Based on IRS data, we estimate there were approximately 5 million RALs made in 2010. IRS data shows that there were 6.85 million RAL applications in 2009. However, not all RAL applications result in loans, as a certain percentage of applications are rejected.
Check into Cash does not promote tax preparation for 2012, but does cash checks
RALs are mostly marketed to low-income taxpayers. According to IRS data, 92% of taxpayers who applied for a RAL in 2010 were low-income. A study from the Urban Institute found that the median adjusted gross income of payday loans OK RAL borrowers is under $20,000, and that one in four taxpayers earning $10,000 to $25,000 use a RAL. In fact, this study found that “taxpayers living in extremely low-income communities are an astonishing 560 percent more likely to use RALs and 215 percent more likely to use RACs-controlling for their family characteristics and their income.” In other words, RAL users are typically not just poor; they live in poor communities. The authors of the study theorized that this phenomenon could be due to targeting by tax preparation chains, particularly in placement of store locations, or due to significant “peer effects.”
In 2010, RACs generally cost $30. This year H&R Block offered a free RAC for the first three weeks of the 2012 tax season, if the taxpayer used the Block Emerald Card. An H&R Block customer who obtained a free RAC could receive his or her refund in 8-15 days, pay for tax preparation out of his or her refund, and pay only those fees incurred by using the Emerald Card. After February 4, the price of an H&R Block RAC was increased to $.
Indeed, some states have begun issuing state tax refunds on prepaid cards to taxpayers who do not use direct deposit. These states include Connecticut, New York, and Oklahoma. New York’s prepaid card appears to be optional, while Connecticut and Oklahoma appear to mandate issuance of a prepaid card (with some exceptions) if the taxpayer does not select direct deposit.
This year, the IRS took another small step toward offering direct e-filing by offering Facilitated Self Assistance, an IRS program in which eligible low-income taxpayers can go to a Volunteer Income Tax Assistance (VITA) site to prepare their own taxes using software on the site’s computers. Volunteers at the VITA site are available to help these taxpayers with the software.
In 2010, Jackson Hewitt lost half of its RAL capacity when its main RAL bank partner, Santa Barbara Bank & Trust, was forced out of the RAL market. That year, Jackson Hewitt sold a financial product to about 2.2 million (or 87%) of its customers. The company stated that “our attachment rate of loan and non-loan refund-based products was 72.2% in 2010;” thus, we can calculate that Jackson Hewitt made 1.8 million RALs and RACs in 2010. Hewitt did not report the breakdown of RALs versus RACs. However, based upon what we know about the RAL industry in 2010, we can estimate that Hewitt made about 500,000 to 600,000 RALs.
This year, there have been numerous news reports and consumer complaints that Mo’ Money Taxes has not been delivering refunds owed to customers. Refunds that the IRS stated had already been issued were allegedly not received by Mo’ Money customers. Other customers claimed they received checks representing their refunds that bounced or were even drawn on nonexistent accounts. In addition, some customers reported that they have gone to some Mo’ Money offices only to find them closed, while others reported that Mo’ Money did not answer its phones or return calls. Two Congressmen have asked the U.S. Department of Justice for an immediate investigation of potentially fraudulent and criminal activity.
Tax refund amounts after the RAL and loan fees are repaid are distributed by Citizens Bank or New Capital Bank using their QIK Funds product, which is a RAC described below
Atlas Financial Services is partnering with Schear Lending Group in 2012 to make “Tax Season Cash Advances,” which appear to be essentially non-bank RALs. These RALs are offered to preparers using RedGear tax software, marketed as “TaxWorks” and “1040Works.” Red Gear is owned by H&R Block, see Section II.A above.
OLTPro is another major software provider. It partners with RefundAdvantage, Santa Barbara Tax Products Group, River City Bank, EPS Financial, LLC, and AdventFinancial as “bank partners” for the 2012 tax season.
Some fringe outlets are just promoting tax check cashing services. Money ount, no ID required, no holds on refunds, and no bank account necessary. Money Mart partners with Liberty Tax Service to cash tax refund checks. ACE Cash Express promotes check cashing for tax refund checks but is not promoting tax preparation. A clerk at an Arizona ACE store quoted three percent as the tax refund check cashing fee, but urged a caller to bring in the check to “run through” the system to see exactly what the fee would be. A $3,000 tax refund check would cost $90 to cash at that rate, but ACE offers a 20% off coupon for check cashing fees on its website. ACE also promotes loading federal tax refunds onto an ACE Elite Visa prepaid card, issued by NetSpend. Consumers who do so get a chance to win a $10,000 prize.
There was no new RAL legislation in 2011. In 2009, Minnesota amended its tax RAL law to prohibit including in a RAL/RAC agreement any provision that directly or indirectly arranges for payment of a fee other than the RAL/RAC fee, repayment of a RAL, or the tax preparation fee. This provision appears to prohibit add-on fees. Minnesota also added to its law RAC disclosures and a requirement that tax preparers act in the best interests of the client.
Issues as to who is the actual tax preparer and who is IRS certified-You’ll notice that the 8879 lists Advance America as the tax preparer/ERO firm, yet the consent forms [the tester] signed lists “e-Tax, Inc” as the ERO/preparers. If AA staff are doing returns (which is absolutely how the process was presented to [the tester] and me), then are they IRS certified?
Amended Notice of Charges for an Order to Cease and Desist, In the Matter of Republic Bank & Trust Co., FDIC-10-079b and FDIC-10-216k, . See Section III.B below for discussion of details of the Amended Notice.
Republic Bank & Trust, What You Need to Know Before Selecting a Bank Product, obtained from a Jackson Hewitt store, on file with authors.