By ARTHUR VIDRO
By Arthur Vidro
This piece originally began by saying Americans are less than four weeks away from our federal income tax returns being due. However, it was just announced on Friday that the filing deadline has been extended to July 15. Even though the deadline is four months away rather than mere weeks, the remainder of this column still applies and will most likely re-run in June or July.
Sadly, I see many people, year after year, settling for less of a tax refund than they are due.
Why do they settle for less? Because they are sacrificing some of their money for the sake of immediate gratification.
Let us suppose you are entitled to a $2,000 refund. When you pay someone – especially a large chain corporation – to prepare your income tax return, the sequence at the end often goes something like this:
Tax preparer: “There. Now we’re finished. You are getting a refund.”
Client: “Great! How much?”
Tax preparer: “Depends. Do you want it today?”
Client: “Sure!”
Tax preparer: “Then you’ll get $1,820 and if you sign here the money will be in your hands or your bank account before we part ways.”
The problem with the above is that the client jumped at the chance to get the money now.
Here is how the above scenario would play out if the preparer does not indulge in shenanigans:
Tax preparer: “There. Now we’re finished. You’re getting a refund.”
Client: Great! “How much?”
Tax preparer: “Depends. If you’re willing to wait for the IRS to process and approve your return, they will send directly to you the full amount of your $2,000 refund – and before we part company you’ll pay me a $60 fee for having done your return. But if you prefer to get the money right now, and not pay me now, then our company will give you $1,820. Then when the IRS gets around to processing your return, they’ll send the refund to us. In essence, out of that $2,000 you’re paying us our normal fee of $60 to complete and file your return plus an additional fee of $120 to advance you the money so you get it now instead of later. So which option do you want?”
What is happening when you get your refund immediately? Obviously, from the client’s point of view, you are getting money now so you can start spending it now.
But from the tax preparation company’s point of view, they are generating a high-interest, low-risk loan to you and all others who partake. The folks who partake tend to be the working poor – just like the folks who take out high-interest car-title loans.
Sadly, the option to get the money immediately is far too popular.
These financial doings at tax time are legal, so it is up to the consumer to beware. Ask questions. Before jumping at an offer, ask what the other options might be.
Many of the participating consumers are not aware they are taking out a loan, or are not aware of the high interest rate being charged on the loan. Heck, some of them don’t even need the money right away, but the allure is too much to resist.
However, far more money will reach your pocket or your bank account if you merely wait. Say, “I want all my refund to be sent to me. I don’t wish for it to go to you. I will pay you the tax preparation fee right now, but I’m not going to pay you interest on the loan you are hoping I’ll accept.”
I didn’t notice these advance payments from tax preparation companies until the turn of the century, but they seem to have begun in the 1980s, when some marketing whiz realized people would gladly pay extra to the tax preparer just to get their money immediately.
At first the lenders didn’t specify that the money you were getting was a loan. It was called your tax refund.
Eventually, a lawsuit filed in 2006 led to these transactions having to be called what they actually are – “refund anticipation loans.” (The term “refund anticipation checks” is also used).
But what happens if the IRS finds something wrong in your return? It need not be anything malicious; perhaps you never received one of your wage or dividend statements. What happens if, for whatever reason, the IRS eliminates a portion or the entirety of the refund that is claimed on your return? Simple. You will be in debt to the tax preparation firm to pay back that loan you took from them.
If you have consumerism questions, send them to Arthur Vidro in the care of this newspaper, which publishes his column every weekend.
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