Secrets of the Tax-Prep Business

U.S. income tax returns must be in the mail by Monday, but most people who did not have to pay more into the system have already filed. Many folks who expect refunds got the money faster by getting refund anticipation loans, or RALs. Mother Jones explains how refund anticipation loans work, by looking how John Hewitt, founder of Jackson-Hewitt, got into the loan business. The RAL was invented by Ross Longfield in 1987.
Ultimately, Longfield persuaded H&R Block to sign up. But no one was as smitten as John Hewitt—who understood that people earning $15,000 or $20,000 or $25,000 a year live in a perpetual state of financial turmoil. Hewitt began opening outposts in the inner cities, Rust Belt towns, depressed rural areas—anywhere the misery index was high. "That was the low-hanging fruit," he says. "Going into lower-income areas and delivering refunds quicker was where the opportunity was."

Customers wanting a RAL paid Jackson Hewitt a $24 application fee, a $25 processing fee, and a $2 electronic-filing fee, plus 4 percent of the loan amount. On a $2,000 refund, that meant $131 in charges—equivalent to an annual interest rate of about 170 percent—not to mention the few hundred bucks you might spend for tax preparation. "Essentially, they're charging people triple-digit interest rates to borrow their own money," says Chi Chi Wu, a staff attorney at the National Consumer Law Center.

A few hundred bucks for tax preparation? Really?
"These businesses are in this neighborhood for one reason: They see they can make a killing here," says Ramon Dalmasi, an accountant with a front-row seat on the growth of the instant tax business. Dalmasi opened a bookkeeping business in the Bronx in 1997 and watched as chain after tax-prep chain popped up on commercial strips in his community. A few years ago, he relocated to Yonkers, an aging suburb just north of New York City, and found the same chains there as well. "They don't see people struggling to put food on the table," he says. "They just see people who can make them millions." Even without a RAL, a working parent who qualifies for the EITC often pays $300 or more at a tax mill. Dalmasi, a CPA who teaches accounting at nearby Lehman College, charges that same client $75 or $100. "Why should I charge anything more than that," he asks, "when it's taking me 20 minutes?"

I have four different types of income from many small sources and a family of six, but my CPA only charges $100. The article points out how the poor are being taken advantage of, but as some have said elsewhere, this type of loan is still preferable to organized crime loans. Link -via Metafilter, where there's a lively discussion on this article.

(Image credit: Joshua Lutz)

See also: Why Do People Fall For Payday Loans?

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If I wanted to charge you $1000 for the same service and you paid it, then who would be at fault? Why do people say things are a rip-off if they go ahead and pay for it? This is a free economy and your dollar speaks pretty loud. Take it wherever you like and quit crying about things like this. 'nuff said.
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I tried to use H&R Block for the first time this year. I've always had pretty complicated taxes because I was self-employed so I paid an accountant to do them for me. He always did them for $150. I moved this year and it wasn't convenient so I figured I'd use the quick "discount" option and go to H&R Block. I just sat down with someone who was essentially a glorified data entry clerk and she put the numbers into the website. It took a couple of trips and about 3 hours total. When she got done I asked her how much it would cost. $547!!! I picked up my paperwork and walked out the door. She never would have brought it up until she had filed my return had I not asked.
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This makes sense why Jackson Hewitt has pop-up tax places in every Wal-Mart store here every year at tax time. I figured that it was just that a lot of people go to Wal-Mart and that Wal-Mart probably encouraged it because they wanted people who found out they were getting refunds to be inside the store where they might be inspired to buy stuff.

That part's probably still kind of true, but sounds like Jackson Hewitt may have targeted the lower income audience that often shops at Wal-Mart. That's sad.
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Call your local 211, and see if the AARP is hosting any Vita Sites in your area rather than going to these. It's probably too late for this year, but next year it may save rather a lot of money.
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It wouldn't suprise me if the majority of those using the services in the high "misery index" areas only needed to fill out a 1040ez form, which should take only a few mins. I bet the "accountants" in those areas are told to prolong the process just to make it seem more complex in an attempt to justify the cost.
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