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How the IRS Helps H&R Block Scam Taxpayers

Tax preparation giants are making a killing on short-term, high-interest, fee-laden loans on tax returns.

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. Sign AlterNet’s petition demanding the executivesof the three biggest tax preparation companies end their 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.

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