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H&R Block suit may signal sunset of refund loans

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    H&R Block suit may signal sunset of refund loans

    I thought HSBC stopped offering RAL couple of years now, I didn't know they are still milking taxpayer through H & R Block. Oh, well, what goes around comes around. What can little guy do without Uncle Sam.
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    By EILEEN AJ CONNELLY, AP Personal Finance Writer Eileen Aj Connelly, Ap Personal Finance Writer – Wed Oct 20, 6:02 pm ET
    NEW YORK – H&R Block Inc.'s allegations that HSBC Bank USA is trying to back out of funding its tax refund loan program signals both a potential blow to the nation's largest tax preparer and an indication that the controversial loans may be disappearing.

    With funding scarce and help underwriting the loans from the IRS discontinued, the high-interest advances on tax refunds are going to be harder to find when tax season begins in January. Where they are available, taxpayers will find that it's harder to get approved and they'll have to pay more.

    Kansas City, Mo.-based H&R Block filed a lawsuit Friday that alleges HSBC has failed to honor its contract to back the loans, which expires next year. The suit says HSBC has not taken the necessary planning steps to ensure that H&R Block will be able to offer refund anticipation loans and refund anticipation checks during the 2011 tax season.

    A refund anticipation loan is a short-term loan backed by an expected federal income tax refund. A refund anticipation "check" is actually an account where a refund is deposited. This enables taxpayers to have their tax return preparation fees deducted from their refund, rather than paying up front. Both products are typically used by low-income customers who file their taxes early in the season.

    In the lawsuit, H&R Block said about 40 percent of its customers used one of these products during the 2010 tax season. Standard & Poor's equity analyst Erik Kolb estimated that translated into about $146 million in revenue from the loan products alone — not counting the tax prep fees for the associated returns — or 3.8 percent of the company's annual revenue.

    In terms of profit, eliminating the loans could mean a 10-cents-per-share reduction next year, estimated Vance Edelson, an analyst with Morgan Stanley. The drop could be higher if customers looking for these loans have their taxes prepared elsewhere. H&R Block was expecting to increase this segment of its business because it had full funding for loans, while some competitors did not.

    The issue with HSBC stems from an August announcement by the Internal Revenue Service that it will no longer inform tax prep companies if all of an individual's expected tax refund will be sent. Without such confirmation, called a "debt indicator," there's no way for tax prep companies and the banks that fund their refund loan programs to know if the refund will be reduced by factors like back taxes due, a defaulted federal student loan or unpaid child support.

    In essence, the IRS debt indicator acted as a form of credit check for a population that typically doesn't have access to traditional credit.

    The IRS said it would stop providing the information because it's now able to deliver refunds quickly.

    "I think it's unfortunate that there's a lot of hardworking Americans that are in a financial situation where they have to pay a substantial fee to access their refunds a week or two before they can get it from the IRS," IRS Commissioner Doug Shulman told The Associated Press at the time of the announcement.

    In the lawsuit, H&R Block said HSBC is trying to back out of funding its refund anticipation products because without help from the IRS, the bank fears it will lose money.

    HSBC said it hopes to reach a solution with H&R Block that addresses concerns about the risk from these loans resulting from the elimination of the debt indicator.

    Despite the current difficulties, the tax prep companies say the demand for the products will remain. "There's always 5 percent of the population who live paycheck to paycheck, they don't have good credit and they don't have any collateral," said John Hewitt, CEO of Liberty Tax Service, which made about 300,000 refund anticipation loans last year.

    Hewitt said his company will be able to offer the loans, but fewer will be approved. "We're going to have to be the bearers of bad news to our customers," he said.

    The loan programs of both Liberty Tax and Jackson Hewitt Tax Services, the nation's second-largest preparer, are backed by Republic Bank & Trust Co. of Louisville, Ky.

    Jackson Hewitt has funding for half of its refund anticipation loan program in place. The company lost half its funding last year when a second bank that backed its loans was forced by regulators to exit the business. But executives said last month it was unclear if Republic plans any changes to its loan approval process in the wake of the IRS discontinuing the debt indicator. It was still trying to find a replacement for the second half of its funding last month, and declined comment Wednesday on its progress.

    #2
    I would think the key to the lawsuit is whether or not there is a clause that allows the bank to back out of the contract for some unavoidable circumstance, such as not being able to verify the applicants refund. It seems to me a bank would have to have some kind of requirement that the applicant can verify the ability to repay the loan. Otherwise the bank is just being stupid. Everyone in the industry was warned years ago the IRS does not like RALs and they were taking steps to make them unnecessary.

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      #3
      I thought there was another method by which a TP could determine if there were debt offset issues on record, posted on another thread, as I recall. Seems like it could still be done, just another step required?

      Comment


        #4
        rals

        You can still call the debt offset line but it is illegal for anyone to call without written permission from the tax payer.

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          #5
          Maybe the U.S. should adapt Canada's approach, where H&R Block directly funds the RAL product.

          Maybe the IRS will let the H&R Block bank make the loans.

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            #6
            RALs

            Anyone who wants to loan money, RAL or otherwise, can do so. With no collateral other than a tax refund which might go to pay off child support or some other debt, it would be a very risky loan to make. The fees for RALs are already high, but in the future they would have to be much higher with no debt indicator from the IRS.

            The main objection I have to RALs is the government providing the debt indicator in order to aid and abet the RAL providers. If the IRS gets out of the picture, then anyone who wants to loan the money should be free to do so, but if usury laws apply, it may not be feasible.

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              #7
              There used to be a regulation which prevented any tax preparer from
              touching an IRS refund. This meant, and hopefully still means, that a tax preparer may NOT lend money against a projected tax refund.

              HRB led the way in obtaining third party bank participation in these RAL's and that satisfied the arms length requirement.
              ChEAr$,
              Harlan Lunsford, EA n LA

              Comment


                #8
                Lending money to clients

                Originally posted by ChEAr$ View Post
                There used to be a regulation which prevented any tax preparer from
                touching an IRS refund. This meant, and hopefully still means, that a tax preparer may NOT lend money against a projected tax refund.
                .
                I see no reason why a tax preparer can't lend money to a client. There is a rule that the preparer cannot receive the refund direct from the IRS. But if a client has a $5000 refund coming and I lend him the $5000 based on his promise to pay me after he gets his refund, the refund goes to him, not me, and if I'm lucky he might pay me the $5000 he owes. If not, then I'm stuck, but haven't violated any IRS ruling.

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                  #9
                  Originally posted by taxxcpa View Post
                  I see no reason why a tax preparer can't lend money to a client. There is a rule that the preparer cannot receive the refund direct from the IRS. But if a client has a $5000 refund coming and I lend him the $5000 based on his promise to pay me after he gets his refund, the refund goes to him, not me, and if I'm lucky he might pay me the $5000 he owes. If not, then I'm stuck, but haven't violated any IRS ruling.
                  Maybe I didn't explain it very well. In the old days, a tax preparer would prepare the return but use his own address instead of client's, this being to maintain control over the refund check. Then when the refund came to the preparer, client would come in, endorse the check over to the preparer. That was the real reason for the rule. The regulations specifically prohibited a preparer from negotiating a refund check.
                  ChEAr$,
                  Harlan Lunsford, EA n LA

                  Comment


                    #10
                    Fee deduction

                    Rather than a RAL or letting the refund go straight to the preparer, it has been suggested that the IRS send the preparer an "appropriate" fee which the IRS would deduct from the refund to the taxpayer. I think this is unlikely, not due to any ethical question, but because it would be extra work for the IRS.

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                      #11
                      Originally posted by taxxcpa View Post
                      Rather than a RAL or letting the refund go straight to the preparer, it has been suggested that the IRS send the preparer an "appropriate" fee which the IRS would deduct from the refund to the taxpayer. I think this is unlikely, not due to any ethical question, but because it would be extra work for the IRS.
                      I saw the news about this and wondered if this might create a kind of "price fixing" by the IRS. We all know that the IRS would only be setting a maximum fee that could be withheld but I really feel that the remifications could be far more.

                      For example, if consumers learn about it, as they inevitably would, most of them would be likely to take the position that they do not want to pay "more than the IRS allows". On the other hand, preparers who had been charging less, could use these amounts as an excuse to up their rates to "what the IRS allows".

                      Do you think that is crazy thinking?
                      Lennox C. (Len) Boush, EA, FNTPI
                      Heritage Income Tax Service, Inc.
                      Portsmouth, VA

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