Many Happy Returns

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Refund anticipation loans and other bank products are gaining in popularity.

by Richard McCausland

ATX chief executive Glynn Willett has news for the professional tax community: “Refund anticipation loan services have moved from the niche H&R Block market to the general-preparation Enrolled Agent and Certified Public Accountant market.”

Partner Insights

Some of his colleagues agree. Mike Wooten, marketing director for Franklin, N.C.-based Drake Software, sees “big demand” for bank products. In his view, it makes sense for tax preparers to offer them, what “with all the electronic filing mandates coming in the very near future.”

The Drake Tax Solution package contains the 1040, all business entities, state products, efiling, and banking software. Roughly 60 percent of the customer base provides bank services. “Interestingly enough, we are now seeing some of the higher-end tax preparers begin to offer bank products,” comments Wooten.

Culver, Wood and Culver, CPAs in Grand Rapids, Mich., a Creative Solutions UltraTax user, takes advantage of Republic Bank’s Refunds Now program. “That service has been pretty valuable for our clients” since western Michigan has been “hit pretty hard” by the fluttering economy, observes Lana Abissi, Enrolled Agent and CFP. “Early in the season, we still have quite a bit of requests for RALs” from taxpayers who “don’t mind spending an extra 60 bucks to get [a refund] tomorrow.”

That said, many tax practices remain decidedly cool toward bank products. Cathy LaViolette, senior product manager for Nelco/Greatland, acknowledges there still exists a mixed response to bank products among the Great Tax customer base. “Some offices highly promote the bank products. Others just have them available should a client request it so that they can always meet the clients’ needs.” In particular, some preparers feel uncomfortable dealing with what they construe as costly loans. However, LaViolette points out, “If customers do not want to offer RALs, they can still market the speed of direct deposit, and continue to have tax preparation fees automatically deducted from refund proceeds. No checks are printed, and the bank fees are much lower for this service.”

She predicts the Jobs and Growth Tax Act will trigger higher demand for bank products. “With additional tax breaks available, I would expect bank products to increase,” says LaViolette. “As taxpayers receive larger refunds, they will want their refund proceeds the quickest way possible.”

CCH, developer of ProSystem fx Tax and a Republic Bank partner, makes a succinct case on its Web site for why tax practitioners should offer bank products. The company urges customers to:

● “Protect your bottom line by having preparation fees withheld from the tax refund.

● “Earn extra revenue by offering a valuable service to your clients.

● “Remain competitive with the fast refunds of big chains.”

Taxpayers also benefit, of course, from the “convenience and security” of picking up a check in the preparer’s office or having it deposited directly into their bank account, notes CCH.

Technology is helping to minimize the risk for RAL banks that are eager to satisfy this demand for rapid loans and refunds. For the last couple of years, the IRS has included a debt indicator (DI) code with all e-filed tax return acknowledgements. The DI notes whether the taxpayer owes a debt to the IRS or one of the agencies overseen by the Financial Management System. FMS debts are for past-due student loans, child support, federal or state taxes, or other governmental agency obligations.

If the taxpayer is expecting a refund, it may be offset if a debt is owed. A bank is unlikely to approve a RAL if the taxpayer has such outstanding debts.

A handful of banks dominate the RAL marketplace: Bank One, Household Tax Masters, NTS/First Security, Republic, Santa Barbara Bank & Trust, and a few others. Under their respective brands, they provide RALs (typically available within two days), Refund Transfers or Refund Anticipation Checks (up to two weeks), and direct deposit services. They also allow for online tracking of the client’s refund status, and provide the Electronic Return Originator with an array of marketing materials.

In an effort to differentiate themselves, RAL banks may offer specialized services. For example, both NTS and Household offer ERO rebates—anywhere from $1 to $5 per refund customer. Republic accommodates clients whose refunds exceed $5,000. And Household now has an Instant Tax Refund Loan, whereby the taxpayer can get a $500 advance within three minutes of applying.

Software/Bank Links

Several of these banks are also looking at forging tighter links with specific tax software vendors. For instance, NTS/First Security boasts that its QIK Funds for Windows, which is compatible with most tax packages, is “completely and seamlessly integrated” with Intuit’s ProSeries. That means it’s possible to transmit the loan/refund application to the bank from within the tax software. Similarly, Republic counts TaxSimple and Universal Tax Systems (TaxWise) among its IRS Direct Transmitter partners. Republic’s RalNow software allows TaxSimple and TaxWise users to extract the efile information needed to approve a RAL. Users can file direct to the IRS and to the bank.

For its part, SBBT has attempted to cater to do-it-yourself taxpayers by offering bank product services via online tax preparation sites such as Intuit’s turbotax.com and Petz Enterprises’ taxbrain.com.

Pricing among the various RAL banks is roughly similar. This past season, for example, NTS/First Security charged $33 in RAL fees for refunds of $200 to $500, and $89 for refunds of $2,001 to $5,000. By comparison, Household’s respective fees were $34.95 and $89.95.

Whether those fees seem expensive or not depends on how rapidly the taxpayer wants to get the refund. The IRS asserts that most refunds for taxpayers who efile are issued within three weeks by the agency, particularly if the taxpayer opts for direct deposit. That means the taxpayer gets to keep his entire refund—a fact that some government entities are insisting be made clear by EROs to their customers (see sidebar, page 27).

But sometimes, three weeks may just not be fast enough.

Just listen to Drake user W.M. “Moose” Huffman, an officer of Pioneer Accounting & Taxes in Jacksonville, Fla. He was reluctant to offer RALs at first because of their expense. “But people living from payday to payday don’t care what the charge is,” he discovered; they often want the refund as soon as possible. He now works with Bank One because “I need to offer people what they want.”

High-Volume Offices

Tracy, Calif.-based Petz Enterprises has specialized in focusing on high-volume professional tax practices, service bureaus, and multi-office retail tax franchisees and independents. “Tax practitioners seek our services precisely because the reliable delivery of bank products is vital to their business,” remarks marketing vice president Craig Petz.

“Nearly all” of Petz’s CrossLink users offer bank products. He’s anticipating an “uptick” in RAL and related sales due to the Jobs and Growth Act. “More people across the board are going to be getting refunds”—and for many, “significantly higher” refunds—than last year, in part because so many were over-withheld as a result of the tax act’s retroactive tax breaks. Among early filers, “They’ll see the size of their refund increase, so I think this will drive more people to RALs.”

NYC vs. RAL

The service fees and interest charges associated with Refund Anticipation Loans are generating a backlash among some consumer protection groups and government entities.
For instance, this past April, New York City Mayor Michael Bloomberg signed legislation that requires local tax preparers to disclose to clients in advance all such fees.
RALs are often improperly advertised as "rapid refunds" or "instant money," according to Bloomberg. "In reality, Refund Anticipation Loans are actually high-interest, shortterm loans whose annual percentage rate can exceed 600 percent," he commented. "Consumers rarely understand the complicated arrangements to which they agree in order to receive, not their tax refunds, but the proceeds of highinterest loans."
Under the new law, New York City tax preparers are required to alert clients that refunds may be obtained directly and "expeditiously" from the Internal Revenue Service.

The vendor offers Household and SBBT products. While some CrossLink users employ their marketing collateral, “Our customers tend to develop their own materials and focus on their own brand identification,” notes Petz.

The company also provides bank services via its online, consumer-oriented TaxBrain.com site. “We find our online customers are generally more affluent than the client of a retail tax office,” comments Petz. He points out that the online do-it-yourself market consumes fewer loan products, but tends to use the 10-day/2-week Refund Transfer service “at a high rate.”

Refund services are “our primary business,” says Ralph Lloyd, CrossLink user and owner of FasTax in Jackson, Miss. “Probably 80 percent” of the 4,000 to 5,000 returns he handles each season involves a bank product. About half of those are RAL applicants, who are willing to absorb the extra expense because “they all want [the refund] the next day.”

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