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News from the tax preparer’s front:

California Attorney General Bill Lockyer announced Jackson Hewitt, Inc. will pay $5 million, including $4 million in consumer restitution, to settle a lawsuit filed by Lockyer that alleged the nation’s second-largest tax preparation firm violated state and federal laws in marketing high-cost refund anticipation loans (RALs) mainly to low-income customers.

“Jackson Hewitt made a lot of money by pushing customers to take out expensive loans rather than encouraging them to wait a couple of weeks to get their refunds from the IRS for free,” said Lockyer. “In the process they deceived consumers and took money from low-income families who can least afford it. They even charged people extra for being poor. This settlement benefits consumers by holding Jackson Hewitt accountable for its conduct, prohibiting the unfair practices we targeted in our lawsuit and requiring the firm to conduct itself in a manner that could set the industry standard.”

The settlement requires Jackson Hewitt to pay $4 million in restitution to customers who purchased same-day “Money Now!” loans, “Accelerated Check Refunds (ACR),” and other RAL products that, according to Lockyer’s lawsuit, Jackson Hewitt illegally promoted. The $4 million will provide up to $30 per RAL purchased from 2001 to 2004, up to $15 for each additional financial product bought from Jackson Hewitt, and restitution to consumers victimized by the debt collection scheme. In addition to the restitution, Jackson Hewitt will pay $500,000 in civil penalties and another $500,000 to reimburse the Attorney General’s Office for its investigation costs.

As described in the complaint, RALs are loans provided to taxpayers, secured by their expected tax refund. Internal Revenue Service (IRS) rules prohibit Jackson Hewitt from providing loans itself, so the company contracted with banks for that purpose. But Jackson Hewitt provided clients the loan applications, filled out the applications, sent the applications to the banks, and distributed the loan checks to customers. Jackson Hewitt’s partner banks from 2001-04, the period covered by the lawsuit, were Santa Barbara Bank and Trust (now Pacific Capital Bank) and Household Finance (now HSBC).

In a typical case, Jackson Hewitt’s RAL program worked like this: After calculating a customer’s taxes and determining their refund amount, a Jackson Hewitt tax preparer signed up the customer for a RAL. If the bank approved the application, Jackson Hewitt ultimately provided the customer a check – not for the full tax refund amount, but for the estimated refund, minus various fees Jackson Hewitt charged the customer. Depending on the amount of refund, those fees forced some consumers to pay the equivalent of annual interest exceeding 200 percent.

Additionally, Jackson Hewitt’s marketing of RALs was deceptive in a number of ways, according to the complaint. Advertisements portrayed RALs as refunds or “Money Now,” instead of loans, the complaint alleges, and omitted information that would have informed consumers the products actually were loans. Jackson Hewitt also misled consumers by stating or implying RALs provided a faster way to get money at tax time than waiting to receive a refund from the IRS, according to the complaint. In fact, consumers who filed tax returns electronically could receive a direct deposit refund from the IRS just as quickly as they could get money from Jackson Hewitt through purchasing one of the firm’s high-cost loan products.

Additionally, according to the complaint, Jackson Hewitt violated state and federal law by using or sharing customers’ tax-return information without their written consent. Jackson Hewitt engaged in these illegal practices to market RALs and collect on debts, the complaint alleges.

Posted under Finance

New York Attorney General Eliot Spitzer sued the nation’s largest tax preparation company for fraudulent marketing of individual retirement accounts (IRAs) on March 15, just 1 month before millions of Americans’ tax forms are due.

The suit alleges that the H&R Block Company steered hundreds of thousands of its clients, including almost 30,000 New Yorkers, into IRAs that were virtually guaranteed to lose money because of a combination of hidden fees and low interest rates.

“The conduct described in today’s complaint is particularly appalling because many of those hardest hit were working families who struggle to save,” Spitzer said. “Instead of providing these families with accurate information that would have allowed them to make informed choices, H&R Block steered them into retirement accounts that actually shrank over time.”
The Attorney General’s office began the investigation in 2005 after receiving information from an H&R Block tax preparer.

Over the past four years, H&R Block opened more than half a million “Express IRA” accounts for its tax preparation clients. Customers were told that the IRA paid “great rates”and was “a better way to save,” but 85 percent of the customers who opened the accounts paid the company more in fees than they earned in interest. More than 150,000 H&R Block customers closed their accounts, incurring additional undisclosed fees, as well as nearly $6 million in tax penalties.

The civil complaint filed in State Supreme Court in Manhattan cites internal documents showing that H&R Block’s senior management knew that many of its customers were losing money on their Express IRAs. For example, in a 2002 email to Mark Ernst, the company CEO, a district manager complained about the impact of these accounts on customers:

“I really don’t think maintenance fees should exceed the amount of interest that we are paying on these accounts. Clients won’t be happy seeing [their] investments decreasing … .”

Mr. Ernst forwarded this email to the Express IRA product manager and added his own comments: “The attached note . . . reflects the general sense that I think exists - that Express IRA is the right thing for our clients, but the product is designed to nickel and dime clients to the point where our field people [don’t] feel as good about the product as they should… .”

Some conscientious H&R Block employees (including the person who brought the information to the Attorney General) actually refused to promote the product to clients.

In 2003, an internal H&R Block report prepared by the Express IRA product manager described the growing concerns of tax professionals about the product in the following way:

“Top 4 reasons tax pros are not offering the product:
1. $15 setup fee – ‘it’s too steep for my clients’
2. $15 recontribution fee – ‘they’ve already paid once, why charge them again?’
3. Low interest rate – ‘my client will never make up the fee’
4. $10 annual maint. fee – ‘my clients have to pay this in addition to the $15 fee.’”

The company’s management took no action to address these concerns. Instead, H&R Block continued to tout the Express IRA as a good way for lower and moderate income people to save.

The complaint alleges that the company pushed the Express IRA in an effort to encourage repeat customers for its tax preparation services and to maximize its fee revenue.

Spitzer’s complaint describes the experience of several New York customers:
– A 32-year-old Albany resident with a taxable income of $17,847 made a one-time, minimum contribution of $300 to an Express IRA in 2002. Over the past four years, the investment earned $10.29 in interest but incurred a total of $45 in fees. The Albany resident’s investment lost 12 percent of its value and will continue to decline.
– A 68-year-old resident of Brooklyn with a taxable income of $25,421 made a one-time contribution of $300 to an Express IRA in 2004. The individual was charged a $15 account opening fee, a $10 account maintenance fee, and a $25 closing fee when the account was closed after 18 months. These fees dwarfed the interest earned on the account ($5.18) and, as a result, the Brooklyn resident’s investment declined by 15 percent.

Advocates for lower-income consumers praised the lawsuit: Sarah Ludwig, Director of the Neighborhood Economic Development Advocacy Project in New York, said: “Lower and middle- income New Yorkers encounter a host of abuses at tax prep sites such as H&R Block. The abuse that the Attorney General has uncovered in connection with the Express IRA is particularly troubling. Working families are entitled to know all the facts about a retirement product – both good and bad – before they decide to invest. Our organization strongly encourages people to get their taxes done at free tax prep sites, which will prepare people’s taxes professionally, with zero incentive to rip people off.”

Spitzer’s lawsuit specifically alleges that H&R Block, based in Kansas City, failed to adequately disclose its fees to its customers, failed to warn that the interest paid would not cover the fees in certain instances, and misleadingly described the interest rates as “great” when they were at times less than one percent annually. This misleading and incomplete disclosure violated New York’s consumer fraud law and was a breach of the company’s fiduciary duty to its clients. Relief sought includes an injunction from further violations of New York law, damages and civil penalties.

The investigation was led by Assistant Attorney General James Park, with Assistant Attorneys General Gary Connor and Matthew Gaul, and Economist Hampton Finer, and was supervised by David D. Brown, IV, Chief of the Investment Protection Bureau.

Posted under Customer Service, Finance

Attorney General Bill Lockyer has filed a lawsuit against H&R Block alleging the tax preparation giant has violated 15 state and federal laws in marketing and providing high-cost refund anticipation loans (RALs) mainly to low-income families.

“Millions of Californians have placed their trust in H&R Block, and unfortunately H&R Block has repaid them by violating that trust,” said Lockyer. “In marketing and selling these expensive loans, H&R Block has profited greatly, but deceived consumers, violated their privacy rights and taken money from California families who can least afford it. This lawsuit seeks to hold the company accountable for unlawful business practices, prevent future violations and compensate victims.”

The complaint asks the court to require the defendants to pay restitution to harmed consumers, plus at least $20 million in civil penalties. The complaint does not specify the total restitution amount, but Lockyer estimated the maximum could reach into the hundreds of millions of dollars.

The defendants include H&R Block, Inc. and the following subsidiaries of the Kansas City, Missouri-based firm: H&R Block Services, Inc.; H&R Block Enterprises, Inc.; H&R Block Tax Services, Inc.; Block Financial Corporation; and HRB Royalty, Inc.

The complaint alleges the H&R Block defendants have violated 15 state and federal laws that regulate debt collection practices and contracts, and prohibit false or deceptive advertising, unfair business practices, and unauthorized use or sharing of individuals’ tax return information.

As described in the complaint, RALs are loans provided to taxpayers, secured by their expected refund. Internal Revenue Service rules prohibit H&R Block from providing the loans itself, so it contracts with banks for that purpose. H&R Block, however, provides clients the loan applications, fills out the applications, sends the applications to the banks, and distributes the loan checks to customers.

In a typical case, the program works like this: A customer comes into an H&R Block branch office. A “tax professional” calculates the customer’s taxes and determines they are owed a refund. The customer signs up for a RAL. If the bank approves the application, H&R Block ultimately provides the customer a check – not for the full tax refund amount, but for the estimated refund, minus loan fees, tax preparation fees and other charges. Depending on the amount of refund, those fees can force customers to pay the equivalent of annual interest exceeding 500 percent, according to the complaint.

Since 2001, the complaint alleges, Californians have bought more than 1.5 million RALs from H&R Block, “generating tens of millions of dollars in income for Block.” H&R Block has received a “substantial portion of the loan fees,” according to the complaint, and has purchased up to 49.9 percent of the loans. To illustrate how H&R Block’s RAL program targets low-income families, the complaint notes recipients of the federal Earned Income Tax Credit (EITC) comprise 70 percent of the company’s customers for RALs and similar products, even though EITC recipients account for just 17 percent of all taxpayers. The federal government established the EITC to benefit low-income workers and their families.

H&R Block holds itself out as a tax preparer and adviser that consumers can trust. But to maximize its RAL revenue, the complaint alleges, H&R Block has failed to adequately inform customers they can keep more of their income throughout the year and not have to wait for a refund at tax time.

Additionally, H&R Block’s marketing of RALs has been deceptive in a number of ways, according to the complaint. Advertisements have portrayed RALs as a “refund” or “instant money,” and falsely told consumers that RAL recipients get “cash, cold, green, in your hand, out the door.” In reality, the complaint alleges, the refund is a loan, the cash is a check, and the check is for substantially less than the refund, after the loan fees and other charges are deducted.

Further, according to the complaint, H&R Block frequently has steered customers to companies that charge fees to cash RAL checks, with H&R Block getting a kickback on a portion of those fees. H&R Block has failed to adequately disclose these arrangements to consumers, the complaint alleges.

H&R Block also participates with banks and other entities in a deceptive debt collection scheme under the banner of its RAL program, the complaint alleges. RAL customers are liable for paying fees and paying back the borrowed money if their anticipated refund does not materialize, for whatever reason. When a customer allegedly owes that debt, H&R Block still will sell them a new RAL when they come to H&R Block in a subsequent year to get their taxes prepared. H&R Block does not adequately tell such customers about any alleged debts, or that when they sign the new RAL application, they agree to automatic debt collection – including collection on alleged RAL-related debts from other tax preparers or banks. These applications are denied, and the customer’s anticipated refund is used to pay off the debt, plus a fee. “Therefore, Block clients who are claimed to owe debt from a prior year are led to expect a loan, but instead find themselves in a collection proceeding,” the complaint alleges.

Additionally, according to the complaint, H&R Block has used and shared customers’ tax-return information without clients’ written consent, in violation of state and federal law. H&R Block has illegally shared customers’ information, and unlawfully used clients’ tax return information for marketing RALs, home mortgages and other financial products, and to collect debts, the complaint alleges.

Posted under Finance