Absent a decision to terminate those products as well, the key priority should be to establish a balance between the need to help people avoid paying out-of-pocket for tax preparation and being able to purchase a RAC at a fair price.

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RALs are one to two week loans made by banks and offered by tax preparers, secured by the taxpayer’s refund.  RALs can be expensive; earlier this year, one bank charged $61.22 for a RAL of $1,500, which translates into an APR of 149 percent. RALs target low-income taxpayers, especially recipients of the Earned Income Tax Credit, a tax break for working poor families. In 2009, RALs skimmed over $600 million from the refunds of 7.2 million American taxpayers.

H&R Block lost its ability to make RALs in 2011 when its bank partner, HSBC, was ordered by its federal regulator to stop making the loans. Despite its inability to make RALs, Block had a good tax season this year, with growth of 5.6 percent in number of returns prepared and 19 percent increase in new clients. In fact, H&R Block cited these positive results as one reason it decided not to bring back the product in 2012.

Jackson Hewitt and Liberty Tax Service both offered RALs in 2011, and use Republic Bank & Trust as their RAL lender. Consumer advocates urged H&R Block’s competitors and the sole remaining RAL lending bank to follow in Block’s footsteps. “Jackson Hewitt, Liberty Tax and Republic Bank should take a page out of Block’s playbook, and stop making RALs,” urged Jean Ann Fox, CFA’s director of financial services, “Faster refunds from the IRS and direct deposit to taxpayers’ bank accounts or prepaid cards get refunds into the hands of taxpayers without the drain of high-cost tax loans.”

In fact, the FDIC has taken action to stop Republic Bank & Trust from making RALs, and is seeking to impose a $2 million fine for alleged widespread legal violations in Republic’s RAL program. However, Republic has appealed the FDIC’s action to an Administrative Law Judge and the appeals hearing is not until February 2012. In the meantime, Republic has decided to defy the FDIC and continue to make RALs in early 2012.

“We think Republic’s decision to make RALs for 2012 is both bad for consumers and foolhardy for the bank,” said Peter Skillern, executive director of CRA-NC. “We are astonished that a bank would continue to offer these risky, abusive loans to consumers in the face of an explicit directive by their federal regulator to stop.”

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