Asbury Park Press

Questionable Practices

Tax preparers are taking heat from consumer groups and the government over loan programs, inflated refunds and their marketing tactics.

Asbury Park Press — Monday, March 5, 2007

BY MICHAEL L. DIAMOND
BUSINESS WRITER

The first time Neptune resident Larry Wilson used a tax preparation company, he was handed a scratch-off card that offered him a chance to save 20 percent on the service.

In retrospect, his chances of hitting the jackpot and getting the discount were about the same as winning the lottery.

"All it was was (a ploy) to get you in there," Wilson, 41, a security officer for Monmouth County, said. "I didn't win anything."

With promises of big refunds and instant cash, the tax preparation business may seem, well, a little unseemly. And with the April 17 tax deadline looming, advocacy groups and government agencies are warning consumers to be wary of inflated promises about giant refunds and quick money.

The warnings come as the companies fend off claims that they are taking advantage of working-class residents who need every cent of their tax refunds, turning the tax-return process into a costly endeavor.

"What they're really part of is this new, growing industry that targets lower-income people, who are having trouble making ends meet, for high-cost loans," said Sarah Ludwig, director of the Neighborhood Eco-nomic Development Advocacy Project in New York.

Taxpayers are welcome to file their own taxes either by paper or electronically, and they can get their refund deposited to their bank account within two or three weeks. And taxpayers with an adjusted gross income of $52,000 or less can file electronically for free on the IRS Web site.

Nonetheless, the tax preparation industry is big business.

In 2004, 64 percent of tax returns in New Jersey – 59 percent nationwide – were signed by a paid tax professional, the IRS reported.

A simple tax return can cost anywhere from $50 to $150, and that figure can increase depending on the complexity of the tax return. The industry's total revenue isn't clear, but Jackson Hewitt, the Parsippany-based company that is the nation's second largest tax preparer behind H&R Block, reported $275.4 million in revenue in 2006 – and that was with only a 4 percent share of the market.

The highly fragmented industry makes choosing a tax preparer dicey. The IRS has investigated about 200 cases of possible tax fraud nationwide in each of the past three years. About half of those cases have wound up with the preparers convicted, the IRS said.

In one recent case, Willie L. Vick of West Orange was sentenced in January to 18 months in prison after pleading guilty to preparing fraudulent tax returns. He claimed more deductions – and secured bigger refunds – than his clients were entitled to, according to court documents.

The lives of Vick's clients were disrupted too. They had to reimburse the government, even though many were low-income and could "ill-afford to pay these back," IRS spokesman Alan Drucker said. "They're just trying to conform to their obligations."

It's not simply the fly-by-night companies that are under scrutiny. Consumer groups this winter have renewed their objections to how the largest tax preparation firms have drummed up business.

One particularly controversial product is the refund anticipation loan, in which the tax firms team up with banks to offer immediate money in the form of loans. The loans last seven to 14 days and are repaid – with interest – from the tax refund.

Tax firms say the loans give low-income workers money immediately so they don't have to wait for the IRS to process their refunds.

But consumer groups say the price is steep and takes money out of taxpayers' pockets. The Consumer Federation of America said the loans' annual interest rates range from 40 percent to as much as 500 percent – not including loan fees that range from $30 to $125 and application fees of about $40.

Add it together and the effective annual percentage rate ranges from 57 percent to more than 1,100 percent, the Consumer Federation said.

The loans skirt state laws that prohibit excessive interest rates because they are made by federally chartered banks, consumer advocates said.

The Consumer Federation said publicity about the loan program might be having an impact. The number of taxpayers receiving the loans declined to 9.6 million in 2005 from 12.4 million in 2004. But it still cost taxpayers nearly $1 billion in fees, it said.

"The unfortunate thing is what we are finding is a lot of people look at the tax refund as someone else's money," said Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, an advocacy group.

The nation's two biggest tax preparation companies, H&R Block and Jackson Hewitt, offer the loans, but the product has landed them in legal trouble.

Kansas City-based H&R Block was sued by the California Attorney General a year ago over the loan program. It paid $101.5 million to settle class-action claims. And it lowered its fees, USA Today reported.

Jackson Hewitt also was sued by the California Attorney General. Among the state's complaints was Jackson Hewitt's marketing plan, which advertised the product as "Money Now" or called it a "refund," rather a "loan."

The company in January agreed to pay $5 million to settle the lawsuit.

"Jackson Hewitt made a lot of money by pushing customers to take out expensive loans rather than encouraging them to wait a couple of weeks to get their refunds from the IRS for free," California Attorney General Bill Lockyer said in a statement. "In the process they deceived consumers and took money from low-income families who can least afford it."

New Jersey Citizen Action recently participated in a protest at Jackson Hewitt's headquarters. And it has asked the New Jersey Attorney General to investigate Jackson Hewitt's refund anticipation loan program.

A spokesman for H&R Block referred a reporter to a press release headlined, "H&R Block Urges Clients to Understand Refund Anticipation Loans."

Among the advice: Shop for the best price. It said the average loan amount of $2,800 costs about $60 at H&R Block when the proceeds are deposited to an H&R Block debit card. The card can be used at retailers and ATMs. However, consumers are charged a $1.50 fee for each withdrawal at a domestic ATM, according to the company's Web site.

Jackson Hewitt officials could not be reached for comment.

For consumers such as Larry Wilson, it presents a dilemma. He works full-time and has three children ranging in age from 3 months to 16 years. He scarcely has time to fill out his tax return. Nor can he afford to lose any of the money the government owes him.

"I don't like to pay extra," he said, "because I need every penny I get."

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