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Companies Target Your Tax Refund; States Crack Down on Loans That Let Consumers Buy Services by Borrowing Against IRS Checks

by Jeff D. Opdyke

From the March 21, 2006 edition, Wall Street Journal (Eastern Edition), Page D1

A VARIETY of companies are trying to get their hands on your tax refund before you do, and state law-enforcement officials are cracking down on some of the practices.

As the April tax-filing deadline approaches, businesses from tax- preparation firms to auto dealerships are offering consumers the opportunity to put their expected refund checks to work weeks before the IRS sends them out -- often by loaning them the expected amount for a high fee. Dozens of retailers, including Olive Garden restaurants and AMC move theaters, have begun offering gift cards in exchange for tax refunds to people who file using TurboTax, the popular tax-preparation software. H&R Block Inc. recently launched savings accounts for customers to channel their tax refunds. And hundreds of car dealerships will prepare your taxes if your refund is applied toward a down payment on a car.

But now, state officials are clamping down on some of these programs, claiming they saddle low and moderate-income families, recent college graduates and others with high fees. Last year about three of every four tax filers received a refund, according to the Internal Revenue Service. Those refunds totaled nearly $218 billion, or about $2,171 per household.

Last week, H&R Block, the nation's biggest tax preparation firm, was sued by New York's attorney general for selling so-called Express IRAs that allegedly earned less money than what customers paid in fees. That action followed a lawsuit last month against Block by California's attorney general, who accused the firm of charging fees that equate to annualized interest rates that can exceed 500% on so- called refund-anticipation loans, the popular instant refunds, which are loans that clients repay when their refunds arrive. Oklahoma's attorney general last week warned consumers away from instant refunds, which are also offered by other big tax-preparation firms, including Jackson Hewitt Tax Service Inc. and Liberty Tax Service, saying the best strategy "is to file your taxes, and wait for your refund check."

Block said at the time that the California suit has "no legal or factual merit," and said it clearly discloses the terms of its loans to consumers. The company also has denied the charges in the New York lawsuit, saying its IRA program offers its customers "a powerful first step toward ensuring a secure financial future."

Block has been aggressively expanding beyond tax-preparation; last week the company said it had been granted a federal savings bank charter that allows it to provide checking, savings and other services through a banking subsidiary. The company this year launched a money- market savings account, which clients can fund with tax refunds. It costs $15 to start, though that is waived if customers deposit a minimum of $1,000 or agree to regular deposits. The firm is also piloting a debit card onto which customers can load their refund. The debit card is free, though the average customer accumulates about $17 in ATM fees before the refund is exhausted, Block says.

Bernie Wilson, Block's vice president for outreach and business development, says the company's goal is to help the low- to moderate- income Americans who do not have traditional banking relationships. "We're helping people save," he says. "We've been very careful to focus on things that will improve the financial situation of clients' lives."

Other firms also are targeting tax refunds. Jackson Hewitt, which has about 5,400 stores nationally, offers taxpayers its "ipower CashCard." It allows taxpayers to have their refund loaded onto what is essentially a prepaid MasterCard, then to access their cash through debit transactions or through ATM withdrawals. Taxpayers must first pay a $30 charge to load their refund onto the card.

Both Jackson Hewitt and H&R Block have teamed up with chains that place check-cashing machines inside some local tax-preparation stores. Taxpayers who opt for an instant refund can turn around and stick that check into the machine and receive cash immediately -- minus another fee that averages 2.7%, according to ACE Cash Express Inc., which provides machines to many Block stores.

Meanwhile, Intuit Inc. began this year offering users of its popular TurboTax tax-preparation software the opportunity to apply some or all of their refunds to gift cards from about 50 retailers, including Starbucks, Sharper Image, Lowe's and Red Lobster. Retailers are offering greater value in the gift card than the amount of money customers put in -- loading the card with $1,200 for a refund amount of $1,000, for instance. However, customers pay a one-time fee of $14.95 to TurboTax for shipping and handling. The offer is available to taxpayers who file their returns electronically.

TaxMax, a unit of CarBiz Inc. of Sarasota, Fla., offers taxpayers a chance to turn their federal tax refund into a down payment on a car -- though at a potentially high cost. The company says it has partnered with about 800 mainly used-car dealerships around the country and charges consumers an average of about $200 to complete a federal 1040A form, a relatively simple form.

TaxMax says customers can show up at the dealership with a driver's license, Social Security card and a W-2 form. A salesman helps fill in two to four pages of paperwork seeking information such as number of dependents and whether the taxpayer wants TaxMax to complete a state tax return for an additional $25 fee. The dealer faxes the paperwork to TaxMax, where the data are entered into a tax program and the return is looked over by a supervisor trained in tax preparation, before it is returned to the dealer and taxpayer. The process takes about 30 minutes. The size of the average return: about $2,300, according to Stan Heintz, chief operating officer for CarBiz, who expects the company to complete about 3,500 returns this tax season.

The J.D. Byrider used-car dealership in Milwaukee expects TaxMax to do about 75 tax returns for its customers this tax season, says franchisee Steve Muller. The TaxMax option "is a very popular program" and the volume of customers relying on tax refunds as down payments on cars has tripled in the past year, he says. Mr. Muller says the tax- selling season begins as early as late November, when buyers come in with their paystub and TaxMax estimates what their refund will likely be for the year.

Liberty Tax Service, with about 1,700 stores nationwide, says about 17% of its customers apply for a refund-anticipation loan, paying $75 or so for loans that average about $2,500. John Hewitt, Liberty's chief executive, says the Virginia Beach, Va., firm tries to discourage most customers from applying for the loans. "We think cross-selling to customers is fraught with difficulties, including pushing these types of products on people that they're bad for," Mr. Hewitt says. Still, he adds, "if you don't have [instant refunds], you're not competitive."

Tom Herman and Lingling Wei contributed to this article.

Refund Checks

Many businesses want to get hold of your tax refund, and earn fees in the
process.

-- H&R Block offers IRAs and savings accounts for customers getting refunds.
-- Jackson Hewitt offers debit cards and instant-refund loans.
-- TurboTax is collaborating with 50 retailers to offer gift cards in exchange for your tax refund.
-- Hundreds of auto dealerships will do your taxes if you apply the refund toward a down payment on a car.