Tax Prep in 2011?

The IRS left a big question hanging in the air when it announced that the debt indicator would not return for 2011. The issue is the split refund. The split refund already exists. This year, tax payers were allowed to dedicate a “split” of their refund They said that will study the idea of letting taxpayers split their refund.

RALs aren’t going to disappear. Right now, Steve Trager, John Hewitt, Alan Bennett and the other titans of the refund anticipation loan are developing the next iteration of the product. Most likely, its new pricing will be shaped by the dramatic new level of risk associated with making these loans.

I can see a variety of possibilities. None of these might happen, or several might take place.

• HSBC is the only bank that can afford to take the risk of making RALs. H&R Block offers the RALs. For the other banks and thrifts, (Republic Bank of Kentucky, River City Bank, Ohio Valley Bank, perhaps MetaBank) it becomes a challenge to safety and soundness. Their balance sheets are too small, in comparison to the cash flows that it would take to fund a meaningful number of RALs in this debt indicator-free environment.
• Tax preparers agree to compensate the banks when a high percentage of the RALs that come out of their stores go bad. It is hard to imagine how Jackson Hewitt could find someone to agree to take their IOU, even a conditional one, but it might work for Liberty Tax.
• More consumers switch over to tax prep software. At some point, the resistance felt by high-discount rate consumers is overcome. A RAL means that you don’t have to pay out-of-pocket for tax prep. How much can that RAL cost before people push back?
• More tax prep shops partner with NetSpend/MetaBank. Jackson Hewitt has the i-power cards in their shop already. Those i-power cards can be converted into i-advance cards. All the consumer has to do is to establish a direct deposit on their card. If the consumer can come into the store with such a card, then they can i-advance their tax prep costs. It seems possible that some kind of arrangement could be made to give consumers their refund cash in 24 hours, provided it is pledged against the next direct deposit.
• The IRS comes up with a split refund alternative before 2012. True, that would be faster than expected, and we’re talking about the IRS…but: Imagine it is implemented for TX 2011, there would be a lot more certainty. Block would probably relish that development, because even though they do have the capacity to see revenue from RALs, their business is still dependent upon tax prep volume. It plays to their advantage in the marketplace. That isn’t the case for JTX.
• Wells Fargo shuts Jackson Hewitt down. It really could happen.
• More people don’t file taxes, including people that could have received the EITC.

One more thing: it seems to me that John Hewitt’s idea of buying H&R Block is on hold.