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February 23, 2005
Experts urge caution with 'quick cash' tax programsMany preparers offer a range of filing optionsByRecord-Eagle business editor TRAVERSE CITY - Angela Eichstadt is looking forward to her income tax refund - but she's not so anxious to pay more in tax preparation fees to get it sooner rather than later. The Volunteer Income Tax Assistance (VITA) program completed the young Traverse City mother's taxes. The organization offers free tax preparation to income-eligible households in northern Michigan. Eichstadt chose VITA over so-called "quick cash" refund programs - where commercial tax preparers offer instant refund loans in exchange for a fee, programs that some tax experts warn are too costly for many taxpayers. "I figure I'm not getting that much of a refund back anyway," Eichstadt said. "But even if I was getting back (more), I'd rather wait than pay extra for it." A national study in 2002 by the Washington, D.C.-based Brookings Institution showed an estimated $1.75 billion in federal Earned Income Tax Credit (EITC) program refunds were diverted to fees for tax preparation, electronic filing and refund anticipation loan (RAL) costs. Fees charged for refund anticipation loans can vary widely, but the study said they typically range from $30 to $100, and that doesn't include standard tax preparation costs. Experts say if a refund loan gives a taxpayer his or her refund just a week or two early, the loan fee can equate to an annual interest rate of 200 percent or more. "You're in effect loaning your own money to yourself, at a really high interest rate," said Alan Berube, a research fellow at Brookings who co-authored the report. The study also showed that the nation's largest tax preparation services raked in $357 million through those "fast cash" products - more than doubling their take in a four-year period. In some low-income areas like Washington, D.C., taxpayers claiming an EITC of $1,500 spent more than 10 percent of their refunds on those services if they used a commercial tax preparer. Local tax preparers echoed the study's findings. "They're not a good deal for consumers - absolutely not," said Enrico Salerno, a retired accountant from Honor who volunteers for the VITA program. "If you ask me, they charge outrageous fees." Others say the refund loan services satisfy a consumer demand. "They are a good thing if that's what the customer wants," said Tony Temple, district manager for H&R Block offices in northern Michigan and the Upper Peninsula. Temple said his company gives cost estimates for all its services, starting with the least expensive mail-in filings. He said H&R's policy is to clearly explain costs involved for additional work that will cost a client more - but acknowledged that's not always the case for some preparers. "We are not misleading," he said. "We start with the cheapest product and go up." Taxpayers are advised to shop carefully when selecting a tax preparer as criminal investigations into fraudulent tax return preparations more than doubled in 2002, the Internal Revenue Service reported. There are an estimated 300,000 practicing tax professionals in the country, plus various companies offering tax preparation software and filing services online. "It depends a lot of what type of return you have," said Tom Aja, tax services partner for the Plante & Moran accounting firm in Traverse City. The chain companies are fine for customers with simple tax returns, he said. But taxpayers with more complicated tax issues should look for specialized help. "I think it comes down to getting a good referral - that's the most important thing," he said. The Better Business Bureau of Western Michigan also recommends taxpayers get referrals from other satisfied clients, and make sure a preparer has represented a client in an audit. The regional BBB, which covers 37 counties in western and northern lower Michigan, fielded 10 complaints against tax preparers and accountants for the 2004 tax year. Nine complaints were received in 2003. See Related Story: Chances increasing that IRS will come knocking
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Record-Eagle/Lara Neel
