Thursday, November 5, 2009


During my “wandering” on the net I came across another sting operation aimed at tax preparers.

This time the operation was conducted in Philadelphia by Community Legal Services of Philadelphia and the Campaign for Working Families, and in Durham, NC by the Community Reinvestment Association of North Carolina. The details of the operation are reported in “Tax Preparers Tax a Bite Out Of Refunds: Mystery Shopper Test Exposes Refund Anticipation Loan Abuses in Durham and Philadelphia” compiled by the Consumer Federation of America and the National Consumer Law Center.

While, as the title of the report suggests, the main target of the undercover operation was providers of Refund Anticipation Loans (RAL), the results also pointed up many tax return errors made by, for the most part, local branches of the national fast-food tax preparation chains.

According to the report’s Summary –

Nonprofit groups in Philadelphia and Durham conducted 17 ‘mystery shopper’ tests of paid tax preparers. The results reveal an industry that varies tremendously in terms of providing consumers with information about refund anticipation loans (RALs), and in its overall quality of services.”

And –

One of the most disturbing test results involved the quality of tax preparation. Several preparers made serious errors that significantly affected tax liability.”

The non-profit consumer organizations recruited 17 taxpayers to become testers, “about 12 of whom received the Earned Income Tax Credit (EITC)”. These testers were not given a uniform tax scenario to bring to all the chosen preparation offices, but were simply instructed to have their returns prepared and obtain RALs from the commercial preparers. So each individual tax situation handled by a preparer was different.

A total of 12 tests were done in Durham and 5 in Philadelphia. Of the 17 targets, 3 were branches of Henry and Richard, 5 were branches of Jackson Hewitt, and 2 were branches of Liberty Tax. Also tested were an “Instant Tax Service”, a “Quick Refund Income Tax”, and 5 “independent” offices.

Regarding the Refund Anticipation Loan issue, the operation discovered many abuses –

• failure to failure to disclose that a RAL is a loan,
• presenting the RAL as a default, without presenting other options,
• failing to disclose the free e-file with direct deposit option,
• confusion and lack of transparency,
• rushing clients through documents without allowing time to review or comprehend them, and
• providing factually incorrect information (i.e. lying).

The actual tax preparation fees ranged from $355 at Jackson Hewitt to $60 at the “Quick Refund Income Tax”. The fees from branches of the 3 major chains ranged from $173 to the $355. The “independents” charged from $75 to $180. The returns in question were not complicated ones, with the Earned Income Credit probably the biggest issue.

When RAL and other ancillary fees and charges were added the total cost ranged from $185.00 (from an “independent”) to $501.53 from Jackson Hewitt. Overall Jackson Hewitt was the most expensive preparer. RAL annual percentage rates ranged from 83% to 300%.
Test results found a significant number of preparers still do not inform taxpayers that a RAL is a loan. Three preparers in Durham and two in Philadelphia did not explain to testers that a RAL is a loan. Two other preparers in Philadelphia made this disclosure only after being questioned by testers.

Even when testers were told that a RAL is a loan, they were confused because many preparers did not give clear price information about RALs, other bank product options, and tax preparation fees. Only one preparer in either city informed the tester of the option to receive a fast, free refund by e-file and direct deposit

Regarding actual tax advice, one preparer advised a tester not to include investment income on a return, “essentially recommending tax fraud”.

What about the “independent” preparers? According to the report, –

One independent preparer turned out to be primarily a gift shop and the other was a small loan lender. However, another independent preparer steered both testers who went to her office away from RALs.”

I expect that the independent preparer who advised against a RAL was probably the only true “independent” tax professional in the target group.

Let’s look at one individual case in which a tester went to an H+R Block office in Philadelphia.

The tester (identified in the study as AR) was a student with total income of $7,770 who qualified for the Earned Income Credit.
When the tester first asked both the receptionist and the actual preparer about the cost she was told there was a basic flat rate of $87 and then the price could go up from there. She was assured that, as she was single without dependents, the fee would not be too high.
The total charges for this return was $242.93 - $184.00 for actual tax preparation and another $58.93 for RAL loan fee, “dummy bank account” fee and “check fee”. A total of 66% of the Earned income credit and 29% of the total refund was last to Henry and Richard’s fees. Not too high?
The case study tells us that –

The preparer then reviewed all of AR’s tax documents and entered her information into a computer program. Her refund was calculated to be $837 on her federal return ($469 for withholding and $368 for the earned income credit) and $87 for her state return.”

The tax preparation fee of $184.00 (H+R was nice enough to round down instead of up from $184.75) was made up as follows-

1040 Fee = $74.50
W-2 Fee = $3.25
EIC “eligibility” = $34.75
EIC “worksheet” = $16.25 (total EIC cost = 51.00)
Interest/Dividends Fee = $7.25
PA State Refund Fee = $37.25
PA “Tax Forgiveness” Fee = $11.50

The tester was given several options for getting the refund, including just sitting back and waiting for the refund for 6 weeks and 4 others that all included additional fees for special H+R services and accounts. But she was never told that she could just e-file and request direct deposit in her own account and get the money in 8-15 days. The only direct deposit option discussed involved using an H+R Block checking account, which would cost an additional $30.00.

It is no surprise that Henry and Richard, Jackson Hewitt, and Liberty Tax Service all charge ridiculously high fees, for actual preparation and various ancillary services and accounts, push RALs and unnecessary ancillary accounts and services on clients, which they do not properly or completely explain, and make errors on tax returns.

This study is another reason why it is obvious that no taxpayer should ever use a fast-food tax preparation chain to prepare their tax returns. It is also another reason why taxpayers should avoid Refund Anticipation Loans.

BTW, I am also not surprised that the true “independent” preparer charged relatively reasonable tax preparation fees and advised against a Refund Anticipation Loan.



Anonymous said...

What a fascinating and disturbing study. It's consistent with anecdotal stories I've heard from people I know.

I note that the study was funded by a well-known foundation, the Annie E Casey Foundation, set up by one of the founders of UPS in 1948 in order to honor his mother. The Casey Foundation's website says it's one of the top 20 private foundations in the country, which has been giving away $200 million dollars a year in funding for a variety of projects over the past ten years.

The Casey Foundation used to fund ACORN, but they stopped such funding in early 2009, according to this Washington Post article:

Mary O'Keeffe said...

Robert, this is a really interesting study. Thanks for calling my attention to it. It's very well-timed since I'll be starting the training for our VITA program next week. Practices at the sites in the study are totally the opposite of what we do at our college VITA site.

I've linked your blog post on my course facebook page.

Robert D Flach said...


Glad you found this study of interest.

Thanks for the link!

Good luck with your VITA training.