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Secrets of the Tax-Prep Business

What do refund lenders see when they look at poor neighborhoods?

REFUND ANTICIPATION loans aren't the primary source of revenue for Instant Tax, Jackson Hewitt, or any of the tax millheres. The main moneymaker has always been the hefty fees they charge to prepare returns. But the RAL gets people through the door. "Obviously, that's why people come to us," Ogbazion says. "Because we can get them their money quickly." Previously, those customers might have struggled on their own or taken advantage of free help that the IRS and others provide to low- and moderate-income taxpayers. The RAL also ensures that the client pays in full, and maybe that's the real genius of it: The preparer's fees and finance charges are taken directly from the refund.


Let's say you earn roughly $25,000 a year as a file clerk. You've got two kids and an elderly dependent. You don't itemize, you qualify for the Earned Income Tax Credit, and you're due a federal refund of $3,978. Here are some tax-prep options, based on one real-life example.*

DIY, MAIL-IN a few stamps
6-8 weeks
IRS.GOV free software if income <$58K
8-15 days
IRS VITA PROGRAM free human tax-prep if income <$49K
8-15 days
TURBOTAX.COM free for "simple" returns
8-15 days
8-15 days
same day

* From a 2010 "mystery shopper" study by Arkansans Against Abusive Payday Lending.
** One CPA said our mystery 1040 was a job he'd only do pro bono. It "would take 15 minutes," noted another.
*** Includes $350 tax-prep fee, $61 RAL fee (57% APR), and $20 "technology access" fee.

Longfield concedes that his innovation drains money from what is arguably the nation's most effective anti-poverty program, but he says it's the customer's prerogative. As for Ogbazion, he views Instant Tax and its competitors as beacons of hope. "Look at where our stores are," he says. "There's no Gap. There's no Nordstrom. We employ people from the neighborhood. We're paying rents in those neighborhoods. We're contributing to the tax base." The flip side of this argument is that instant tax mills are part of a phenomenon that lasts barely four weeks yet sucks up roughly $4 billion each tax season.

"These businesses are in this neighborhood for one reason: They see they can make a killing here," says Ramon Dalmasi, an accountant with a front-row seat on the growth of the instant tax business. Dalmasi opened a bookkeeping business in the Bronx in 1997 and watched as chain after tax-prep chain popped up on commercial strips in his community. A few years ago, he relocated to Yonkers, an aging suburb just north of New York City, and found the same chains there as well. "They don't see people struggling to put food on the table," he says. "They just see people who can make them millions." Even without a RAL, a working parent who qualifies for the EITC often pays $300 or more at a tax mill. Dalmasi, a CPA who teaches accounting at nearby Lehman College, charges that same client $75 or $100. "Why should I charge anything more than that," he asks, "when it's taking me 20 minutes?"

Others in the poverty business have rephrased that question: Why not get into a business where 20 minutes of work can yield a few hundred dollars in fees? Outfits like Refunds Today offer software ("requires absolutely no tax preparation knowledge") that walks enterprising pawnbrokers or check-cashers or payday lenders through the process. Why settle for the $100 you'll make cashing a customer's tax-refund check, asked a guest columnist for Cheklist, the trade publication for the nation's check-cashers, when a fat $400 payday "sits 10 minutes of data entry away?" Then there's Tax Max, which claims that 3,000 auto dealers use its software, and TaxStar, whose "dealership portal" features testimonials from sales managers grateful for a way to put a few thousand dollars—instantly!—in the pockets of a customer, right there on the lot.

In 2008, more than 8 million Americans shelled out $738 million for refund anticipation loans, according to industry watchdogs (PDF). When I visited Ramon Dalmasi, he told me he discourages customers from taking a RAL—but he did have a neon "Rapid Refunds" sign in his window and several posters promising instant cash. "We're in a poor neighborhood," he explained. Advocates scored a victory of sorts when, starting in 2008, the big tax chains and lenders lowered their RAL fees. "We basically shamed them into it," says consumer attorney Wu. Even so, a customer seeking an instant refund at H&R Block last year paid a $29.95 "refund account fee," a $24.95 "instant RAL surcharge," and a $20 "check processing fee" on top of a finance charge tied to loan size. On a $2,000 refund, that worked out to 128 percent annual interest.


BY THE WINTER of 2010, there were six tax-prep stores on the 400 block of South Broadway, a scruffy commercial strip in Yonkers that also hosted three 99-cent stores, a pair of check-cashing outlets, and a Rent-A-Center. H&R Block occupied the prime spot, a few steps from where a bus disgorged passengers returning from the city. A half-block to the north sat a Jackson Hewitt. A half-block to the south, across the street from Dalmasi's shop and a few doors away from a storefront with a Liberty Tax Service sign in the window, was Alan Meister's Instant Tax franchise.

Ogbazion had arranged for me to spend time with Meister, one of his franchisees, promising, "You'll see for yourself the quality of service we provide." It was a narrow sliver of a store, barely wide enough for the four desks that sat one behind another against the wall. Meister set up shop in the fall of 2009, after several decades with Ernst & Young. He lives 20 miles away in Chappaqua, where the median household income is $207,747 (and where the Clintons own a home), but leased a storefront in this mixed-race community because its household income was about a quarter as much. Another huge plus, he told me, "was there was a very high proportion of people receiving the Earned Income Tax Credit."

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