Tax preparers regroup after IRS moves to limit refund loans

A decision from the Internal Revenue Service last week is to stop providing taxpayer-debt profiles comes as brick-and-mortar tax preparers already are struggling to hold on to their ground against electronic services, such as TurboTax.

Without the so-called "debt indications" from government data, tax preparers and banks will find it more difficult to front controversial loans known as refund-anticipation loans, or RALs, which are secured by a filer's expected tax refund.
Tax preparers face additional hardship as their banking partners that back the RALs drop out of the business.

Shares of H&R Block Inc. have lost 37% this year, while Jackson Hewitt Tax Services Inc.'s stock is off more than 80%. TurboTax owner Intuit Inc. on the other hand, has seen its shares rise 26% this year.

The long road to recovery

While consumer groups hailed the IRS move earlier this month as a step toward ending a predatory-lending practice, national chains such as H&R Block and Jackson Hewitt won't easily exit the lucrative business and say the effort may even backfire with higher fees, hurting consumers.

In reaction to the decision on the taxpayer-debt profiles, Jackson Hewitt founder John Hewitt said that a portion of the 8 million to 9 million RAL customers will no longer qualify for loans without the government data available.

Those who do qualify will face steeper fees; Hewitt sees tax preparers charging $100 to $110 more, or about a 60% jump, in RAL prices.

What's missing from the IRS announcement is that 40% of RAL recipients don't have bank accounts; only those able to receive direct deposits get refunds back in 10 days.

H&R Block extended 2.1 million RALs in 2010, each with an average amount of $3,000 issued for 10 to 11 days. Each RAL costs about $62, or 2.1% of the loan amount.

Expensive loans

The RAL-related fees siphoned $738 million from 8.4 million American taxpayers in 2008. People who seek such advances are often the working poor who are strapped for cash.

RAL taxpayers receive money on the spot, as opposed to having to wait for a refund check in the mail. But this convenience comes at a hefty price and costs the very taxpayers who need the money in the end. As you notice the companies who offer these types of loans haven’t gone out of business by doing so. Maybe these companies could actually offer these types of loans as a free service to help those very tax payers who have been faithful customers that they have been making several hundred million dollars off of them. Does the president/company actually have to make that much money in one year; couldn’t they not take a pay increase while several hindered thousand taxpayers don’t have that option in today’s economy?

As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.