A young man braving biting wind and snow walked up to a small kiosk outside Laser 1040 Tax Service recently, asking, “Will you cash this check?”
After producing his driver’s license for identification, he didn’t flinch at the 2.75 percent fee to cash his $3,733 tax refund check. In less than two minutes, the man walked away from the tax business at 121 Grand Ave., pocketing a wad of cash that cost him around $100 in fees.
Others too eager to wait are willingly paying fees to take out a bank loan against their coming refund.
Many local accountants have leveled almost universal criticism of these refund anticipation loans as rip-offs.
“They are filling the market need for the person who doesn’t want to wait 10 days for a refund, which is foolish,” said Trudy Chester, who has been preparing tax returns out of her Heights home office at Trudy’s Bookkeeping & Tax Service for three decades.
But Becky Spencer, who owns the two Laser 1040 offices in Billings, said these critics ignore the needs of poor people who could lose their job or their home if they don’t fix their car or pay the rent right away.
“Truth is, these loans are like a lifesaver for them,” Spencer said, adding that desperate people will find a way to get money.
About a tenth of Spencer’s customers — 600 people per year — take out refund loans.
Maybe they need a deposit on an apartment or can’t afford to pay the tax preparer upfront. Refund loans also deduct the prep fees from the pending refund.
“They’ll go get the loan from Guido and he’ll break your legs if you don’t pay,” Spencer said.
Some just can’t psychologically wait, forget the cost.
But refund anticipation loans are getting harder to find.
Consumer groups are lobbying against the loans, and federal agencies are imposing stricter rules. Also, the need is diminishing as IRS refunds arrive sooner, thanks to electronic filing and direct deposits.
But in early February, the IRS sent out a notice that its refunds were running two weeks late, largely blaming glitches in new fraud detection software. The delays have since ended, according to local accountants.
Tax preparers haven’t offered the loans, although
banks or credit unions have. But this year, only one national bank is making them.
In 2010, JP Morgan Chase stopped issuing them. So did the largest U.S. tax preparer, H&R Block, after its lender stopped financing the loans in the face of Federal Deposit Insurance Corporation criticism. H&R Block handles one out of every seven returns.
Only Republic Bank & Trust of Kentucky issues these loans, mainly through the country’s second- and third-largest preparers, Jackson Hewitt and Liberty Tax Service.
After the FDIC called Republic’s participation “unsafe and unsound” last spring, Chi Chi Wa, staff attorney for the National Consumer Law Center, predicted that refund loans would end next year.
Republic is “the last man standing,” he said.
Republic charges a flat fee of $61.22 for a refund loan that cannot exceed $1,500. That adds up to a minimum average annual percentage rate of 124 percent.
Only borrowers with refunds of at least $2,000 can qualify. In previous years, loans weren’t capped at $1,500 and loans were made on smaller refunds.
Janelle Crowley, who owns the Jackson Hewitt stores in Billings, Laurel and Roundup, agrees with Spencer that this is a legitimate service, especially for Americans without bank accounts. According to the Federal Deposit Insurance Corp., about 21 million Americans are under-banked, meaning they use checking and savings accounts but also use payday loans and check cashing services.
By the FDIC’s count, at least 9 million Americans don’t have any bank account. Other estimates suggests as many as 60 million Americans live outside the banking system.
“There are genuinely people out there who need to have that money immediately,” Crowley said. “It’s a small price to pay, to be honest with you.”
Customers who have only one source of income tend to rush in as soon as their W-2 arrives in late January, she said.
“So, when they get that, a great number of our customers who are Native Americans chose the refund anticipation loan,” Crowley said.
Montana Free File, which helps low-income and senior citizens find free tax help, teamed up with some financial institutions, including Valley Federal Credit Union, to offer refund loans. Valley charged no fees, but the taxpayer had to open a savings account with a minimum $25 deposit.
But two years ago the IRS stopped telling lenders how much debt would be withheld from the refund, so Valley stopped making the loans.
“It’s hard to make a loan if there’s nothing there on the refund, if they didn’t have the money because they owed child support,” said Valley manager Steve Bruggeman.
Large tax preparers have turned to other products as sales dropped due to the recession and more people do their own returns with tax preparation software.
H&R Block offered “free filing” through Feb. 28, but only the few people filing the simplest federal form, the 1040EZ, qualified.
In January, retailing giant Wal-Mart said it was doubling the number of in-store kiosks this tax season. Jackson Hewitt will have 2,800 kiosks and H&R Block will have 250.
These kiosks tend to attract lower-income people who don’t have bank accounts, who may come back later and cash their check for another fee.
There is serious money at stake.
Last year, 64 million Americans received an average federal refund of $2,985. Each refund could net $30 to $90 to a check casher charging 1 percent to 3 percent.
Most locally based accountants and tax preparers said they never have or no longer offer refund loans.
Brad Brown, a CPA and managing partner at Weber, Dobson & Jensen in Billings, said it isn’t a good business practice.
“The refund anticipation loans are a little predatory,” he said.
Ethically, fees to prepare a return should be fixed, not based on the size of the refund, Brown said.
Andy Nelson, who owns Western Pawnbrokers at 2817 Montana Ave., also stopped doing refund loans, saying his employees aren’t accountants.
“It cost the customer a couple hundred bucks, but they ended up being a lot of work for us and we were too busy,” he said.
Nelson still cashes checks for a 2 percent fee.
Tracy Willett, who has logged 47 years preparing taxes in Billings, warns of another fee he thinks is over the top: $50 fees to protect against audits.
“To me, it is the biggest rip-off because if you are doing your job right, why do you need to pay an audit protection fee?” he said.
Chances of getting audited on a basic return are almost nonexistent unless the IRS picks it at random, Willett said.
But Spencer said companies that issue debit cards, including cards where tax refunds are deposited, are the real rip-offs. Someone swiping the card may pay $2 at an ATM and be hit with another $1 bank charge on the back end, regardless of the amount they withdrew.
“So, you’ve paid $3 to get $20 of your money, that’s highway robbery. To me that’s more predatory than refund loans,” Spencer said. “We’re talking about poor people here.”