|It’s been a tough tax season for H&R Block so far with news items like:
H&R Block blunder delays 600,000 tax returns
“Together with fellow tax preparation giants H&R Block and Jackson Hewitt, Liberty has become a leading purveyor of RALs: short-term, high-interest, fee-laden loans on imminent tax returns, the majority of which are taken out by the working poor. “
What is also interesting is that Liberty Tax (mentioned in the quote above) is quickly expanding into Canada (Liberty Tax Canada) and is fighting to capture some of H&R Block’s share of the “Tax Discounting” or RAL market.
“For years, RAL loans were falsely marketed not as loans at all, but as “rapid refunds” and “instant refunds.” Though now legally barred from such false advertising, tax preparer services still prey on the lack of financial sophistication common among RAL purchasers, two-thirds of whom live near the poverty line and qualify for the Earned Income Tax Credit”
“These loans target the poor,” says Chi Chi Wu of the National Consumer Law Center. “Because they are secured by and repaid directly from the borrower’s promised tax refund, the lenders are able to do it risk-free. And if for some reason their refund doesn’t show up or meet expectations, borrowers find themselves on the hook for a lot of money, up to 500 percent APR, for a loan they most likely did not need in the first place.”
H&R Block’s business model (short-term refund loans) exists mainly due to the desperation of those struggling financially. Why would you have H&R Block employees (many have limited training and experience) prepare your return if it wasn’t for the instant refund? Why would you pay up to 500 percent APR on a loan (aka instant refund) when you get the money within a week or two?
In my commentary on the article, Instant tax refunds carry steep costs, I calculated a 175 percent APR on a two week refund loan (based on the articles example) but if you use the direct deposit option for your refund (which is free), you receive your refund in one week and so the loan becomes a 350 percent APR.
“As a result of IRS participation in the RAL industry, Nina Olsen, the national taxpayer advocate — a sort of IRS ombudsman — has compared the United States government to a “payday” lender.”
The same can be said of the Canadian government.