THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, January 9, 1995 TAG: 9501070190
SECTION: BUSINESS WEEKLY PAGE: 10 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY DAVE MAYFIELD, BUSINESS WEEKLY STAFF
LENGTH: Long : 208 lines
On buses, balloons and billboards, on TV and radio and in newspapers, the new year's first great advertising blitz is getting into gear.
Fast. Super fast. Quick. Rapid. Speedy.
These are the ad slogans of the nation's tax preparers. For the next month, starting late this week, they'll be swamped with tens of millions of refund-seekers who want their money back fast from Uncle Sam. The faster, the better.
They pay the tax services a pretty price to help them get hold of that cash.
But something happened on the way to tax season this year - something that's likely to anger a lot of refund-hungry taxpayers and cause turmoil for tax preparers.
``It's a period of high anxiety,'' said Steven R. Dickey, chief operating officer for a 200-store H&R Block franchise that includes Hampton Roads.
The news is a lot of taxpayers won't be getting their refunds nearly as fast this year. And the fastest of the fast-refund programs offered by tax preparers will be a lot more expensive.
It all started 2 1/2 months ago, after the nation's biggest tax services had just about put the finishing touches on their plans for the upcoming season.
The IRS dropped a bombshell: It would no longer warn lenders if taxpayers have federal liens against them. Lenders relied on the warnings when making so-called refund-anticipation loans.
These loans have grown highly popular in recent years. Basically, they allow somebody who has a refund coming to get that money - minus fees paid to tax preparers and bank lenders - within a day or two of electronically filing a tax return. That's weeks before the IRS itself releases the refund.
The preparers and lenders can do this because they simply keep the full refund, when it arrives a few weeks later, as payment for their services. The loan is then effectively paid off.
But without an IRS warning about whether the person seeking the refund-anticipation loan is delinquent on prior years' taxes, child support or student loans, banks now risk handing over to people more money than they're entitled.
Now, they won't find out until weeks later if the refund they had anticipated was reduced or wiped out to pay off other claims like child support. At that point, the lenders will have to try to collect the shortfall from the borrower - a major new hassle that will drive up their costs of making the special loans.
The impact of the IRS decision was fast and severe for tax preparers.
Two of the five major banks that preparers had been counting on this year to offer refund-anticipation loans dropped the program. The remaining ones jacked up their fees by an average of about threefold and said that to reduce their risk they will turn down a lot more applicants - as many as 40 percent this year, compared with 10 percent last year.
When H&R Block Inc., the nation's largest tax preparer, announced in late November that the changes may hurt its 1995 earnings, the company's stock dived 17 percent in one day. That's how significant the fast-refund program has grown to Block.
Jackson Hewitt Inc., the nation's second-largest tax preparer, is even more dependent on the loan business. More than 60 percent of the returns it processed last year involved refund-anticipation loans, said John T. Hewitt, president of the Virginia Beach-based service.
``We are going to have problems in our offices,'' Hewitt said. ``A lot of people are going to be outraged. . . . And they're going to be confused because they've gotten these loans before.''
Some tax preparers say they're happy to see the fast-refund business take a hit. They say the loans are a ripoff - that taxpayers who electronically file need only wait a few more weeks to receive their refunds and avoid paying an extra $29 to $169, this year's likely range of fees on the loans.
Then there's fraud. Then-Treasury Secretary Lloyd Bentsen, who announced the IRS policy change Oct. 26, said giving banks a heads-up that no liens were found against a taxpayer encouraged fraud schemes. An especially high number of fraudulent claims for the Earned Income Credit, he said, involved refund-anticipation loans.
``The crooks take the money and run,'' he said.
Andy Kline, owner of VA-1040 Tax Service in Chesapeake, agrees with Bentsen's assessment.
``I really felt that a good percentage of the people who were coming in here for RALs were not playing it straight,'' said Kline, adding that he decided to drop out of the program last spring after two seasons of handling the loans.
Kline said RALs, shorthand for refund-anticipation loans, encourage fraud for two main reasons: the one- to two-day turnaround on the loans; and the fact that people seeking the loans don't have to pay anything up front. All bank and preparer fees are deducted from the loan check when it's handed over to the taxpayer.
Other people involved in the refund-anticipation loan business, quite naturally, disagree with the criticisms.
About 10 million of the loans were made last tax season, pointed out Ross N. Longfield, president of Beneficial Corp.'s Tax Masters unit.
``That's the best proof, the most elegant proof of the value of the product,'' he said. ``Obviously, they think it's worth the money.''
RALs are no more fraught with fraud than any other refund method, said John Hewitt of Jackson Hewitt. He said numerous government studies in the past several years support his position.
Whatever the case, one thing's clear: This tax season is going to be one of the more tumultuous in recent decades.
The turmoil will likely drive a higher-than-normal number of preparers out of business. But it may also present well-run tax services with one of their best shots in recent years to gobble up market share.
John Hewitt has adopted a contrarian's philosophy toward this year's changes.
``I think people who seize the initiative in uncertain times do far better off than if they retreat,'' he said.
Hewitt has told his managers and franchisees to beef up their preparer work forces and extend their office hours this tax season.
Otherwise, he said in a recent electronic-mail notice, ``we will lose potentially the best opportunity to build our customer base since 1987.''
Hewitt is optimistic for several reasons. The clampdown on RAL programs by the banks has made it virtually impossible for new preparers to get into the loan program this year and has forced out some marginally successful participants from last year. He thinks that will funnel more taxpayers into the offices of Block and Jackson Hewitt, the only two national preparers.
Even the dramatic increase in RAL rejections by the banks should work in Jackson Hewitt's favor, he figures. As word-of-mouth spreads among taxpayers about the high reject rate, he thinks taxpayers will be more likely to change services this year.
Since H&R Block did nearly 20 times more RALs last year than Jackson Hewitt, Hewitt thinks his service will gain more of Block's former customers than Block will gain of Jackson Hewitt's - even if the same percentage of each switch.
He estimates Jackson Hewitt will handle between 400,000 and 450,000 RALs this year, up from 327,000 last year.
I hope you can see what a tremendous opportunity this occurrence presents to all of us,'' Hewitt said in his e-mail pep talk. ``. . . Be assured that we are looking at every possible avenue to maximize and exploit this opportunity. We're into guerrilla warfare now.''
Craig Wilson, owner of Virginia Beach-based Quick-File Tax Network, said Hewitt's strategy makes some sense.
``When the banks started pulling out of the program,'' he said, ``everybody was on hold, trying to figure out what to do.'' Wilson said he was forced to give up seven Northern Virginia offices to Block this season because he couldn't line up an RAL program there that was competitive with the bigger services'. He'll also enter the new season with four fewer offices in Hampton Roads.
Dickey, the H&R Block franchise executive, said it's unlikely that Block will gain from the turmoil.
He does think there's a chance more taxpayers will be funneled to Block from small preparers. ``But to say we're going to benefit, that's just smoke and mirrors,'' he said. ``We know it's going to cost the customer more (for RALs). We know it's going to cost us more to handle RALs.''
Example: Dickey has hired an extra 96 customer-service reps this year to deal almost exclusively with questions from RAL applicants. He also set up an 800 number for customers to call to check on their loans' status, rather than tying up lines into individual tax offices. RALs accounted for about half of the returns processed by Block in Virginia last year.
Hewitt admits there's more risk this year being in the RAL business.
He figures that loan-delinquency rates for banks could increase as much as tenfold this year - even though the lenders will scrutinize applications more closely, particularly by using credit-bureau checks.
If delinquencies top 4 percent, some banks may even cut preparers out of their programs, he said in a Dec. 19 e-mail to franchisees.
One big uncertainty is how the IRS will deal with claims for the Earned Income Credit. As part of its increased fraud scrutiny, the agency has threatened to withhold temporarily from an unspecified number of tax filers the portion of refunds related to the credit.
This puts refund-anticipation lenders in more jeopardy. That's because even if the refund is later released in full, the remainder of the refund related to the tax credit will in that case be sent to the taxpayer rather than to the bank. So the bank will have to collect that money from the taxpayer to pay off the loan.
For that reason, one major RAL lender, Bank One, won't even lend the Earned Income Credit portion of refunds this year.
Despite the risks, Hewitt said, his service will have enough time to change or even eliminate RALs altogether - before it gets too deep into the tax season.
Large losses in the first few weeks of the season ``would be bad,'' he said. ``But it's not going to ruin the company.''
Even without RALs, tax services have other products to pitch, he said. He's already expecting a big increase in applications for accelerated check refunds. Those are checks issued after the IRS actually releases the refund - generally two to three weeks from the time of application. They cost less than RALs.
Hewitt said the biggest risk to his company is to waste a chance to capitalize on the turmoil this tax season.
``We think we're better-prepared than everybody else,'' he said, ``so it's to our advantage.'' ILLUSTRATION: Cover color illustration by John Earle.
Color staff photo by Jim Walker
Daniel Grunberg, left, director of technology, and Chuck Delaney,
head of network computer services, work at Jackson Hewitt
headquarters. The Virginia-Beach based company is looking to turn
this season's tax turmoil to its advantage.
John T. Hewitt, president of Jackson Hewitt Inc., hopes to seize the
day and bolster his business. "I think people whe seize the
initiative in uncertain times do far better off than if they
retreat."
Color staff photo by Christopher Reddick
Andy Kline, owner of VA-1040 Tax Service in Chesapeake, holds a form
showing the annual percentage rate of a refund-anticipation loan
filed by another tax company. Kline dropped out of the loan program
last spring. "I really felt that a good percentage of the people who
were coming in here for RALS were not playing it straight," he
said.
by CNB