Smart TaxesSmart Taxes

Beware of 3 tax traps

There's nothing wrong with charging a fair amount for a valuable service. But for years, some tax-preparation companies have been squeezing extra fees from people least able to afford them.

By Stacy Johnson Feb 16, 2011 5:15PM

The following post comes from Stacy Johnson at partner site Money Talks News.


It should be enough to perform a service and charge a fair fee. But for some tax preparation services, doing people’s taxes in exchange for money apparently isn’t enough. Because some feel the need to squeeze as much as possible out of the unsuspecting for services that either aren’t necessary at all or are of dubious value.


Let’s take a look at three examples.


Tax trap 1: Charging for services the taxpayer could be getting free

Every year I do a TV news story explaining how to get free in-person tax preparation. Here’s this year’s version: 3 Tips for Free Help. To boil it down, if you made less than $49,000 last year, you can walk into any of thousands of locations and have your taxes done by a trained volunteer and electronically filed absolutely free.


This is a fact obviously known to any major tax preparation service. And yet some don’t hesitate to charge eligible taxpayers to prepare their return.


Tax trap 2: Refund anticipation loans

As we reported in August 2010, the practice of getting your tax refund back by taking out a “refund anticipation loan” may be that’s getting harder to do.


Refund anticipation loans, or RALs, are high-cost, short-term loans for consumers who want their refund “instantly.” They’ve been criticized by consumer advocates – including me – for years: See Difference Between a Loan Shark and a Tax Refund Loan? Not Much. The reason is simple. These loans, often targeted at the working poor, typically come with fees that translate into annual percentage rates of 50% to 500%. That’s a lot to borrow what’s already yours – your tax refund.


Check out the following news story, then meet me on the other side for more on these loans.


So, as you saw in the video above, refund anticipation loans are getting harder to find: That’s the good news. The bad news? Because they’re getting harder to find, they’re also getting more expensive.


In recent years, refund anticipation loans finally started attracting unwanted attention from government agencies, including the IRS.


“Refund anticipation loans are often targeted at lower-income taxpayers,” IRS Commissioner Doug Shulman said in this press release last year. “With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”


And the IRS did more than issue a press release. Last year the agency also stopped providing tax preparation services with something called a Debt Indicator, a service that allowed preparers and banks to ensure that a taxpayer's refund wasn't going to be withheld by Uncle Sam to satisfy a debt, like a student loan. Without the Debt Indicator, making loans to taxpayers became a lot more risky.


Another factor negatively affecting RALs is that more and more banks are leaving the business, either voluntarily or involuntarily. Last April, for example, one of the largest banks in the RAL business, JPMorgan Chase, stopped the practice. Last October, the Office of Thrift Supervision issued a directive that effectively put another big player, MetaBank, out of the business. In December, the Office of the Comptroller of the Currency issued a directive prohibiting HSBC – previously the banking partner for H&R Block – from offering RALs.


Today there are only three small banks in the refund loan business, all headquartered in Louisville, Ky.: Republic Bank & Trust, River City Bank and Ohio Valley Bank. Because there are fewer banks in the business and the volume is drying up, the fees they charge to make these loans are increasing.


Tax trap 3: Refund-anticipation checks

Unfortunately, refund anticipation loans aren’t the only way tax preparation services try to squeeze fees out of hapless consumers. There’s also the refund anticipation check, or RAC.


The fastest way to get a tax refund is to file electronically and have the IRS deposit the refund directly into a bank account. This often allows taxpayers to get their refunds in less than two weeks, and is a major reason refund loans no longer make sense. The problem? Millions of taxpayers don’t have a bank account.


That’s where a RAC comes in. A refund anticipation check allows the unbanked to harness the speed of IRS direct deposit to get their refund. It’s not complicated…

  • A bank working with the tax preparer opens a temporary account for the taxpayer.
  • The IRS direct deposits the refund check to that taxpayer’s account.
  • The bank issues a refund check to the taxpayer, then closes the temporary account.

Simple? Yes. Smart? No. Because the taxpayer often pays in the range of $30 for this “service.”


And while it’s possible that there are unbanked millionaires, one imagines that most taxpayers enticed into these arrangements probably aren’t, and can ill-afford to pay $30 to do something they could do for free: open a bank account. Even if the taxpayer chooses not to have a bank account, he can still have his refund direct deposited to a prepaid debit card, including any existing payroll or prepaid card he already has.


According to this press release from the National Consumer Law Center and the Consumer Federation of America, in 2009 12.9 million people got their refunds this way, thus transferring about $387 million dollars of their money to these companies' bottom lines.


“Consumers should considering opening a real bank account to get their refunds fast, instead of paying $30 for a one-time use account,” recommended Jean Ann Fox of Consumer Federation of America.


Here’s a novel idea: Maybe tax preparation services should stop trying to nickel and dime this nation’s working poor and do what the rest of us do -- make an honest living.


More from Money Talks News and MSN Money:


Feb 16, 2011 10:19PM
Hold on there now momo462.  I have used RALs in the past.  I sure as hell am not a lazy bum.  Served my nations military, to protect people like you, and everyone else.  Worked a regular job, paying my dues since I was 16.  Offered a full Senator sponsorship to attend ANY military academy of my choosing, including West Point, I turned it down, so that I could work, and be enlisted like everyone else.  I work my 40+ whenever possible, and yeah, I have three kids.  I take care of my kids, because I'm not a lazy person.  I'm not poor white trash either, so you might want to reconsider how you go about insulting your fellow Americans.
Feb 16, 2011 11:29PM
If people are too stupid to figure out that they are getting ripped off on these things then it is their fault.   I am sure there are some people out there who need the money because of an emergency and for that I wish the situation wasn't as it is, but for a huge number of people, they are just clueless or want the quick gratification of the money right away.  I see a number of people on welfare who get their nails done every week, who have flat screen televsions, blu ray players and the lastest video game counsole.  Sorry but those are not necessities, those are luxuries and if you don't want to get worked over with the loan interest then get your taxes done early and wait for the refund.
Feb 17, 2011 9:23AM

Here's a little tip.  Stop giving the government too much of your money during the year and you won't need that RAL or RAC.  But then you would also have to be careful with your money and not spend it on things you do not need.


Probably too much to ask of most people.

Feb 16, 2011 8:17PM
I agree Sage of the Age. I myself am a tax preparer for a large tax preparation company. This is the customer's right to choose when, why, and how they will spend their money. Not all consumers that choose the RAL option are low income people receiving EIC. Many of these people are working 40-50 hours a week and have had things come up. I had a lady that applied for a RAL this year because she was being evicted in two days. Her husband had died and had lost his income. Do you tell this woman she does not deserve to receive her money in 24-48 hours because YOU disagree with how she spends her money? Ignorance is what fuels this nation. I am fine if you do not choose this product because it is YOUR right. As tax preparers we are obligated to explain all the fees associated with the loan product and I also explain to them they are able to receive a Refund Anticipation Check in 8-15 days for a lesser cost or even efile at no cost. momo462, I hope for your sake that you are never in a situation where you qualify for Earned Income Credit because of a life catastrophy or even unemployment. Shame on you!!!
Feb 19, 2011 12:05PM
I am on welfare for the first time in my life.  I lost my son 2 years ago and his girlfriend was p.g. with his baby which she did not want.  She had the baby for me because of his untimely death.  I have a daughter that lives with me who is very ill.  I have worked my entire life until 6 months ago when the car industry took a bite.  I happened to work in that industry, so I lost my job.  I have filed my won taxes every year.  I have a lot of different issues this year to deal with that I don't know if I am equipped to handle.  Social Security, Welfare, Unemployment, for examples.  I don't need a rapid tax return even though I am a welfare Grandma.  I just don't appreciate people putting me down for being on welfare.  You should walk in someone else's shoes before you judge.  Shame on you!!!!!!
Feb 18, 2011 11:10AM
I have a number of clients who earn less than $49,000 and still come to pay me to do their taxes.  It is their choice to pay for a service they could receive at no charge.  If they go to the doctor is she obliged to mention that they could instead go to the county hospital ER at no charge on the taxpayers dime?  If they buy a fast food meal should they  tell them they can get free food at the charity operated soup kitchen downtown?  Should the clerk at the supermarket mention the local food bank to the customer who is buying bread and peanut butter?  I consider it insulting to assume that a client cannot pay for a service they ask for.  I am curious as to how the writer of this article files his/her return.  Do you go to the volunteer center and wait in line for a couple of hours to save yourself a few dollars thereby taking  a spot from someone who really needs the free service?
Feb 18, 2011 3:09PM

Another thing to be aware of if you are taking advantage of one of the many online tax preparation services are the fees. Almost everybody has seen the ads on television and splattered all over your computer about free simple tax returns. And that's great. Now, what happens if you file something other than an EZ return? You get charged a fee. And that's okay, too. You are receiving a service which most certainly makes the process if not painless at least a lot easier. So you are more than willing to have $14.95 taken out of your refund or pay in advance to save having to pay an additional $1,816 in taxes. For this nominal fee you get your Federal and one state return.

What's the problem? You are getting a refund and you opt for direct deposit of that refund. The bank through which this refund is processed will also charge you a fee ... anywhere from $9.95 to $20 depending on where you live and which bank and/or tax prep service are used.

Now, here's the surprise that got me. Having two state returns to file, and having used the same service for many years, I clicked on a "bundled" service which apparently would allow me to file the second state in addition to the first state and the federal for a mere $17.95.  The 'bundle effect' was of negligible benefit, providing a quick link to pre-filled forms which are readily available in blank form to easily fill out anyway. I ended up not using it as it was really no easier than filling out the forms the same way I have done for the past seven years through this same service.

Now, imagine my surprise when I reached the end of the prep and found I was being charged the $17.95 PLUS the initial $14.95 AND a $16.95 banking service fee. This left me being charged by various parties a total of $49.85.

Rather than filing the returns, I fired off a note to the company's Customer Service about what ostensibly was double charging for the returns. To their credit, the next day I received a very nice message from a representative informing me the $17.95, which was taken out at the beginning of the filing, would be refunded. I then did go back to their site and finish my filings for the new standard charge of $17.95 plus the banking service fee of $16.95. Yes, it's more than I anticipated but it's less than being charged twice.

The moral of this story is ... whether it's filing taxes or any other business transaction, pay attention to that list of fees you are about to pay. Make sure there is legitimate supporting goods or services to back it up before you agree to pay up.

Feb 16, 2011 8:03PM
Okay, Turbo Tax, Okay FDIC, Okay whoever!  Obviously you have no concern for people who are about to have their car repo'd or being thrown out of their homes and need money fast.  You are also trying to take away the right anyone has to make their own decisions about how they want to spend their money.  I work in a Jackson Hewitt Office and am proud that we are offering RAL's this year as a choice for those who need money fast.  It's not the RAL that you are taking away-it's the rights of people to choose what they want and may need you are taking away.  I agree that the RAL is not a good choice and I always tell my clients so, however, who am I or who are you to tell them that they can't choose that option if their situation is critical.  Shame on you!!!!!!
Feb 17, 2011 10:42PM
I always find it amusing when people who don't have a pressing need ridicule those who do and do what needs to be done to address that need. Yeah, we shouldn't have our with-holdings set high enough to get much of a return back. Yeah, it's only two weeks to get the money electronically if you do everything just right. A thought for you while you sit atop your soap box: the people you are looking down on don't perpetrate Ponzi schemes, embezzle millions or any other white collar crime the inevitably cost victims everything either. Those people are the one's who do everything you call "right."
Feb 25, 2011 6:59PM
I don't like someone telling me I'm being ripped off and don't take the quick check...I don't have to wait when desk are backed up with returns...It puts my return on top and I don't have to worry about the check getting lost...They can usually get me a lot more money than if i did it myself ...Professionals don't miss things that you would so I don't mind giving some of those extras back for they are running a buissness too....Don't tell people their getting ripped off when it is a choice like buying an extended warrantee on something...
Feb 16, 2011 7:23PM
Its not the hard working people who use the RAL.
Its the lazy bums who work a couple of hours a week and  do nothing else but make children
to be eligible for child care credit. These are freebies from the Government using taxes from
us hard working folks.
If they get $5000 free why would they care paying H&R Block $500 to get it as day or two earlier?

Feb 17, 2011 2:55PM
  I am A registered Nurse working  hard every day in NY. I  needed to get my refund fast to pay for one of My daughters' trip to another country to pursue her classes in journalism.  and the deadline was close.  Thank God for RAl.
Feb 17, 2011 4:42AM
I've dealt with 123 mortgage refi on two refis now, and in each case it was about as painless as anything that involves paperwork by the acre can possibly be. I would heartily recommend his services without reservation for those thinking of refi.

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.