Taxpayers May Use IRS Free Filing to Bypass Tax-Refund Loans

Taxpayers may find the federal government’s free e-file system gets them cash refunds almost as quickly as the short-term loans from some tax preparers that cost as much as 25 percent of the proceeds.

The Internal Revenue Service offers free online tax preparation for workers with adjusted gross incomes up to $57,000, or about 70 percent of all U.S. filers, according to its website. The agency can process a return and issue a refund within 10 days, Commissioner Doug Shulman said in an Aug. 5 statement. That’s down from as long as eight weeks, according to a 2008 report by the Treasury Inspector General for Tax Administration.

Preparers such as H&R Block Inc. and Jackson Hewitt Tax Service Inc., the two biggest in the U.S., offer short-term “refund anticipation loans” to customers as a way to get immediate cash. The IRS said Aug. 5 it will stop providing lenders with data they use in underwriting the loans. That’s likely to drive up their cost and reduce availability, according to Harry Buckley, chief executive officer of Jackson Hewitt.

Advocacy groups such as the Washington-based Consumer Federation of America have criticized the loans as predatory because they can carry triple-digit interest rates on an annualized basis. The CFA said consumers spent about $738 million in loan fees in 2009 and some customers pay as much as 25 percent of their tax refund in fees to get their money a week earlier, according to the Treasury report.

“This is really opportunistic lending,” Jean Ann Fox, a CFA director, said in a telephone interview. “Most of the people that get refund anticipation loans are the working poor, and these loans are sold to slightly speed up access to the money that you would’ve gotten directly from the IRS.”

Average Loan

The average refund loan offered by Kansas City, Missouri- based H&R Block is about $3,000 and costs $62 for a term of 11 days to 12 days, said company spokeswoman Kate O’Neill Rauber. H&R Block offers loans that cover the refund plus the preparation fees, which average $187, she said. The firm prepared 23 million tax returns and offered 2.1 million refund loans in 2010.

Jackson Hewitt, based in Parsippany, New Jersey, said its average refund anticipation loan was $3,000 to $4,000 for a term of about 11 days, spokeswomen Melanie Scherenzel said. She declined to give average tax preparation costs.

The IRS waiting period may be too long for customers with emergency financial obligations, said Kate Fulton, H&R Block’s senior vice president of government affairs. “It’s their money, and they want it more quickly than the IRS can furnish it,” Fulton said in a telephone interview.

Free File

The government’s Free File program is available online in English and Spanish. The IRS and AARP, a Washington-based group which advocates for older citizens, also sponsor community programs that offer free preparation for low- and moderate- income individuals. While taxpayers earning more than $57,000 can also use Free File, the program offers only limited advice, according to the IRS.

For state returns, some companies offer free tax preparation and e-filing services; others may charge a fee, according to the IRS website.

Fulton of H&R Block said that 40 percent of its clients taking the short-term loans don’t have banking accounts needed for the electronic filing of refunds, which may delay the process by four to six weeks. When the refund does come, it’s in the form of a paper check, which clients must pay a fee to cash, she said.

Tax preparation firms partner with banks to offer the loans, and Buckley said the IRS decision to stop providing the underwriting data will make it harder for companies to secure lenders.

“Many people, particularly outside the industry, feel we try the shove these loans down people throats,” Buckley said in a telephone interview. “That’s not the case at all. That’s one option that helps people get their money. We will do it anyway they want based on how fast they want their money.”

To contact the reporter on this story: Laura Keeley in New York at lkeeley@bloomberg.net.

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