A lot of taxpayers who expect refunds will find themselves in a bind this year amid delays in payouts. That has prompted a jump in loans to tide over people due refunds -- with the tax preparers doing the lending.
Refund lending is a controversial practice. For a loan to help those waiting for refunds, tax prep firms tack on a fee of $35 to $45 per return, according to the Consumer Federation of America. Added to the average $200 cost to prepare a tax filing and refund of $2,800, that’s a pretty steep tariff for a loan that lasts a just month or two.
The reason for the delays this season is a new law designed to combat fraud, which targets tax credits most open to abuse, or at least error. Under the new law, the IRS can postpone paying refunds to people who claim the Earned Income Tax Credit or the Additional Child Tax Credit.
Thanks to malfeasance or mistakes, the U.S. Treasury came up more than $21 billion short in 2013, the IRS has calculated.
Affected refunds will be delayed until Feb. 15, even if taxpayers filed early. This tax year, the crackdown will delay as much as $50 billion in refunds for 3 million Americans, the IRS expects.
As a result, the top three tax-prep companies are trotting out lending programs to help refund-bereft taxpayers to bridge the gap. The preparers cast it in altruistic terms, a way to help their stricken clients. But they also readily admit it’s a way to recover market share lost to lower-cost TurboTax, offered by Intuit (INTU), other cut-rate online services and the IRS’s own web-based free-filing plan.
Industry leader H&R Block (HRB), for instance, saw earnings slip for the 2016 fiscal year ending in the spring by 21 percent. Then it fell into the red for the first half of the current year ending in October. Rival Liberty Tax (TAX) did better, doubling net income, which is partly attributed to its refund program.
The other member of the big three tax-prep outfits, Jackson Hewitt, isn’t publicly traded. It began its loan program three years ago, and the other two debuted theirs recently.
Until 2012, when the government outlawed the practice, Block and several other preparers offered high-interest loans in anticipation of refunds. Liberty, for examples, lost a lawsuit in California that alleged it pushed loans that charged as much as 395 percent annually, and recently it settled another case.
In the new iteration, billed as no-fee and no-interest, the tax preparers deny any hidden fees are tacked onto the price tag to put together a filing. “We make absolutely no money on this,” said William Cobb, H&R Block’s chief executive.
Each of the top three preparers insist that prices have not risen this year and are the same whether a customer takes out a refund loan or not. “They’re flat, year over year,” said David Prokupek, Jackson Hewitt’s CEO. All in all, the endeavor this year will set the firm back $40 million, which Prokupek said would be allocated as a marketing expense.
He noted that many states have usury laws, which bar charging excessive interest, and that militates against prep firms soaking their clients. The loans “have an 80 percent approval rate” the company’s customer surveys show, he added.
The way a refund loan works is that you borrow only a portion of your refund -- which the preparer knows all about because it crafted the return. No firm will allow you to borrow to cover the whole IRS check. The upper limit on a loan is around $1,300 for the leading three preparers.
Often, loan repayment is sent electronically straight from your bank account to the prep company. Should your refund fall through, perhaps because delinquent child support payments or old tax debts come to light, the big three pledge to eat the cost and not sock you with a penalty.
Foes of refund loans, of course, paint them as unnecessary. The National Consumer Law Center advocates that you file electronically to speed your refund, and if an urgent bill is due, ask for more time until the IRS payment arrives.
Either way, when it comes, a refund check is welcome. “Let’s say you make $18,000 to $50,000 a year,” Jackson Hewitt’s Prokupek said. “A $4,000 to $6,000 refund is a lot of money.”