Cendant Corporation, parent company of national tax preparation service Jackson Hewitt, has hired a high-powered law firm to help fight a bill that is making its way through the Minnesota legislature. Should the bill become law, tax preparation firms in Minnesota would be barred from charging the high rates that now accompany tax refund anticipation loans.
Much controversy has surrounded the high-priced loans that tax preparation firms offer, often to low-income taxpayers, to speed up the tax refund process. The loan fees, which are normally assessed as a flat rate of anywhere from $5 to $100, can translate into exorbitantly high annual interest rates of well over 100%.
A study performed last year by the Brookings Institution determined that tax preparation firms such as Jackson Hewitt and H&R Block target low income taxpayers, in particular those eligible for the Earned Income Tax Credit (EITC), as customers for their refund anticipation loans. The study found that taxpayers claiming the EITC often spend as much as 10% of their refundable credit on tax preparation services and refund anticipation loan fees.
On one hand the Brookings study seems to imply that tax preparation firms have some sort of predatory motive for locating a large proportion of their offices in geographic areas where taxpayers are more likely to qualify for the confusing EITC and thus require assistance in preparing their tax returns. "There is a clear relationship between the location of EITC earners and the location of tax preparation services," states the study. "These [tax preparation] firms are clearly over-represented in communities with large concentrations of EITC earners, regardless of population levels."
At the same time, the Brookings report makes the point that these taxpayers have financial needs that make them more likely to require rapid access to their refunds than taxpayers in higher income brackets. "To be sure, the concentration of tax preparation services in low-income communities points to a considerable demand for assistance in preparing returns and in gaining access to EITC refunds quickly."
The proposal currently under consideration by the Minnesota Senate would require tax return preparers to provide taxpayers with notices, written in large type, indicating the actual annual interest rate of the fee for a refund anticipation loan as well as the exact cost of the loan. In addition, tax preparers would be required to inform taxpayers that they can have their tax returns prepared at no charge by representatives from the Minnesota Department of Revenue.
Cendant has argued that such legislation would constitute an infringement of free market practices.
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