H&R Block said Tuesday that it won't offer refund anticipation loans next tax season because it's getting more new clients and the appeal of the high-cost loans is shrinking.
Kansas City, Mo.-based Block prepared 6.5 percent more tax returns this year, even though it lost its bank funding for making loans based on anticipated federal tax returns just before tax season. Regulators ordered the bank that provided the money, HSBC, to stop funding the loans.
The federal Office of Comptroller of the Currency would not explain why it issued that directive, but the action followed a move by the Internal Revenue Service to stop providing a code that let tax preparers know if customers would get their entire refund, or if some will be held to cover things like unpaid back taxes. Tax prep companies used the code as a form of credit check for the loans.
For the 2011 tax season, only one bank was able to continue backing the loans, Republic Bank and Trust of Kentucky, which funded loans offered through Block competitor Jackson Hewitt Tax Services.
The nation's largest tax preparer shifted strategies to make up for the loss. By offering free simple tax form preparation and reviews of prior tax returns and beefing up its online tax prep offerings, Block lured 18.6 percent more first-time customers in 2011.
"Last year we had our best tax season since 2001," said Kathy Pickering, vice president of government relations. "We feel we're going to be able to build on that momentum."
Once-popular refund-backed loans accounted for just 4 percent of Block's revenue in the 2010 season, the last time they were offered. Demand for the products had dropped by more than one-third from 2007, Pickering said.
One reason the loans are less appealing to taxpayers is that the Internal Revenue Service is sending out refunds faster than it used to. It now pledges to get most refunds to taxpayers within two weeks, if they have the funds deposited directly into a bank account or onto a prepaid card.
Block expects to see even better delivery times this year because of changes the IRS has made.
Another reason for the declining popularity is the spate of negative publicity refund anticipation loans received in recent years, mainly because of their high costs.
The Consumer Federation of America in May noted that the fees associated with the loans—this year about $61 for a loan of $1,500 that would be repaid in just a few weeks. That translates to the equivalent of an annual percentage rate of 169 percent. The nonprofit organization said 7.2 million taxpayers paid over $600 million in 2009 to borrow against their tax returns.
H&R Block did not forecast its earnings or say if it will continue this year's promotions. Block traditionally unveils its tax season strategy during its investor conference. This year, that event is scheduled Dec. 8.
Pickering said the announcement was being made now to inform franchisees as they prepare for the upcoming season.
Block will continue to let customers use their refunds to pay tax preparation fees with refund anticipation checks. That product requires customers to have their refunds deposited on a Block-branded Emerald prepaid card or into a bank account or sent to a Block office that will pay the refund, with the fee deducted.