I’ve been reading international tax blogs such as this one:
You find interesting tax businesses which don’t exist (or aren’t well advertised) in New Zealand or Australia.
“Tax Refund Anticipation Loans” or RAL’s is one such business.
How this works is that banks lend money through tax return preparers such as H & R Block using the tax refund as collateral for the loan. The risk of the return being wrongly prepared is low because H & R Block are a reputable firm.
Questions come to mind regarding the mechanics of this process?
How can a bank be certain that the information provided to the tax return preparer is correct?
I guess the answer is that they can’t but based on the law of averages the information is generally correct. This puts the loans into the high risk, high interest basket of lending, and as such the loans carry punative rates of interest.
Another question is how the tax return preparer makes money out of the deal? Perhaps some kind of bank hander from the lender?
It’s not uncommon for lending firms to pay large bonuses to retail staff who encourage purchasers to take out hire-purchase loans to cover the cost of their purchase. Perhaps this process works in the same way.
Maule focuses on the ethical considerations of such loans:
Two questions popped up as I read the article. First, is it appropriate for the company that is preparing the tax return and thus calculating the refund to make loans based on that refund? Second, is it appropriate to charge interest at the rates being charged?
The first question should be answered in the negative because there is a conflict of interest. The higher the loan, the more interest income is generated for H&R Block. This puts the company in the position of trying to maximize the refund, when the company should be maximizing the client’s compliance with the tax law. Every “close call” is going to be affected, subtly or not so subtly, by the impact on the lending activity. It’s best to leave the refund anticipation loan to some other lender, to whom the customer can go after he or she is handed a copy of the return by the preparer. H&R Block, after all, should stick to tax return preparation and not open up a bank.
The second question must be answered in the negative. According to the story, and I’ve read similar reports elsewhere, the annualized interest rates on these refund anticipation loans are as high as 700 percent. SEVEN HUNDRED PERCENT? Toss in the fact that roughly 80 percent of the people using refund anticipation loans are low-income, and suddenly there is a recipe for all sorts of unacceptable situations. I’m not alone in this reaction. H&R Block has been sued on account of its refund anticipation loan practices, has paid out tens of millions in damages, and still must defend charges brought by the California Attorney General. State banking commissioners have been asked to investigate.
This is not a blog on politics, however, it seems to me that if RAL’s are outlawed then people will find other methods to finance their consumption.
There is also further information on RAL’s in his posts here and here