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.
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.
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.
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.
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.
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.
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.
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?
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