Tax & Financial Consulting Services
With the filing season about to start, a lot of people are turning to professional tax preparers to assist with their returns. But those services can come at a steep cost, and a recent study found that they’re also steering hundreds of millions of dollars away from recipients of the Earned Income Tax Credit. That means, essentially, that the federal government (and taxpayers) are providing massive subsidies to companies instead of the working poor for whom the program was intended.
The Consumer Federation of America and the National Consumer Law Center earlier this year released the report “Tax Preparers Peddle High-Priced Tax Refund Loans: Millions Skimmed from the Working Poor and the U.S. Treasury.” The report details how and why low-income people spend more than a billion dollars on tax-preparation and related services.
The focus of the report is the “refund-anticipation loan” (RAL) business that allows taxpayers to file their returns electronically and receive a loan on their refund amount –from a bank but arranged by a tax-preparation company – in a day or two. While...taxpayers who file electronically can normally expect their refunds to be direct-deposited into their bank accounts within 7-10 days.
Customers will pay over a billion in RAL fees in 2008, and for most taxpayers, that money will come out of income that was withheld from their paychecks.
But the cost is especially high for people who receive the Earned Income Tax Credit (EITC) – the federal anti-poverty incentive that reduces the tax obligation of the working poor and supplements their earned income. According to the study, over 45 percent of the people who receive RALs also get the EITC.
In addition to paying $450 million in RAL fees each year, EITC recipients pay $845 million for tax-preparation, electronic filing, and check-cashing. In all, the report concludes, tax-preparation and RAL services take more than $1.3 billion a year intended for low-income taxpayers.
The report itemizes the costs associated with RALs: “Customers pay three fees to get a refund-anticipation loan: a fee to a commercial tax preparer for filling out the federal and state tax forms, typically $95 to $350 [the average is $120]; a fee for the electronic filing, with the average being $40; and a loan fee to the lender, typically set on a sliding scale based on the amount of the expected refund. Typical loan fees range from $29 to $89, but can be as high as half the refund. … The total amount of the three fees can range from $159 to $459.” The average EITC recipient will pay approximately $250 in fees and interest on tax-preparation and an RAL, which represents more than 15 percent of the average benefit.
Like many short-term loans targeting the working poor, the interest and fees charged on RALs don’t seem bad because they aren’t generally disclosed in percentage terms. While interest and fees of $29 to $89 might seem reasonable, these loans – with a term of approximately 10 days – have annual interest rates that range from 67 to 774 percent. Tax-preparation services get around state laws capping interest rates by partnering with federally chartered banks, because the federal government has no usury laws.
One reason these refund-anticipation-loan services have largely operated without media or government scrutiny is that – to some degree – the people who are paying high fees for these services don’t see themselves as getting ripped off; income-tax refunds are often viewed as free cash, and the EITC is not even a “refund” but a subsidy from the federal government. “So many people look at this as ‘found’ money.”
It would be easy to simply fault the H&R Blocks and Jackson Hewitt for exploiting low-income people, but the issue is more complex than that; it's “systemic.” A variety of factors contribute to the problem:
• The Earned Income Tax Credit is complicated, and many low-income people need help preparing their returns to claim it correctly.
• Because many people who receive the Earned Income Tax Credit live paycheck-to-paycheck, they don’t have the money up-front to pay for tax-preparation services. If they need professional help to prepare their taxes, a refund-anticipation loan is a relatively easy way to pay for it, because preparation fees come out of the loan amount.
• Outside of big cities, there are few places that offer free tax-preparation service. The Quad Cities offer some volunteer income-tax assistance through Project Now, for example, but the program does not allow people to file returns electronically. That means EITC recipients who use the service have to wait months for their money. “Most people wanted to go where they could file electronically” and get their money sooner, said one Project Now representative.
• To get a refund quickly – within two weeks – taxpayers need to file their returns electronically and have a bank account. The “unbanked” – more than 10 million households fall into the category – can file paper returns, but because they frequently need the money quickly, they opt for refund-anticipation loans.
• Congress has established a goal of having 80 percent of tax returns filed electronically by 2007. That gives the IRS an incentive to increase e-filing any way it can, and provides a DISCENTIVE to crack down on companies that might be exploiting low-income people who without RALs would probably file paper returns.
• Many people don’t realize that tax-preparation services that offer refunds in a day or two are actually providing loans on the anticipated amount of the refund. “An H&R Block study found that many consumers would decline to participate in the ‘Rapid Refund’ service if they knew it was a loan,” the report said. “Company training manuals instruct staff not to provide full information, but to limit affirmative disclosures to items ‘most important to the client,’ such as when the check would be available, the amount of the fees, and whether the fees would be withheld from the check.”
In that environment, customers are getting suckered: “If you don’t know it’s a loan, your don’t have your credit defenses up.” In addition to paying high fees, customers are also liable for the amount of the loan if the refund ends up being less than expected.
Here is a common staement made by companies that offere these products, “We’re not in the loan business. We offer these because our customers demand it.”
Well, at G&G Associates we don't offer these products even though we can. We take pride in not nickeling and diming our clients on ridiculous fees, and we surely aren't in the business of ripping our clients off. By offering these products, we would be participating in the financial robbery of our clients.
G&G Associates takes pride in helping our clients understand the power of interest and if you are paying 67 - 774% in interest in fees, but only making 3-5% in interest on your savings YOU WILL NEVER get ahead.
Remember, our society wants you to stay in a condition where your head is barely out of water. But, at G&G Associates we aim to get you in the position to walk on water.
Tax & Financial Consultant, RFC
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"The hardest thing in the world to understand is income tax." Doing Your Taxes doesn't have to be difficult. You could do it yourself but that's like changing your own oil..what else could be wrong with the car? Let us do the job for you-accurately and efficiently to get you all the money you deserve. Visit our website for more information or call us today to set your appointment.