Tax Preparation Service Review

Tax-prep services come under fire

It's relatively easy to find critiques of and advice regarding tax-preparation services, because there are only three major players -- H&R Block, Jackson Hewitt and Liberty Tax Service -- and all three offer pretty much the same menu of services. We were especially impressed by a recent report by the National Consumer Law Center (NCLC) about them. We also found older but still very relevant articles from ConsumerReports.org, SmartMoney magazine and MarketWatch.com. About.com also has a good selection of helpful articles. Sites like ConsumerAffairs.com solicit negative reviews from users -- and get plenty of them -- but the reviews at Epinions.com, a more neutral site for user feedback, don't paint a much nicer picture, especially in recent years.

As you might have guessed from the above, with the exception of random comments on Internet bulletin boards praising one service or another, most of the sources we consulted are critical of big-chain tax-preparation services. Complaints are varied, but highlights (or lowlights) include high fees and poorly trained or outright incompetent tax preparers. However, some of the loudest complaints center on these services' aggressive promotion of refund-anticipation loans (RALs), short-term loans secured by a customer's tax refund. RALs put your refund dollars in your pocket in a day or two, but they come with high fees and even higher interest rates.

With these points in mind, the question is why 25 percent of taxpayers nationwide continue to get refund-anticipation loans from tax-preparation chains. Experts say that many customers go to tax-prep services because they want to get their tax refunds as fast as possible and are willing to pay the costs associated with refund-anticipation loans. However, as discussed below, both the IRS and the FDIC have begun to clamp down on RALs to the point where they may eventually become unavailable.

The other reason to use a tax service is time savings and nervousness about making a mistake by doing it on your own. But if you have a steady job, a couple of kids, some interest income and simple deductions (like gifts to charity), you can save yourself a lot of money by doing your taxes yourself; see our report on the best tax-preparation software. A tax preparer might come in handy if you have multiple streams of income, home-office expenses or other complications. For some people, it's worth the expense so they don't have to do their taxes themselves. As long as you stay away from RALs, know what you're paying for, and insist on a tax preparer with knowledge and experience, you should receive good service at a reasonable price.

New rules for preparers, tighter requirements for RALs

Until this year, you had to be licensed to cut hair, but not to be a paid tax preparer, one expert points out. As a result, investigations by consumer groups have found that some tax preparers who work for chain tax-preparation services don't know how to fill out basic tax forms, much less understand tax regulations. To address the issue, this year the IRS began phasing in nationwide rules for paid tax preparers. The new regulations require tax preparers to register with the IRS and obtain a unique identification number. Eventually, preparers will also have to pass a competency test, take 15 hours per year of continuing professional education and comply with a code of ethics. However, according to a recent article in the Wall Street Journal, "a U.S. tax-policy auditor … said it will likely be three years before the Internal Revenue Service's new federal oversight of paid tax-return preparers is in full force, finding that the IRS has inadequate resources and processes in place."

Action has also been taken by the federal government with regard to RALs. In August 2010 the IRS eliminated its debt indicator, which signaled that all or part of a taxpayer's refund would be withheld for certain debts. As a result, RALs became much riskier for lenders, and in December 2010, H&R Block's partner bank, HSBC, was ordered to stop financing RALs. This action opened the field for H&R Block's competitors, notably Jackson Hewitt and Liberty Tax Service, to attract some of H&R Block's former customers -- people who go to a tax-preparation service primarily because they want an RAL. However, in February 2011 the FDIC notified Republic Bank & Trust, the primary lender for Jackson Hewitt and Liberty, that its RALs are "unsafe and unsound" without the debt indicator. As of February 2011, H&R Block no longer offers RALs, but Jackson Hewitt and Liberty continue to offer them despite the FDIC's notice to their lender, which they say will not affect them this tax season. Both now offer a maximum loan amount of $1,500, however, regardless of the expected amount of the refund.