Tax preparation companies have largely stopped offering much-derided refund anticipation loans, but that doesn't mean taxpayers are safe from seemingly attractive deals that are laden with hidden fees.
The latest costly taxpayer trap involves offers that allow you to pay your tax preparation fees later -- out of your refund with "nothing out-of-pocket." If you thought those old high-cost, dubious value refund loans were bad, these deals are even worse.
"It's a minefield for taxpayers," said Chi Chi Wu, staff attorney at the National Consumer Law Center in Washington, D.C.
Consider industry leader H&R Block (HRB). Block no longer offers loans that promised to get you early access to a portion of your tax refund, said spokesman Tom Collins. But it does offer "refund anticipation checks." What's that? It's the ability to pay your state and federal tax preparation fees with your refund -- at a cost of $48.
Why would you pay $48 to delay coughing up the cost of tax preparation for about three weeks? Because you might be unprepared for what they charge to prepare your taxes. Block offices no longer offer a clear up-front fee schedule. If you want to know what the firm will charge to prepare your taxes, you need to make an appointment, come in with your tax information and then ask for an estimate, according to representatives at several tax preparation offices and the autobot on the firm's toll-free help line.
Of course, after committing that much time and effort to getting a fee estimate, you might be reluctant to walk away without having your taxes completed. Thus, if you didn't have quite enough in your checking account, you might be tempted to sign up for Block's refund anticipation check. (It's worth noting that the term "check" is a bit of a misnomer. If you want a paper check for what's left of your refund, after tax prep and refund anticipation check fees, it will cost you another $25, according to the terms and conditions on the Block website.)
A Block spokesman said the average cost for having a federal and state return prepared is $215, so the $48 to $73 (if you get a paper check) fee to pay that bill through your tax refund boosts your tax preparation cost by roughly 25 percent. If you tried to equate this fee to an annual percentage rate, it looks even more astronomical -- about 350 percent.
And, of course, accepting this deal actually means you get your tax refund a touch more slowly than you would if you just had the IRS direct-deposit the money into your bank account because now the refund has to go through Block. This deal expedites your refund only if you don't have a bank account of your own.
Meanwhile, Liberty Tax (TAX), which recently settled a lawsuit over the refund anticipation loans it sold between 2009 and 2012, now promises loans of up to $750, secured by your refund, absolutely free.
What's the catch? On this part of the deal, none. Republic Bank, which offers these loans, charges the tax preparation company $35 for the service, but Republic bars passing that cost on to consumers. If, however, the consumer chooses to use a "refund transfer" to pay the tax preparation fee, there's a refund transfer fee of about $30.
A tax preparation consultant might also encourage you to have your refund automatically loaded onto a NetSpend debit card. (Repubic Bank gives tax preparation firms $5 for each refund transfer loaded onto a NetSpend card.) And although the card proclaims there's no minimum balance or activation fees to get it, taxpayers will pay through the nose over time.
Three of the 28 pages that make up NetSpend's cardholder agreement are devoted to fees. Cardholders either pay monthly fees ranging from $5 to $10 each month, or they pay a fee every time they use the card.
For example: Buy something with a signature transaction, and you'll pay $1 a pop. Each time you plug in your PIN to make a purchase, it'll cost you $2. Use that card overseas, and you'll pay the regular transaction fee, plus 3.5 percent of the purchase amount. Get cash from an ATM, and you'll pay $2.50 per withdrawal, plus any fees that might be imposed by the company that operates the ATM. You'll even get nicked with a fee if your ATM transaction is declined -- that's $1.
In 2014 (the latest year for which the IRS has statistics), 21 million Americans used these high-cost services to pay for their tax preparation. But they have plenty of better options -- truly free services for those who can't afford the sometimes high cost of professional tax preparation.
The IRS offers free electronic filing through the FreeFile program. Many states also offer free filing on their websites. Those who need personal help can go to a Volunteer Income Tax Assistance Center, where trained and tested tax preparers file returns for low-income and elderly consumers for free. To find a nearby VITA site, go to IRS.gov and plug in your ZIP code.
"Consumers should know that there are a lot of free resources out there if you can't afford tax preparation fees," said National Consumer Law Center's Wu. "You just need to be aware of them and take advantage of the help they provide."