The Check Is in...the Bank

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Like many tax preparers, Daniel E. Cavazos of Brownsville, Texas-based Cavazos Income Tax sees bank products, such as Refund Anticipation Loans as being a consumer-driven product. However, the tax preparers who offer them to consumers are facing some changes for the upcoming tax season as banks tighten the reins and lower-cost options hit the marketplace. "Most clients are already familiar with these products and they request them," says Cavazos, president and chief executive officer of the firm, which currently serves about 4,000 clients.

He has been using Orrtax Software for the past four years, and says that about 65 percent of the firm's clients choose to take advantage of one of the bank products offered by his company: RALs, Instant RALs, Electronic Refund Check and Electronic Refund Direct Deposit.


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"RALs are chosen usually because they need their money as soon as possible to take care of expenses or debts incurred for Christmas," says Cavazos. "ERCs and ERDDs offer the convenience of having preparation fees deducted from the refund instead of paying at the time that the services are rendered."

Citing data provided by the IRS, Gene Goldenberg, vice president of marketing and product strategy of small firm services at CCH, says that in the tax season just completed, nearly 20 million took advantage of bank products (i.e. RALs and Refund Transfers). This compares with the 13.65 million in 2004 and marks an increase of about 44 percent during the past four years.

However, it is no secret that RALs, in particular, have faced their share of criticism as consumer advocacy groups have lobbied they are "predatory" loans and have suggested that tax preparers push such products for their benefit.

"RALs are secured by or expected to be repaid from the consumer's tax refund. They carry effective annual percentage rates of 40 percent to over 500 percent, and put the taxpayer at risk of unmanageable debt if the IRS denies or reduces the expected refund. RALs drained about $1 billion from the refunds of nearly 10 million taxpayers in 2005, the latest year for which IRS data is available," wrote the National Consumer Law Center in a letter to Congress in April.

And many CPAs take a dim view of the bank products.

Brian Haderle, a CPA who owns the Padgett Business Services franchise in Rexford, Idaho, is among that group.

He has been happily using TaxWorks for 15 years. But while he signed up for the company's refund program about two years ago, he did not use it.

"We signed up thinking it was something we might use," he says. "Philosophically, I guess I'm not sure I would be doing my clients a service to do so."

So despite TaxWorks cutting its fees on bank products by half, Haderle has not been tempted to change his mind.

Still, vendors who participate in these programs emphasize their popularity.

"What must be understood is that they are demand-driven products. As some consumer groups suggest, they are not being driven down people's throats," says Goldenberg.

Nevertheless, changes are afoot for professionals like Cavazos when it comes to the bank products for the 2008 tax filing season as banks tighten the reins and lower-cost options hit the marketplace.

"We are getting back to the basic products," says Jay Huling, chief operating officer of Chase tax-related products. "We are moving away from higher-risk products that happened before the tax season starts."

Huling's sentiment appears to ring true for much of the industry as the leading players are taking a vanilla approach to the upcoming tax season as compared with past years. As of press time, banks had yet to officially release the specific products and pricing for the upcoming tax season.

"No one has released a radical new product, that I've seen," adds John Sapp, vice president of sales and marketing at Drake Software, referring to the discussions he has had with the banks Drake is partnered with (Republic Bank & Trust Co., Chase and Santa Barbara Bank & Trust).

As Huling alluded to, banks have opted to move away from the controversial holiday loans and pay-stub RALs for the upcoming season.

These loans were risky because they were based on estimated, not actual earnings, and were made before the tax preparer knew if the IRS would seize the borrower's tax refund to pay for a prior tax debt, child support, etc. The pay stub/holiday loans would project the taxpayer's refund using his or her pay stub, weeks or even months before W-2s were issued.

These higher risk products not only resulted in excess losses, but also excess fraud. Some industry members speculate that the additional fraud may have left some gun shy, and that there will be more scrutiny when it comes to banks approving RALs for the upcoming season. There also may be fewer RALs paid because some banks may still be owed money from last tax season.

"I think there will be a ripple effect because there was additional fraud involved," says Bill Nelson, managing director of Tax Refund Solutions at Republic Bank & Trust Co.

Another major development for the upcoming season is that HSBC is no longer doing RALs in the independent marketplace as contracts expire, industry sources say, but does still have a multi-year agreement with H&R Block for funding.

An HSBC spokeswoman declined to elaborate but did say, "Block is indeed one of our business partners in the [Taxpayer Financial Services] business. However, as a matter of practice, we do not discuss our partners or relationships with our partners." She adds that it was too early to discuss 2008 tax season product offerings.

This means "Santa Barbara Bank & Trust and Chase become the two heir parents to HSBC clients," says Charles Petz, CPA, vice president for tax software development at Petz Enterprises.

Steve Varga, assistant vice president of client services for Santa Barbara Bank & Trust, says that the bank is already picking up some of the former HSBC business.

One example of this is Petz Enterprises. Petz says that HSBC did most of its funding last year but now Santa Barbara is taking that volume. It also works with Republic Bank.

Petz user Ralph Lloyd, who is the owner of Jackson, Miss.-based Fas Tax, says last year he used HSBC to offer his clients bank products but is now talking with the other RAL players like Santa Barbara.

"I want the assurance of a high approval rating. I'm looking for who I feel the most comfortable with," says Lloyd, who estimates that 85 percent of his 11,000 or so clients opt for a RAL product. "I offer them the whole [range] and give them all of the costs up front before they choose and they pick what [bank product] they want."

Given that the banks drive the market, the software vendors, are waiting on official word of what will be in store for the upcoming season, but most agree that a lower-cost RAL is a definite.

This trend is evidenced by H&R Block, which announced in August that it has joined with refund lenders to lower the cost of RALs nationwide to 36 percent APR both through H&R Block offices and other professional tax preparers.

Last year, H&R Block introduced the 36 percent APR RAL, disbursed through H&R Block Bank's Emerald Prepaid MasterCard. But this year, at its 12,800 offices, H&R Block will broaden access to that type of RAL, making the 36 percent APR RAL available to all clients.

It also will introduce access to low-cost RALs through independent tax preparers who use TaxWorks and 1040Works software from RedGear Technologies, a recent H&R Block acquisition. H&R Block is working with refund lending banks as providers of the products. H&R Block's acquisition enabled H&R Block to enter the professional tax market, targeting small- to mid-sized firms. TaxWorks joined H&R Block as an independent subsidiary.

"We have asked all of the major banks to make this product available to everyone," says John Davis, president of RedGear Technologies. He says that, so far, Santa Barbara and HSBC have embraced it to some degree.

According to the company, the new RAL pricing can save taxpayers money by reducing RAL fees and eliminating electronic filing fees at independent tax firms. The new RAL pricing means clients of independent tax preparers will pay $60 for a refund anticipation loan that last year cost $127 (based on costs for an average refund loan of $2,700 through professional tax preparation software).

The loan products made available to professional tax preparers through TaxWorks and 1040Works (previously known as USA TaxSystems) have been branded as ANEW.

H&R Block also recently acquired ExpressTax, a 300-location tax preparation franchise business. TaxWorks and ANEW products will also be available to all of the Express Tax locations.

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