Refund Anticipation Loans and Audit Guarantees

Refund anticipation loans: Buyer beware

As stated above, a large part of the business of national tax-preparation chains like H&R Block and Jackson Hewitt consists of providing refund-anticipation loans (RALs). The basic problem is, while many people are owed a hefty refund on their yearly taxes, the U.S. government usually doesn't get around to cutting these checks until six to eight weeks after the return is filed. In this economy, especially, that $2,000 can come in handy sooner rather than later--hence the usefulness of an RAL.

The way an RAL works is that the tax preparation chain (H&R Block, Jackson Hewitt, etc.) has the filer open a "dummy account," so the government check, when it comes, is deposited into these firms' coffers. In the meantime, the chain gives the filer a loan for the equivalent amount (minus hefty fees), which can carry double- or even triple-digit interest rates over the following months. The net result is that about $200 (or more) of a $2000 refund can be eaten up by fees and interest, to the chain's benefit. The latest innovation is prepaid credit cards with hidden fees and high interest rates onto which the RAL money is loaded, a practice introduced recently by H&R Block and taken up by Jackson Hewitt.

There's a terrific article by the Greater Philadelphia Urban Affairs Coalition that details the nitty-gritty of RALs. This community group asked lower-income filers to visit H&R Block and Jackson Hewitt outlets, and these "mystery shoppers" reported being pressured to open dummy accounts and take out RALs, even when they were only interested in basic tax preparation. It's no wonder that many government functionaries and community-interest groups feel these loans may be predatory and in need of regulation.

To be fair, though, there's another side to this story. As a rule, financial services don't exist unless there's significant demand for them, and a huge number of customers seem to be willing to endure high fees and interest rates to get their refund money sooner rather than later. The problem appears to be one of transparency. Prompted by legal action, chains have been forced to be more upfront about the fees and interest rates associated with RALs, and to make it clear to tax filers that these are loans rather than genuine government refunds. In other words, RALs aren't going away anytime soon, but consumers may soon be better equipped to understand their advantages and disadvantages.

More confusing is the issue of the "audit guarantees" issued by H&R Block, Jackson Hewitt, and other tax preparers. Virtually all the experts we found say these guarantees are next to worthless, even the ones for which you pay extra, such as H&R Block's "Peace of Mind" guarantee and Jackson Hewitt's "Gold" guarantee. The fact is, you can't count on these chains to send a representative to represent you in an IRS audit or to pay the full penalties for filing mistakes; the actual performance seems to vary on a case-by-case basis. William Perez, About.com's guide to tax planning, reports on one case in which the "Peace of Mind" guarantee was not honored because there was a mistake on the return. The bottom line is, you need to double-check the return yourself and count on facing the IRS alone if you get into trouble. Interestingly, William Perez also points out that these value-added guarantees help the chains more than they help you, because they provide a ready pool of money that covers the mistakes of inexperienced tax preparers.

This brings up the issue of how the tax preparers at H&R Block, Jackson Hewitt and Liberty Tax Serivce are trained. Of the three chains, H&R Block has the best reputation for making sure its preparers are adequately trained, though we still found complaints online about inexperienced, seasonal employees hired to handle the crowds in March and April. The fact is, there isn't a government-sponsored certification program for tax preparation, so it's up to the chains to make sure that your preparer is up to snuff. When you're dealing with 3,000, 6,000 or 12,000 storefronts, many of which are franchised, individual standards may vary.