Refund Anticipation Loans and Audit Guarantees

Buyer beware when it comes to refund-anticipation products

As noted elsewhere in this report, a large part of the business of national tax-preparation chains (with the exception of H&R Block, beginning this year) consists of providing refund-anticipation loans (RALs). The basic problem is, while many people are owed a hefty refund on their yearly taxes, they need (or want) the money right away. According to the IRS, if you e-file and have your refund check direct deposited into your bank account, you should get your refund in eight to 15 days, but many people don't realize this or don't want to wait even that long. In addition, many people who get RALs don't have a bank account into which their refund can be direct deposited. The taxpayer can get an RAL in a day or so and doesn't have to pay the tax-preparation charges up front since they come out of the refund.

A related product is what H&R Block calls refund-anticipation checks (RACs), Jackson Hewitt calls assisted refunds, and Liberty Tax calls electronic-refund checks (ERCs) or electronic refund deposits (ERDs). These allow taxpayers to get their refunds in eight to 15 days through a temporary bank account the tax preparation chain sets up for them. The IRS deposits the refund into the account, and the tax service issues the taxpayer a check or loads the funds onto a prepaid debit card, minus tax-preparation charges and other fees. As noted earlier in this report, eight to 15 days is the same length of time the IRS takes to direct deposit a refund, so RACs and related products are really targeted at people who don't have their own bank account and/or can't pay the tax-preparation fees up front.

The National Consumer Law Center (NCLC) and the Consumer Federation of America (CFA) advise taxpayers to avoid RALs and RACs and other assisted refund-type products. According to a joint report by the two organizations, for example, the $61.22 charged by Jackson Hewitt for an RAL of $1,500 "translates into an APR of 149%." If the taxpayer's refund exceeds $1,561.22, the excess must be paid in the form of an assisted refund with another charge of $29.95, for a total of $91.17, plus tax-preparation fees. The groups also say that many taxpayers don't realize that an RAL is a loan and not their actual tax refund, even though tax preparers are supposed to explain this fact and disclose all related fees and interest.

More confusing is the issue of the "audit guarantees" offered 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 (or hire an attorney) if you get into trouble. Interestingly, 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 Service 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. As discussed elsewhere in this report, the IRS now imposes requirements on paid tax preparers, but its certification program is not yet fully operational, 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.