Hanging over the entire retail tax prep sector is the uncertainty about what the IRS will do to the debt indicator. During his comments in May to CERCA, Mark Ernst made it clear that he expects better results from the program. Here is part of what he said back then:
The Debt Indicator as it is currently delivered is a public good – meaning the IRS provides this information so that consumers can get an advantage they wouldn’t be able to get otherwise. In as much as the DI is the primary underwriting tool, that advantage should really come in the form of lower prices. But in fact prices are higher for RALs today than they were when the DI didn’t exist. That suggests that the entire value of the DI is going to industry participants and none is going to consumers when, arguably, all of its value should go to consumers.
Ernst is framing the DI as a public good that reduces search costs for preparers. He’s confounded why that subsidy wouldn’t result in lower pricing in the marketplace. His spring CERCA speech suggests that he is about to take action to make sure that the DI does result in a public benefit.
The rumor is that there will be news from the IRS by August. Reading between the lines, Ernst is not going to end the DI, but he is going to use it as a carrot to force reforms.
The challenge is to find a way to help with settlement costs. Ernst appears to be committed to giving consumers a means to avoid paying out-of-pocket for their tax prep. That’s consistent with one of the reasons given by tax preparers to rationalize the use of their products. Customers need an advance, otherwise, they can’t pay the cost of filing.
The DI carrot will probably be delivered to thwart the junk fees that are attached to RALs. These are probably more of a problem than RAL costs. When consumers get a tax refund loan, they often pay several fees. While there is a RAL fee, some charge a fee to put the refund into an account. Others charge fees for “technology,” and others also charge for e-filing.
One possibility is that Ernst will take a page from asset policy and use the “split refund” in a new way. The split refund was a new wrinkle in recent years. It was developed in response to advocates of savings accounts. In a split refund, consumers can set aside part of their return to a special savings account.
A new iteration could allow filers to set aside a portion of their refund for payment directly to preparers. In that system, no one lends any money to borrowers. It still needs the debt indicator, though, because it wouldn’t work to put tax preparers on the hook for refunds that were held up because of outstanding debts.
That would be a “fix,” both to the problem and to the problem as defined by tax preparers.
I am not sure that this is a fix that the preparers are going to like. They may prefer the problem, because a solution would end a lot of demand for the high-fee products that drive their cash flow. RAL’s constituted 3.5 percent of revenuesc at Block, but 22 percent at Jackson Hewitt. So, this is a solution that could hurt Jackson Hewitt more than Block.
