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 current articles from ConsumerReports.org about storefront tax preparers, as well as slightly older but still very relevant articles from financial publications and websites such as SmartMoney magazine, MarketWatch.com and Kiplingers.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 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), which put your refund dollars in your pocket in a matter of days, but come with lots of gotchas. Those include high and often poorly-disclosed fees and interest rates. Every expert says RALs are an especially bad deal these days since with e-filing and direct-deposit, refunds almost always reach taxpayers in less than two weeks.

With these points in mind, the question is why about 25 percent of filers nationwide continue to use tax-preparation chains. Brand recognition is a big factor. Lately, though, it seems that more and more customers are going to services like H&R Block because they want to get their tax refunds as fast as possible and are willing to pay the costs associated with refund anticipation loans. Consumer advocates have lobbied against RALs for years, but many people are in such desperate straits that they feel they can't wait even a few days for ready cash. According to a report at RISMedia.com, in 2010 "after several years of declining use, tax refund anticipation loans could make a big comeback this tax season with poor, cash-strapped taxpayers."

The other reason to use a tax service is time savings and nervousness about making a mistake by doing it on your own. But the fact is that 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. But a tax preparer may 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

One issue -- poorly trained tax preparers -- is being address in new IRS regulations that are slated to go into effect for the next tax year. Beginning in 2011, the IRS will phase in nationwide rules for paid tax preparers. These rules will require registration with the IRS to obtain a unique identification number. Preparers will also have topass a competency test, take 15 hours per year of continuing professional education, and comply with a code of ethics.

Unfortunately, no action will be taken with regard to RALs, though the IRS has announced that it will appoint a task force to look into them. Already, though, the price and availability of these financial products are changing. In 2009, the bank that financed most of the RALs for Jackson Hewitt was ordered out of the RAL business by its federal regulator. Jackson Hewitt then made a deal with a smaller RAL lender, Republic Bank and Trust, which announced that it would drop its price for RALs this year, bringing it more in line with what other banks charge. This continues an ongoing trend; the National Consumer Law Center and Consumer Federation of America report that the price for a typical RAL of $1,000 to $4,000 decreased 35 percent or more from 2007 to 2010.

However, despite the fact that this year more people than ever may apply for RALs, fewer will be eligible for them. Republic Bank and Trust, for example, decided to discontinue their "instant" loans so that they can screen applicants more carefully. Other lenders are tightening their eligibility requirements as well. Many recent complaints at ConsumerAffairs.com are from people who say that their tax preparer did not tell them they might not be approved for an RAL, and that they paid for the preparer's services only to find out later that they couldn't get a loan. Some say they would have done their taxes themselves if they hadn't needed a RAL.