THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, February 19, 1995 TAG: 9502200230
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY DAVE MAYFIELD, STAFF WRITER
LENGTH: Long : 139 lines
John Hewitt knew this was going to be a tough tax season. But he didn't count on near-riots and gun threats at Jackson Hewitt Inc.'s tax offices.
The 1995 season will go down as one of the most tumultuous ever for tax services and taxpayers alike.
Midway through the tax season, millions more refunds than normal, most claimed by poor working families, have been delayed because the Internal Revenue Service is trying to crack down on fraud.
The delays have turned into an unprecedented public-relations nightmare for tax services like Jackson Hewitt and H&R Block Inc. Both have built their businesses largely on the promise of helping such families get refunds back quickly. A large percentage of the held-up returns so far have been filed by tax services.
Quite naturally, their customers are angry and confused. Some have become desperate for their refund money.
``We had a near-riot in an office in Florida, where we had to call out the police. We've had people threaten to pull out guns on preparers. We've just had all kinds of problems,'' said Hewitt, president of Virginia Beach-based Jackson Hewitt, the nation's second-largest tax service behind Block.
The biggest target of the IRS crackdown: claims for the Earned Income Tax Credit. As many of half the refunds claiming that credit, designed mostly to help poor working families with children, have been delayed for up to eight weeks.
The IRS says it warned the tax services it was going to check claims for the credit much more closely this year. The agency contends that the problems the services are having with customers could have been avoided if they'd done a better job warning clients about potential delays.
But Steven R. Dickey, chief operating officer for Block's 200-store Virginia franchise, said that's a bum rap. ``Contrary to what the IRS is telling people now, we in the industry did not know that they were going to do this,'' he said.
Block executives said, for instance, that they expected only about 5 percent of returns claiming the Earned Income Tax Credit would be delayed this year - not half. At least 7 million of the 86 million returns claiming refunds this year will be held up for further scrutiny, the IRS says. Tax services say the actual number could go as high as 12 million.
Cassandra Boone is one refund-awaiting taxpayer who has given up trying to sort out who's right or wrong.
``I'm mad with everybody,'' said the Norfolk woman. Boone said she agreed Jan. 20 to pay $200 in fees to Jackson Hewitt and a bank affiliated with the tax service to speed up her expected refund of about $2,700. She quickly got a loan of about $1,300 from the bank for part of the anticipated refund, but learned later that she'll have to wait up to eight weeks longer than normal for the remainder because the IRS is scrutinizing her claim for the tax credit.
Boone said she has called the IRS repeatedly, to little avail. Meanwhile, she said the tax service and the bank have refused her demand for a refund of her fees. She now regrets signing contracts binding her to pay the fees.
Tax-service executives said one of their biggest frustrations this season is that the IRS appears to be taking a random approach toward closely scrutinizing refund claims. Block's Dickey said that makes it harder to explain to taxpayers why their refunds have been delayed.
But the IRS contends there are methods to its scrutiny. In a question-and-answer form given to Virginia's congressmen and senators, IRS District Director Margaret J. Lullo said the agency just hasn't disclosed ``any specifics about our screens, since this could give those attempting fraud a road map for avoiding our checkpoints.''
The IRS is justified in taking a closer look, Lullo said. She pointed out that a Treasury Department task force last summer estimated the cost of fraudulent and questionable refund claims at between $1 billion and $5 billion a year.
IRS officials have said the Earned Income Tax Credit is particularly riddled with abuse. At up to $2,528 per family this year, that credit is highly desirable to families in or teetering near poverty. Under the program for 1994, the government is expected to pay out nearly $20 billion in credits to more than 15 million families. Congress opened eligibility to several million more families starting this season.
Tax services are so affected by the closer scrutiny of claims for the credit because a disproportionately high percentage of people filing for the credit use preparers.
Many of these people have been enticed to the tax services by so-called refund-anticipation loans. These loans are made by the tax services' affiliate banks to qualifying tax filers, generally within a day or two of the return's filing. The banks and tax services profit from the loans by tacking on special fees, which often translate into annualized interest rates in the hundreds of percent. As payment on the loans, they simply keep the customer's full refund when it's cleared sometime later by the IRS.
The loans became a lot harder to get from the start of this year's tax season. That's because the IRS stopped telling the tax services and their banks if taxpayers filing electronically had outstanding liens against their tax refunds for such things as unpaid student loans or child support.
The tax agency claimed giving out the notice invited fraud. But without the notice, banks said they faced a greater risk of lending refunds to people who actually didn't qualify. So they've rejected a much larger percentage of loan applicants this year.
And now that the IRS is holding up millions of refunds to more closely check claims for the Earned Income Tax Credit, the banks have stopped lending to taxpayers if it's related to the credit.
Hewitt said the change forced most of his service's customers away from the loans. Some are still filing their returns electronically, he said, but under a program that gets them their refunds within two to three weeks, instead of a day or two.
Others are filing paper returns. They'll wait six to eight weeks for their refund, even without a delay in case the IRS wants to scrutinize an Earned Income Tax Credit claim.
Even though fees for these products are smaller than for the refund-anticipation loans, Jackson Hewitt still should show a higher profit this tax season than last year because it's handling more returns overall, Hewitt said. But Block's Dickey said it's likely his franchise will take a profit hit, partly because preparers and other employees have to spend much more time answering customers' complaints and explaining changes.
All that Boone of Norfolk cares about is when the rest of her refund arrives. She's supporting a 2-year-old daughter. Her car needs major repairs. ``I just want my money,'' Boone says. ILLUSTRATION: Graphic
TAX TIPS
To help you avoid delays in the processing of your income-tax
returns this year:
Check all names and Social Security numbers. Make sure they match
information you've already provided to the Social Security
Administration. Spouses who've recently married and changed their
names, but forgotten to record the change with Social Security, may
see refunds delayed because the IRS is matching information on tax
returns against Social Security records.
Make sure you've checked the correct filing status.
If you're claiming the Earned Income Tax Credit:
Remember there are income limits that determine whether you
qualify. The limit for families with two or more dependent children
at home, for instance, is $25,296 for 1994. Certain tax-free income,
such as military housing allowances and contributions to 401(k)
savings plans and health care reimbursement accounts, may have to be
counted in determining whether you qualify.
Sources: Internal Revenue Service; Richard Noyes, Virginia Beach
CPA
by CNB