Myth vs. Fact

Click a myth below to reveal the fact.

 

Myth: The Refund Transfer is a loan.

Fact:  No.  A Refund Anticipation Loan is a loan, but a Refund Transfer (also called Refund Anticipation Check, Electronic Refund Check, etc.) is a fee transfer product.  While these products have been offered under the oversight of federal regulators as non-loan products for over 20 years, there has been a recent misconception that these are loans.

The RT is not a refund loan or a loan for associated tax preparation fees.  Upon receipt of a taxpayer’s tax refund, a RT is used to withhold and disburse all tax preparation fees requested by the taxpayer with the remaining refund being disbursed to the taxpayer.  If the refund does not fund there is no outstanding balance owed to the bank and the bank does not charge interest or enter into collections on the unfunded fee amount.  A charge is only incurred when the fee transfer service is rendered.

Myth: Can't everyone pay for tax preparation with a credit card?

Fact:  It’s assumed that everyone has a credit card, yet according to a CreditCard.com scientific poll, 29% of American consumers do not have a credit card and this number is growing.  The number of consumers without a credit card has grown 10% over June of 2009, and with the high foreclosure rate many consumers are having a harder time qualifying for credit.  With some credit card companies charging a penalty APR of 30% for those making late payments, more consumers are moving back to paying with cash.  In fact, a recent study by non-partisan public policy research and advocacy organization Dēmos found the #1 strategy for paying down debt was using a tax refund.

Additionally, many small business owners are choosing to only accept cash as credit card merchant account fees cut into tight profits in the competitive tax preparation market.

Myth: Can't everyone prepare their own tax return?

Fact: Many consumers are willing and able to prepare their own tax return, but an even higher number elect to hire a paid tax professional.  With a frequently changing and complex tax code, approximately 60% of US consumers hire a tax professional to prepare their return.  For some taxpayers there is a large refund at stake, and these taxpayers are reluctant to prepare their own return for fear of risking a smaller refund or missing out on credits they are entitled to.

Some consumers may be capable or willing to prepare their own return, but they do not have a computer or access to the Internet to e-file a return.  One in four people do not own a computer and 29% of Americans do not have Internet access, according to recent studies by Pew Research and US Dept. of Commerce.

Myth: Doesn't the IRS offer free tax preparation to everyone?

Fact: While the IRS Volunteer Income Tax Assistance Program (VITA) is available in limited areas to taxpayers that qualify (restricted to basic returns and annual income below $50k), its accessibility is limited with only 1 VITA site per 52,822 people.  VITA site coverage is sparse in rural areas, and some locations are open as few as 2 hours per day or just 3 hours per week!  Even consumer advocate Adam Rust admits, “In too many communities, there are no VITA sites. When they are in place, many are open infrequently.”

With an average accuracy rate of just 39% in 2011, some taxpayers are concerned that they may be getting what they paid for.  Learn more here.

Myth: Don't bank products encourage fraud?

Fact:  Tax refund fraud is growing and it has nothing to do with bank products and everything to do with the tax refund.  The IRS stopped some $6.5 billion in tax refund fraud in 2011, and the IRS has not estimated the amount of fraudulent refunds that were issued.  It appears that many criminals are increasing their profit margins by manipulating the fraudulent tax return information in order to qualify for the IRS Free File program – with returns prepared for free using either the IRS fillable forms or Free File tax software.  Industry stakeholders including tax software providers and financial service providers are vigilant in their work to stop tax refund fraud, augmenting the IRS efforts by providing an additional layer of fraud detection and returning hundreds of millions of dollars to the IRS in fraudulent refunds.

Myth: Doesn't everyone have a bank account?

Fact:  In a July 2010 study entitled “Unbanked by Choice” the Pew Health Group asked why many Americans are unbanked.  While 9% of the consumers surveyed were expelled from their account, another 22% chose to close their account.  For many of those surveyed Alternative Financial Services (AFS) are popular because of their convenience.  Some 40% of respondents claimed that they would be “very likely” to switch to a financial institution that was open in the evenings and on Sundays.  Unbanked consumers are often unbanked by choice and the Pew survey found that unbanked consumers were just as satisfied as banked consumers.

The FDIC also conducted a survey with similar findings.  The FDIC notes, “Survey data indicates that the majority of under-banked households that go to nonbanks for money orders and check cashing do so primarily for convenience.  Speed and cost were also reasons.”

Myth: Aren’t bank products just for low-income taxpayers?

Fact: Consumers of all income levels use refund-related bank products.  A Department of Treasury study found a fair number of taxpayers with incomes above $50,000 use Refund Transfers (RT).  Many of these consumers prepare their own return online and prefer having the tax preparation fees withheld from their refund rather than using a credit card online – see Marcos del Rio’s story for example.  The RT facilitates online tax preparation fee payment much like PayPal facilitates payment of online purchases.

Unbanked consumers often use refund-related products as both a means to pay for tax preparation and for the additional benefit to receive their refund faster than it would typically take to receive their refund as a check from the IRS.  While the groups using bank products during the tax season are diverse, unbanked and working class consumers often realize the greatest benefit.

Myth: Aren’t Refund Transfer fees high?

Fact:  The short answer? No. Let’s examine the cost of fee payment products relative to comparable fee payment and money transfer services.

Tax refund-related bank products have many names including Refund Transfer (RT), Refund Anticipation Check (RAC), Refund Settlement Product, etc., but they all provide the same benefits – withhold tax preparation fees from a tax refund allowing a taxpayer to receive their refund in 1-2 weeks with no money paid out-of-pocket for tax preparation.  The tax preparer’s fees are withheld from the refund amount and deposited into the preparer’s account.

Fees for this service typically range between $10-30 depending on the type of product offered, and the fee is a fixed price that is not percentage based.  With an average refund amount of $3,000 and a standard fee of $30, taxpayers are paying 1% on average. There are a number of financial services that process fees or transfer funds and few can compete with the low cost of an RT.

  • Western Union charges an 8.6% fee for money transfers and additional fees may apply if the sender uses a credit card.
  • PayPal charges a standard rate of 2.9% for receiving payments.  The total value of transactions processed through PayPal was $92 billion in 2010.
  • The IRS has approved third party e-pay service providers that process credit and debit card tax payments to the IRS on behalf of consumers and small businesses, with fees ranging from 1.9% to 3.89%.

Consumers can avoid these fees by simply exchanging cash, but consumers choose to pay a fee for the convenience and security of electronically transferring funds.

Myth: Can't everyone pay for tax preparation up-front?

Fact: Nearly 3 in 10 American consumers do not have credit cards, and with an average preparation fee of $190, consumers living paycheck to paycheck may not have the cash on hand to pay for tax preparation.  With tax time arriving after the Christmas season, cash is limited and many consumers need their tax refund just to catch up.

Many taxpayers depend on the option to have their return prepared by a paid tax professional with the fees being withheld from the refund amount.  The convenience of this service is well worth the low cost.

Myth: Taxpayers should just wait 2-3 weeks for their refund.

Fact: This statement is often repeated by those that are disconnected from the challenges of working class consumers.  For over twenty years tax refund-related bank products have been offered in an environment of rigorous compliance and regulatory standards, giving unbanked consumers the ability to receive their refund in the same amount of time as banked taxpayers.

While some consumers would enjoy the luxury of being able to wait 2-3 weeks for their refund, the reality is that many unbanked consumers need that refund in 1-2 weeks to pay bills.  In many cases taxpayers simply don’t have a way to pay up-front for tax preparation without a refund-related product.  TCA does not believe that all consumers need refund-related products, but we believe that taxpayers should have the choice to select a product that meets their needs.