Taxpayers Line Up for Expensive Refund Loans in Shadow of Yankee Stadium

Virgie Barber climbed over the mounds of snow piled on streets around Yankee Stadium on a Friday night to file her tax return and get an instant refund loan.

“Times are tough and people need their money right away,” said Barber, 44, of the Bronx, New York. “It’s sad that people have to pay to get their money in a day. Every year I say I’m not going to do it.”

Barber joined a queue of people on Jan. 28 entering the Jackson Hewitt Tax Service Inc. franchise on Gerard Avenue after work with a W-2 form in hand and hopes of getting a refund- anticipation loan from one of the few companies able to offer it. The loans, known as RALs, are secured by an individual’s expected tax refund, with annualized interest rates that may run as high as 124 percent.

Regulators have cracked down on RALs and the Internal Revenue Service has said they are marketed to those who may not have cash to pay for help on their returns. Tax preparers and their bank partners made 8.4 million refund loans in the 2008 filing season, costing consumers about $738 million in fees, according to a February 2010 report by the National Consumer Law Center in Boston and Washington-based Consumer Federation of America.

Jackson Hewitt, the second-biggest U.S. tax preparer after H&R Block Inc., advertises the loans as a way to get money “in as little as one day,” according to the Parsippany, New Jersey- based company’s website. The median household income in the Bronx was $35,000, according to the latest U.S. Census data.

Nationwide Hiring

Barber’s return was prepared by Nyri Arne Jeffries, 33, one of about 32,000 workers Jackson Hewitt hired nationwide for this tax season. Jeffries, who previously worked in retail, completed a 10-week tax course plus 2 weeks of training on the firm’s computer software before starting to prepare returns, she said.

“I like to deal with finances,” said Jeffries, who wants to get her bachelor’s degree and run her own consulting business one day. “Taxes to me are the back office of everything.”

Jackson Hewitt offers the loans through an agreement with Republic Bancorp Inc., based in Louisville, Kentucky. The bank approves the funding. “We’re just the middleman,” said Kassandra Davis, 42, who handles compliance for returns from New York and New Jersey franchises, in an interview at the Gerard Avenue office. About 6,500 returns were processed last year at the company’s three locations near the stadium, said Davis.

Wait for Refunds

Before explaining the terms of the refund loans, preparers like Jeffries are instructed to tell customers that the fastest way to get their refund is through the IRS, which typically takes 8 days to 15 days if you use direct deposit, said Davis.

Because electronic filing and direct deposit have reduced the wait for refunds, the IRS will no longer help banks underwrite tax-refund loans by providing them with information about a taxpayer’s debt, the agency said in August. H&R Block isn’t offering tax-refund loans this year after the Office of the Comptroller of the Currency, which regulates national banks, blocked HSBC Holdings Plc from funding them. H&R Block had a contract with the London-based bank set to expire in 2013. JPMorgan Chase & Co. exited the refund-loan business in April 2010.

The Federal Deposit Insurance Corp. is “carefully scrutinizing whether RALs are a safe and sound product given the absence of a debt indicator due to the IRS decision,” spokesman David Barr said in an e-mail.

To qualify for a $1,561.22 loan at Jackson Hewitt, a taxpayer needs a minimum federal tax refund of $2,000. The finance charge is $61.22 with an estimated annualized percentage rate of 124 percent. There’s an additional $49.95 in fees for the bank’s administration and Jackson Hewitt’s transmission, according to the signage in the office.

‘Hard Look’

People should “take a hard look” at the cost of these loans before signing up because there are tax preparation services available for free that deliver refunds quickly, said Marietta Rodriguez, national director for homeownership and lending at NeighborWorks America, a Washington-based nonprofit that supports a network of community development and affordable housing organizations.

“This time of year people are always feeling a spending hangover from the holidays and people are particularly vulnerable to this hard money,” Rodriguez said. “The cost related to the loans is very high usually and entities that offer them make them very accessible.”

In addition to its storefront franchises, Jackson Hewitt also offers tax preparation services in more than 2,000 Wal-Mart Stores Inc. locations, according to Philip Sanford, chief executive officer and president of the tax preparer.

Filing Fees

“For a significant portion of our customers their tax refund is their largest single financial transaction of the year and for a significant portion of our customers they want their money in as little as a day,” said Sanford in an interview. The company had no comment on the interest rates or fees for RALs, said spokesman Michael LaCosta.

The cost for filing the simplest federal and state returns with Jackson Hewitt in the Bronx location ranges from $58 to $104, according to signage in the office. Additional charges apply for more complex returns such as deductions for education expenses, Davis said. The loan fees and tax preparation charges are subtracted directly from the refund when the taxpayer opts for a RAL. “There are no upfront costs,” Davis said. Customers may know if they are approved and pick up their check within a day, she said.

Free IRS Filing

The IRS offers free online federal tax preparation for workers with adjusted gross incomes up to $58,000, or about 70 percent of filers, according to its website. The software is offered by several companies, some of which may also provide state tax return filing for free or for a fee. TurboTax, a tax product sold by Mountain View, California-based Intuit Inc., participates in the free file program, for example, and also has free state-tax preparation available for qualified taxpayers in 21 states, said spokeswoman Ashley Kirkendall.

The IRS is requiring all paid tax preparers to register for a preparer tax identification number, or PTIN, starting this year, David Williams, head of the agency’s return preparer office, said in a telephone interview. The requirement is the first step in a phased-in effort to create minimum standards for preparers, Williams said.

Competency Exam

Certain preparers will need to pass a competency exam and take 15 hours of continuing education courses each year, according to Williams. A start date for these requirements has not been set yet, the IRS said.

“Taxpayers are ultimately responsible for the accuracy of their returns under the law so they need to be careful in choosing a preparer,” Williams said.

Barber opted for a loan, knowing it was an expensive way to get her refund because of bills to pay such as her car registration and insurance, she said.

“The economy is so bad but things are looking up,” Barber said, rushing out of the Jackson Hewitt office into the winter night with plans to be back the next day to pick up her check.

To contact the reporter on this story: Margaret Collins in New York at mcollins45@bloomberg.net.

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.

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