Personally I think refund anticipation loans are rip offs. I know some home based and small tax preparers for whom they are a significant part of their business. The reason? While sanity might dictate that RAL’s are rip offs, people want them and they have to offer them to compete. Last time I spoke to one of them, I believe that if someone came in and paid $35 for a tax return being prepared, I think the RAL paid a fee of about $35 too. In other words, this let a preparer double their revenue per customer. Some experienced preparers with a large tax base only worked from January through tax season plus handling some late filers at a much less hectic pace. They went fishing quite a bit as I recall.
So, if you make a living by the tax code, expect to take a cut by the tax code if this comes to pass.
The logic of the IRS in this matter is interesting. They claim the RAL fees are so large that they may be tempted to commit fraud by overestimating what is due back. That really didn’t make sense based on the information I had about the practice. As I recall (several year old discussion), the preparer got a flat fee. It was the lenders who would make more money from the transaction on the interest. I suppose mega preparers who can coordinate with banks and get a kickback on interest too could be accused of this. But it still doesn’t make sense…
Talking about abuse, since the tax code is obtuse and when Money magazine asks preparers nationwide what a hypothetical family owes and nobody really can come up with the same figure, who can say?
The leading tax preparers say they expect to still be able to offer the product.
The IRS says they only have “anecdotal evidence” of fraud.
But small work at home tax preparers should pay attention to the matter and stay in touch with your lender.
Bloomberg IRS May Stop Tax Preparers From Offering Refund Loans (Update6)
The Internal Revenue Service said it may try to restrict tax preparers such as Jackson Hewitt Tax Service Inc. and H&R Block Inc. from offering refund loans and audit insurance because those products can encourage fraud.
The plan, if adopted by the IRS, would prohibit tax preparers from passing along tax return information to lenders who provide instant refunds and then in some cases charge customers triple-digit interest rates to repay the loans. Consumer groups and taxpayer advocates have urged the government to crack down on such practices.
The IRS said in a statement today that tax preparers may be tempted to inflate refunds to get higher fees. There is a “financial incentive to take improper tax return positions in order to inflate refund claims inappropriately,” the IRS said.
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