Tax Refund Loans used to be big money makers for companies like H&R Block, Liberty Tax Service and Jackson Hewitt. Tax preparers might have charged something like a $50 fee plus a 36% annual interest rate. Let’s say the customer had their taxes prepared and it showed that they would receive a refund of $1000 from the IRS. A bank would advance the customer $935 ($1000 minus the $50 fee minus $15 in interest), and would be paid back in 15 days when the IRS send the $1000 refund directly to the bank. (The tax preparation company would share in the $65 profit with the bank.) On a national scale, getting tens of thousands of taxpayers to sign up a tax refund loan means the potential to earn millions of dollars in an extremely short period of time (typically 7-15 days).
Consumer organizations hate tax refund loans like they hate payday lenders. They look at them as extremely high cost, short term loans that are marketing to unsophisticated lower income people. The organizations were successful in lobbying elected officials and regulatory bodies to virtually put a stop to tax refunds loans. State attorney generals and other regulators sued H&R Block and others, for deceptive marketing and unlawful debt collection practices and contracts, among other things. The IRS put a rule in place that tax refund loan providers can not base their fees on a percentage of the refund amount or tie it to any other figure on the tax return (like adjusted gross income). So if a tax preparation company like Liberty Tax Service still offered the service and charged a $50 fee, they would have to charge the same fee to someone getting a $100 refund, and someone getting a $100,000 refund. Advancing someone $100,000 for 2 weeks to earn a $50 fee is fraught with risks.
The major tax preparation companies now all offer no fee, no interest tax refund loans. Liberty Tax Service offers an “Easy Advance” of up to $3250. Jackson Hewitt offers a “No Fee Refund Advance” of up to $3200. H&R Block offers a “Refund Advance Loan” of up to $3000. These are all advertised as 0% interest rate, zero fee loan programs. They offer these programs because they attract customers to use them for tax preparation. The companies can make money from the customers by charging for tax preparation, as well as offering other services such as prepaid debit cards and lines of credit. The customers have many options for tax prep, from doing it themselves or TurboTax, using competing websites like TaxSlayer, to even having it done for free if they qualify for the IRS’s Volunteer Income Tax Assistance or Tax Counseling for the Elderly programs. The tax refund loan is the hook that gets the customer in the door.
There is nothing stopping other companies or other people from making money in the same way. To prepare federal tax returns for compensation, you need a Preparer Tax Identification Number (PTIN) from the IRS. In some cases, you must also register with you state. Let’s say a pawn shop or apartment community had many customers that they knew were always having money problems. These could be the perfect target market for them. With the right tax preparation software and a moderate understanding of tax preparation, they could make money the same way the big boys do — by offering these customers free tax refund loans but charging for tax preparation.
