Secrets of the Tax-Prep Business

http://motherjones.com/politics/2011/04/gary-rivlin-tax-prep-refund-anticipation-loan

UPDATE (April 2012): Since this story first appeared, the refund anticipation loan business has taken additional hits. According to the New York Times, only one major tax preparer is offering them this year. After cutting a deal with the FDIC, Republic Bank & Trust, which underwrites RALs peddled by the Jackson Hewitt chain, is getting out of the business. But the preparers, as Gary Rivlin explains below, have a range of tricks in store to reel in new customers.

JOHN HEWITT WASN'T seeking to turn the working poor into cash cows when his father and some friends helped him buy a six-store tax-service chain in Virginia Beach back in 1982. A 33-year-old college dropout who'd recently left his post as a regional director for H&R Block, Hewitt bought the Mel Jackson Tax Service hoping simply to break his old employer's near-monopoly on the market. "We're going to be bigger than H&R Block!" he liked to boast, though his operation was a mere tadpole challenging a leviathan with 7,000 stores in middle-class neighborhoods across the country. Hewitt renamed the company Jackson Hewitt and bet that his early embrace of computers would give him a leg up on his former bosses. But it wasn't until he began offering something called a refund anticipation loan (RAL)—a product aimed at down-market customers desperate for cash—that his chain really took off.

Over the years, entrepreneurs and corporate executives have devised any number of clever ways for getting rich off the working poor, but you'd have to look long and hard to find one more diabolically inventive than the RAL. Say you have a $2,000 tax refund due and you don't want to wait a week or two for the IRS to deposit that money in your bank account. Your tax preparer would be delighted to act as the middleman for a very short-term bank loan—the RAL. You get your check that day or the next, minus various fees and interest charges, and in return sign your pending refund over to the bank. Within 15 days, the IRS wires your refund straight to the lender. It's a safe bet for the banks, but that hasn't stopped them from charging astronomical interest rates. Until this tax year, the IRS was even kind enough to let lenders know when potential borrowers were likely to have their refund garnished because they owed back taxes, say, or were behind on child support.

Hewitt didn't invent the refund anticipation loan. That distinction belongs to Ross Longfield, who dreamed up the idea in 1987 and took it to H&R Block CEO Thomas Bloch. "I'm explaining it," Longfield recalls, "but Tom is sitting there going, 'I don't know; I don't know if people are going to want to do that.'"