The Shriver Brief : Poverty Law Commentary & Insights : Sargent Shriver National Center on Poverty Law : Affordable Housing, Healthcare Reform

It’s that time of year again; W-2s are showing up in mailboxes across the country signaling people to start preparing to file their 2012 taxes. Like in years past, tax preparers are already bombarding the public with reminders about the impending tax season. Unlike previous years, however, there are a number of big changes in this year’s tax landscape.

First and foremost, 2012 is likely the last year for refund anticipation loans (RALs). As discussed in previous blogs, RALs are short-term, high-interest-rate bank loans sold through tax preparation sites, such as H&R Block or Jackson Hewitt. Although marketed as “instant refunds,” RALs are actually extremely high-cost bank loans that last 7-14 days until the actual Internal Revenue Service (IRS) refund repays the loan. All fees are deducted from the final RAL amount issued to the taxpayer. If, however, the RAL customer does not receive the expected tax return amount as calculated by the tax preparer, he or she is liable to the lender for the difference. By one estimate, consumers paid approximately $833 million in RAL fees in 2006 and $740 million in 2007.

The allure of RALs is that they provide taxpayers an immediate advance on their anticipated tax refunds. Yet, most taxpayers could have their refund in two weeks or less if they file electronically on their own. Fortunately, after this 2011 tax season, RALs will no longer be offered. In December of last year the Federal Deposit Insurance Corporation (FDIC) entered into a settlement agreement with Kentucky-based Republic Bankcorp Inc., the last bank in the country providing funding for RALs for tax preparation companies, which will prohibit the bank from continuing to fund them after this year.

While the demise of RALs was slow and painful, Jackson Hewitt, the sole tax preparer that will be offering RALs this tax season, is making sure that RALs have one last party on their way out. Jackson Hewitt’s flashy TV commercials ads are trying to turn tax time into party time. In particular, Jackson Hewitt, as the only player in the market, is trying to capitalize on this last tax season as much as possible. In addition to its traditional tax preparation and RAL services, Jackson Hewitt is also partnering with Wal-Mart. Wal-Mart recently entered the banking game by providing check cashing services and also began offering a prepaid card, the MoneyCard. Through its partnership with Jackson Hewitt, it will also provide so-called “free” tax preparation.

Over 3,000 Wal-Mart’s will offer free 1040 EZ assisted filing, and customers will be given their tax refunds in the form of Wal-Mart cash cards.  Most people, however, cannot use the 1040 EZ form. The 1040 EZ form does not cover anyone who wants to itemize deductions (usually homeowners) or anyone claiming student loan interest, health care credits, the earned income tax credit (EITC), child tax credits (CTC), or retirement credits. Because a 1040 EZ filing cannot be used in connection with refunds, households that use the 1040 EZ form to have their taxes prepared for free will be forgoing things like the EITC, which is the largest anti-poverty program in the United States. If a household elects to claim the credit, then Wal-Mart’s tax preparation service will not actually be free. 

Additionally, even for those that do have their taxes prepared for free, the cards on which their refunds are paid come with hidden fees. Fees for Wal-Mart’s Cash Card include $2 to withdraw cash from an ATM, $1 to check the balance, and $3 if $1,000 isn’t added to the card in a given month.

Tax time is a critical time helping for low- and middle-income families to save. Tax filers who are eligible for EITC, CTC, and other credits can receive free tax preparation by going to a Volunteer Income Tax Assistance (VITA) site and getting their tax refunds for free. Additionally, VITA sites will help these households file electronically thereby allowing them to receive their refunds within days without having to rely on predatory products such as RALs. With such savings, low- and middle-income families can open bank accounts, possibly through a Bank On program, which provides low-income families with low-cost accounts at mainstream banks and financial institutions, thereby launching them onto the path of long-term financial stability.

So yes, tax time can be party time, but just don’t invite Jackson Hewitt to the party.

This blog post was coauthored by Alison Terkel.

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This tax season one of the largest tax preparation sites, H&R Block, will not be offering refund anticipation loans (RALs) thanks to the Office of Comptroller of the Currency (OCC). The OCC has prohibited H&R Block’s financial partner, HSBC Bank, from funding any RALs whatsoever.

H&R Block was the leader in providing these loans, and in 2010 H&R Block collected about $146 million in loan related fees from tax payers. Until recently HSBC Bank has been the financial backer for the H&R Block RALs. In August of last year, however, the Internal Revenue Service (IRS) announced that it would no longer provide tax preparers and associated financial institutions with the “debt indicator,” which is used to underwrite RALs. As a result, HSBC, which began exiting the RAL business in 2007, attempted to break its long-term 2005 contract with H&R Block, its only remaining RAL customer.

H&R Block, on the other hand, contended that RALs can be done without the IRS debt indicator and filed suit against HSBC seeking to require the bank to perform its contractual obligations. Although the parties reached an agreement wherein HSBC would provide the loans for one more year, the OCC intervened and issued a regulatory directive prohibiting HSBC from funding the loans, leaving H&R Block with no financial partner to provide both RALs and some of its refund anticipation checks, "RACs." H&R Block shares also went down 7% as a result of this news.

Last tax season, H&R Block’s main competitor, Jackson Hewitt, lost its main RAL partner when Santa Barbara Bank & Trust was ordered by banking regulators to exit the RAL market. That left Jackson Hewitt scrambling to find another banking partner. In December 2010, Jackson Hewitt reached agreement with Republic Bank & Trust Co., a unit of Republic Bancorp Inc. to back some, but not all, of its RAL program. Upon this announcement Jackson Hewitt shares went up 35%.

H&R Block will continue to offer RACs which, though not an instant refund, provide a check to the tax filer in 7 to 10 days. In the meantime, its competitor, Jackson Hewitt, will be seeking to lure former H&R Block customers away. 

As discussed in previous Shriver blogs, this is just the latest RAL repercussion. It seems that consumer advocates’ and financial regulators’ continual push for stricter guidelines and policies regarding RALs have paid off. Today, with quick turnaround from electronic filing and direct deposit, many taxpayers can likely receive their tax returns within ten business days, reducing the need for RALs. Now is the time to demand that the OCC protect low=income families and prohibit all RALs.

This article was coauthored by Kelly Ward.

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The Internal Revenue Service (IRS) announced last week that starting with the 2010 tax filing season they will no longer provide tax preparers with the mechanism they had been using to underwrite refund anticipation loans (RALs). Specifically, the IRS will no longer provide a “debt indicator” tool which gives tax preparers an indication of whether a client will have any portion of the refund offset for delinquent tax or other debts including unpaid child support or delinquent student loans. Preparers used this indication to decide whether or not to offer a customer a RAL as an incentive to immediately pay for the fees of tax preparation and get cash in hand.

RALs are short-term, high-interest-rate bank loans sold through tax preparation sites like H&R Block and are heavily marketed and sold in low-income communities. RALs provide taxpayers an immediate advance on their anticipated tax refunds, yet at a cost of interest rates ranging from 50% for a $10,000 RAL to 500% for a $300 RAL.

Because refunds are now widely issued electronically within 10 days of filing, the IRS decided that there was no longer a need for the debt indicator or an instantaneous refund. As IRS Commissioner Doug Shulman explained: “Refund Anticipation Loans are often targeted at lower-income taxpayers. With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”

To replace the debt indicator, the IRS will begin exploring the possibility of providing a new tool to tax preparation sites. Instant access to cash and the ability to immediately pay for tax preparation services with RALs have been major selling points for consumers. The IRS is, therefore, investigating cost-effective and secure alternative product s to RALs.

Legislators and advocates alike have praised the decision to no longer provide the debt indicator. These high-cost loans, which are targeted at low-income families and those eligible for the earned income tax credit who need money quickly, are irrelevant given the speed at which federal tax refunds are now delivered. In eliminating these loans, taxpayers will no longer spend millions of dollars for a 10-day loan when they can receive the cash for the refund in approximately the same time period.

In recent blogs, the Shriver Center reported on the negative impact RALs have on low-income communities and the measures being taken to eradicate these product s from the tax preparation industry and from financial institutions. The Office of the Comptroller of the Currency (OCC), reacting to consumer advocacy including efforts by the Shriver Center, issued new requirements for tax preparers’ advertisement and sale of such loans earlier this year. Similarly, the FDIC mandated at least one cease and desist order and several RAL provided voluntarily agreed to stop proving such loans. The IRS’ recent investigation into RALS and the task force which it convened on this topic lead to its decision to eliminate the debt indicator tool. This latest development could spell the end for RALs, and the Shriver Center applauds the IRS’ action in ending this abusive practice.

Susan Ritacca coauthored this article.

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