How the IRS Helps H&R Block Scam Taxpayers
Editor's Note: Liberty Tax Service, H&R Block and Jackson Hewitt are making out like bandits by charging effective interest rates of up to 500 percent on “Refund Anticipation Loans” to low-income Americans. SignAlterNet’s petition demanding the executivesof the three biggest tax preparation companies endtheir predatory tax refund scams.
You know tax season is around the corner when you see start seeing the guys in the cheap Statue of Liberty costumes. They begin popping up in mid-February, haunting subway exits and downtown intersections nationwide draped in garish aqua togas, faces lit up in sparkle paint, heads topped by radiant crowns of chipped Styrofoam. They are the hourly sandwich-board street barkers of Liberty Tax Service, carrying not tablets symbolic of ancient Roman wisdom, but paper fliers advertising modern-day tax services.
Echoing the original, these copycat Lady Liberties also beckon the poor. But instead of offering refuge, they offer scams.
Among the products and services provided by Liberty Tax Service are Refund Anticipation Loans (RAL). Together with fellow tax preparation giants H&R Block and Jackson Hewitt, Liberty has become a leading purveyor of RALs: short-term, high-interest, fee-laden loans on imminent tax returns, the majority of which are taken out by the working poor. Over the last two decades, RALs have become a common and increasingly controversial part of the nation's tax season hustle. In 2008, more than eight million Americans spent nearly a billion dollars paying interest and fees on RALs—often based on misleading or incomplete information—swelling the profits of tax preparers and their partner banks.
Critics have long decried these loans as predatory. The nation's largest consumer groups have documented how the industry depends on manipulating the ignorance of RAL borrowers. For years, RAL loans were falsely marketed not as loans at all, but as "rapid refunds" and "instant refunds." Though now legally barred from such false advertising, tax preparer services still prey on the lack of financial sophistication common among RAL purchasers, two-thirds of whom live near the poverty line and qualify for the Earned Income Tax Credit. Liberty Tax and Jackson Hewitt even offer referral incentives to community groups that cater to the poor and the elderly.
Because the loans cover an extremely short period—usually between one and two weeks—their cost (36 percent plus various fees) often amounts to triple and even quadruple digit annual interests rates.
"These loans target the poor," says Chi Chi Wu of the National Consumer Law Center. "Because they are secured by and repaid directly from the borrower's promised tax refund, the lenders are able to do it risk-free. And if for some reason their refund doesn't show up or meet expectations, borrowers find themselves on the hook for a lot of money, up to 500 percent APR, for a loan they most likely did not need in the first place."
What makes these loans largely risk-free for the lenders is a crucial technological assist provided by the Internal Revenue Service, called the Debt Indicator program. It began in the early 1990s, when the IRS began allowing tax-preparing firms to access the records of their clients. At the time, the aim was to encourage electronic filing. Today electronic filing is a common practice, and the only purpose served by the program is to allow RAL-lending banks access to a client's private tax file via their partner firm (i.e. H&R Block). After lenders learn there is no lien on the prospective borrower's soon-to-arrive return, they can make the high-interest loans knowing the government check is all but in the mail.
"The government is spending billions on programs to help the working poor, but by cooperating with the RAL industry, they're also helping redistribute this same income upward," says David Clay Johnston, a columnist for Tax Notes and lecturer at Syracuse Law School. "The sole purpose of the Debt Indicator program is to help predatory lenders manage risk and thus enhance profits. It is a useful and free tool: a form of no-cost credit check."
As a result of IRS participation in the RAL industry, Nina Olsen, the national taxpayer advocate—a sort of IRS ombudsman—has compared the United States government to a "payday" lender.
"The IRS could put a stop to the practice [of predatory RALs] if it wanted to," says Wu of National Consumer Law Center. "There is already a law that tax preparers aren't supposed to share personal information. The agency needs to start setting and enforcing rules—and licensing the preparers."
The government has lent its support to the RAL industry in other ways. In December 2009, one of the worst offenders in the world of high-interest RAL loans, Santa Barbara Bank & Trust, received $180 million in TARP funds. It was no secret at the time that the bank was one of the highest-priced RAL lenders, charging about 40 percent more than most of its competitors.
"Santa Barbara fed off of taxpayer money twice," says Peter Skillern, director of the Community Reinvestment Association of North Carolina. "First, it fed off hundreds of millions in refund dollars in making RALs to working families. Second, it funded its RAL loans using tax dollars from the bailout."
Earlier this year, federal banking regulators ended Santa Barbara Bank & Trust's involvement in the RAL industry. After years of repeated disciplinary government action against the bank—for tax fraud, deceptive lending and poor screening—it was finally banned from the RAL market after it missed two TARP payments. This left its main RAL client, Jackson Hewitt Tax Services, without a lending partner at over half of its offices. Most but not all of this gap has been filled by others, including the Iowa-based MetaBank (ticker symbol: CASH).
After years of escaping government regulation, observers say there is now hope that the industry is on the cusp of serious reform. Following completion of a six-month review of the tax preparation industry, the IRS has announced sweeping new regulations. Although nothing has yet been made official, the IRS has proposed requiring paid preparers to register with the IRS, pass a competency test, and comply with an as-yet defined "code of ethics." The Service has also spoken of a task force to review RALs and related products. Part of this review would involve revisiting the Debt Indicator program.
All of which would be a much-needed and long-overdue acknowledgment that the United States government has been unable to stop, at best, and partner to, at worst, the systematic scamming of American taxpayers for too long.
SignAlterNet’s petition demanding the executivesof the three biggest tax preparation companies endtheir predatory tax refund scams against the poor.