Tuesday, March 18, 2008

Tax-Time Merry-Go-Round

We must be getting close to April 15, that magical date on the US calendar by which taxpayers must “voluntarily” reconcile taxes payed with taxes owed for the government. I can tell because the California Attorney General, Jerry Brown, is holding press conferences decrying the evils of refund anticipation loans (RALs) at H&R Block.

RALs are short-term loans to cover the period between the time a customer files a tax return electronically and the time the IRS transmits the refund to the lending bank. The loan period, then, is somewhere between 5 and 12 days (the IRS estimates a direct deposit refund on an e-file at 7-14 days and it may take the bank up to two days to process the loan).

Because the loan period is so short, we can calculate using simple interest. In an blatant effort to hide the fact that a RAL is a loan, Block estimates on its website that a RAL on a $2,400 refund would cost the customer $26.04 in interest plus a “Refund Account Fee” (loan origination fee) of $29.95. The math, if you're interested: 36% / 365 days * $2,400 * 11 days.

Why 11 days? Good question. That's the number that Block uses in their estimates, and, for such a short-term loan the number of days makes all the difference. Jerry Brown insists that the interest rate is 80% or more plus fees, so let's see how many days he uses: $26.04 / (80% / 365 days * $2,400) = 4.95 days

Why do I always hear Claude Rains in my head when I work with government math?

Last year, when it was Jackson-Hewitt's turn in the barrel, the buzz-phrase in regards to RALs was that this system "preys on the financially illiterate". I could not agree more.

To get a RAL, Block's customers must fill out a 1-page loan application. Prior to that, though, they must fill out a minimum two-page IRS Form 1040. To fill that out, they either have to wade through the 44,000-page US tax code, or pay a tax preparer to fill it out for them. Then, they have to swear, under penalty of perjury, that the statements made on the 1040 are true and correct, something that gives even tax attorneys pause.

Oh, and by the way, to be due a $2,400 refund, the withholding from the prior year must have been too high by an average $200 per month. This amounts to an interest-free loan to the government for a year or more. A system which did not prey on the financially illiterate would increase their tax refund by at least the risk-free rate compounded over the period of the loan.

Look, stones are cheap and everybody lives in a glass house these days. But, this. This pandering by Jerry Brown is so blatant, and so over the top, and so slimy! And, it happens every year all over the country. And, no one ever calls them on it.

Who on earth devised a tax code so convoluted and overarching that it requires a person or family that qualifies for the Earned Income Tax Credit to even file a tax return or have money withheld from their paycheck? Who, in their right mind, feels that someone, who is so desparate to get their hands on a couple of hundred dollars of their own money that they would apply and pay for a five or eleven-day loan, should have to pay hundreds of dollars to a tax preparer to lessen their chances of being indicted for perjuring themselves on their tax return?

How are the tax dollars these people are paying used? In California, besides paying Jerry Brown's salary, the majority of the dollars go to public schools so the children of people who are financially illiterate can raise a bumper crop of people who are financially illiterate. Instead of suing H&R Block, Brown should be suing the schools that aren't teaching kids to compute simple interest!

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