Unregulated Preparers, Lack Of Disclosures & Costly Financial Products Put Your Tax Refund At Risk

Image courtesy of (GotCredit)

Each year during tax time millions of consumers put their financial future in the hands of strangers, trusting that these tax preparers — who are largely unregulated — know the rules, will get them the best possible result (hopefully a refund), and won’t sell them on a product that costs more than it’s worth. But in the world of complicated tax codes and credits, consumers continue to face a long list of risks, including untrained preparers, undisclosed fees, and dangerous refund anticipation products. 

These are just a few of the issues — and financial dangers — that the National Consumer Law Center and Consumer Federation of America are warning consumers about in their annual Tax Time Report [PDF].

“There’s a minefield of dangers for the tens of millions of consumers who use paid tax preparers to fill out their most important financial document of the year,” Chi Chi Wu, staff attorney at the National Consumer Law Center, and author of the report, said in a statement. “The hazards range from losing a chunk of their refund for unnecessary financial products, to errors or even fraud committed by unregulated preparers.”

Unprepared Tax Preparers
NCLC, CFA, and a host of other consumer groups and government agencies have previously highlighted the dangers of using untrained and unregulated tax preparers, but it’s worth noting again that there are just four states that actually have laws in place that require paid tax preparers to meet minimum education, competency, or training standards.

In fact, a 2013 study by the NCLC found that 47 states have stricter regulations for barbers than they did for paid tax preparers.

These ill-prepared preparers can expose consumers to potential error and even fraud. These risks were highlighted in a “mystery shopper” report from NCLC last year that found inaccuracies in 27 out of the 29 tax returns prepared by paid tax preparers.

While taxpayers may not be aware of the lack of regulation or training for paid preparers, they certainly expect these professionals to be held to certain standards.

A recent poll conducted by CFA as part of the new Tax Time report found that 80% of the public supports requiring paid tax preparers to pass a test administered by the government that would ensure that paid preparers have the knowledge and training to complete taxpayer returns correctly, while 83% of respondents support licensing requirements for preparers.

Another 56% believe that paid preparers should have special training but don’t need a degree and 31% of the public believes that paid tax preparers should have a college degree in accounting.

Even large chains of tax prep offices are not immune from ill-trained and unscrupulous preparers. Earlier this year, the U.S. Department of Justice sued to shut down a South Carolina franchisee of the huge Liberty Tax Service company for filing fraudulent returns. Among other accusations in the lawsuit, preparers allegedly gave customers fictional jobs based on their hobbies and told them to claim children that don’t exist.

While errors perpetrated by ill-prepared tax preparers can certainly wreak havoc on the refund a consumer receives, it isn’t the only danger lurking inside the walls of the local tax preparation office.

Refund Anticipation Products
Years after high cost Refund Anticipation Loans (RALs) were all but removed from tax preparation offices, NCLC and CFA say a new generation of these unnecessary and costly financial products are being pushed by tax preparers.

When banks exited the RAL market in 2012, they left a hole for non-bank entities to fill, namely payday loan companies.

According to the new report, non-bank and “no-fee” RALs have been cropping up with increased frequency around the country.

“This year, some lenders are offering a new version of RALs that purportedly does not impose a charge directly on the consumer,” the report found. “However, some of these “no fee” RALs do appear to impose a cost in terms of a higher RAC fee. Also, there is concern that some preparers may pass the cost of the loans onto the taxpayer through increased tax preparation or junk fees.”

Tax preparation offices across the country are also now offering Refund Anticipation Checks (RACs). Much like RALs, RACs are a financial product used to deliver tax refunds and to pay for tax preparation fees by deducting them from the refund.

Under a RAC, a bank will open a temporary account into which the IRS direct deposits the refund monies. After the refund is deposited, the bank issues the consumer a check or prepaid card and closes the temporary account.

NCLC and CFA found that RACs, of which 21.6 million were issued in 2014, do not deliver refunds any faster than the IRS, despite charging consumers fees between $25 to $60.

Difficult To Compare Fees
As with past reports, the NCLC and CFA found that it was increasingly difficult to obtain tax preparation fee information before signing on the dotted line.

Tax preparation is one of the few services that do not provide meaningful price information to consumers, the report found.

And when fees can be as high as $400 to $500, it’s important for consumers to know how much they’ll shell out ahead of time. Yet, ask a paid preparer for an estimate on what it will cost you and they may flat-out refuse to give you a figure. They may also give you a vague estimate that they aren’t locked into and which could be very different from the actual costs.

“The lack of transparency and disclosure in tax preparation fees is appalling,” Wu said in a statement. “Without adequate price information, it’s a complete failure of the competitive market.”

According to the CFA’s poll, 89% of respondents support requiring paid preparers to supply an upfront list of fees.

“It is not surprising that the public overwhelmingly supports requiring upfront pricing from paid preparers –households need every penny of their refunds and should be able to comparison shop  paid preparers for the best value just like they can for other services,” CFA senior policy advocate Michael Best, said in a statement.

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.