<DOC> [109 Senate Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:21431.wais] S. Hrg. 109-81 TAX RELATED FINANCIAL PRODUCTS CAN BE COSTLY ======================================================================= HEARING before the PERMANENT SUBCOMMITTEE ON INVESTIGATIONS of the COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED NINTH CONGRESS FIRST SESSION __________ APRIL 15, 2005 __________ FIELD HEARING IN ST. PAUL, MINNESOTA __________ Printed for the use of the Committee on Homeland Security and Governmental Affairs U.S. GOVERNMENT PRINTING OFFICE 21-431 WASHINGTON : 2005 _________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 COMMITTEE ON GOVERNMENTAL AFFAIRS SUSAN M. COLLINS, Maine, Chairman TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware LINCOLN D. CHAFEE, Rhode Island MARK DAYTON, Minnesota ROBERT F. BENNETT, Utah FRANK LAUTENBERG, New Jersey PETE V. DOMENICI, New Mexico MARK PRYOR, Arkansas JOHN W. WARNER, Virginia Michael D. Bopp, Staff Director and Chief Counsel Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel Amy B. Newhouse, Chief Clerk PERMANENT SUBCOMMITTEE ON INVESTIGATIONS NORM COLEMAN, Minnesota, Chairman TED STEVENS, Alaska CARL LEVIN, Michigan TOM COBURN, Oklahoma DANIEL K. AKAKA, Hawaii LINCOLN D. CHAFEE, Rhode Island THOMAS R. CARPER, Delaware ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota PETE V. DOMENICI, New Mexico FRANK LAUTENBERG, New Jersey JOHN W. WARNER, Virginia MARK PRYOR, Arkansas Raymond V. Shepherd, III, Staff Director and Chief Counsel C. Jay Jennings, Investigator Elise J. Bean, Minority Staff Director and Chief Counsel Mary D. Robertson, Chief Clerk C O N T E N T S ------ Opening statement: Page Senator Coleman.............................................. 1 WITNESSES Friday, April 15, 2005 Pat Eckelberry, Former H&R Block Tax Preparer, Wayzata, Minnesota 4 Nila Grant, Former Jackson Hewitt Tax Preparer, New Hope, Minnesota...................................................... 6 Julie Burbach, H&R Block Client, St. Paul, Minnesota............. 8 Beth Haney, Ph.D., Research and Outreach Director, Children's Defense Fund, St. Paul, Minnesota.............................. 14 Bonnie Esposito, Executive Director, AccountAbility Minnesota, St. Paul, Minnesota............................................ 16 Gary P. Weinstein, Vice President, Legal and Government Affairs, Jackson Hewitt Tax Services, Inc., Parsippany, New Jersey...... 24 Robert A. Weinberger, Vice President, Government Relations, H&R Block, Kansas City, Kansas..................................... 27 Alphabetical List of Witnesses Burbach, Julie: Testimony.................................................... 8 Prepared statement........................................... 42 Eckelberry, Pat: Testimony.................................................... 4 Prepared statement........................................... 37 Esposito, Bonnie: Testimony.................................................... 16 Prepared statement with an attachment........................ 57 Grant, Nila: Testimony.................................................... 6 Prepared statement........................................... 40 Haney, Beth, Ph.D.: Testimony.................................................... 14 Prepared statement with attachments.......................... 44 Weinberger, Robert A.: Testimony.................................................... 27 Prepared statement with an attachment........................ 161 Weinstein, Gary P.: Testimony.................................................... 24 Prepared statement with attachments.......................... 141 EXHIBITS 1. GRefund Anticipation Loan Process, chart prepared by the Permanent Subcommittee on Investigations....................... 168 2. GVoluntary Income Tax Assistance (VITA) Sites in Minnesota, chart prepared by the Permanent Subcommittee on Investigations. 169 3. GIRS Tax Assistance Centers in Minnesota, chart prepared by the Permanent Subcommittee on Investigations................... 170 4. GPrintout of IRS.gov Internet website, regarding Free File Home--Your Link to Free Online Filing.......................... 171 5. GH&R Block Quality Interview--Value-Added Closing sheet received from Pat Eckelberry, former H&R Block Tax Preparer.... 172 6. GH&R Block Intra-Company Correspondence, received by Pat Eckelberry, former H&R Block Tax Preparer regarding Peace of Mind guarantee................................................. 173 7. GStatement for the Record of Maerine Henderson............... 174 8. GStatement for the Record of Richard Turner, RAL Program Director, Santa Barbara Bank of Trust.......................... 176 9. GStatement for the Record of HSBC Taxpayer Financial Services 179 10. GStatement for the Record of ACORN Financial Justice Center, St. Paul, MN................................................... 189 11. GCorrespondence from Jackson Hewitt to the Permanent Subcommittee on Investigations regarding percentage of Jackson Hewitt customers who receive an Earned Income Tax Credit in Minnesota and who also obtained a refund anticipation loan..... 191 12. GCorrespondence from H&R Block to the Permanent Subcommittee on Investigations regarding questions for the record........... 192 TAX RELATED FINANCIAL PRODUCTS CAN BE COSTLY ---------- FRIDAY, APRIL 15, 2005 U.S. Senate, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, Washington, DC. The Subcommittee met, pursuant to notice, at 1:02 p.m., in The Reading Room of the James J. Hill Reference Library, 80 West Fourth Street, St. Paul, Minnesota, Hon. Norm Coleman, Chairman of the Subcommittee, presiding. Present: Senator Coleman. Staff Present: Jay Jennings, Investigator. OPENING STATEMENT OF CHAIRMAN COLEMAN Senator Coleman. This hearing of the Permanent Subcommittee on Investigations is called to order. Good afternoon and thank you for attending today's hearing. As Chairman of the Permanent Subcommittee on Investigations, I have investigated and conducted hearings on a wide variety of subjects related to fraud, waste and abuse, including consumer abuses in the credit counseling industry, Department of Defense contractors who owed over $3 billion in unpaid taxes, the safety and availability of imported prescription drugs, the abuse of tax shelters to evade paying billions of dollars in Federal taxes, and the Oil-for-Food program in which Saddam Hussein diverted billions of dollars to reward his friends, bribe U.N. member states, and rebuild his military. As your Senator, my primary responsibility is to represent the interests of the people of Minnesota. I have heard and read about Minnesotans' concerns related to the financial products that are offered by tax preparers, and particularly Refund Anticipation Loans, or RALs, as they are known. It is a pleasure to conduct this hearing in Minnesota so that I can determine whether there are abusive practices in the marketing of these products, what options exist to mitigate their high costs, and to ensure that there are appropriate checks and balances to promote fairness and integrity in the tax preparation industry. In addition to RALs, the other bank products include refund anticipation checks, refund transfers, debit cards, loans to pay taxes that are due, and in one case, advance loans that are offered in November and December for holiday needs. RALs are loans provided by banks, and I want to stress that. Loans provided by banks through tax preparers that are secured by the taxpayer's anticipated refund. These loans are considered high risk and carry an extraordinarily high annual percentage rate ranging from 28 to 424 percent. RALs may be offered as a same-day advance loan or as a payment that is made to the taxpayer within 2 days of filing their tax return. RALs are the fastest and most costly method of obtaining a refund in the form of a loan, and they may be appropriate for some taxpayers who are in extreme financial distress, lack a bank account, or cannot afford to pay their tax preparation fees. On the other hand, there were over 12 million tax-related financial products sold in 2003, of which almost 9 million were RALs. It is not clear whether the popularity of RALs is due to financial distress, taxpayer impatience, or aggressive marketing tactics. In addition to being costly to consumers, my investigation has determined that these products are highly profitable, generating over $200 million in revenue in 2004 for H&R Block and Jackson Hewitt, the two largest tax preparers in the country. Let me briefly review the RAL process. Take a look at Exhibit 1,\1\ which is on my right and your left. When a taxpayer is due a refund and wants a RAL, the taxpayer authorizes IRS to send their refund to the bank that is making the loan. IRS sends the taxpayer's refund to the bank. The bank deducts the tax preparation charges and the application fee, and sends that money to the tax preparer. The bank further deducts a bank account setup fee, the finance charge, and any outstanding balance due from a prior RAL. Whatever remains is provided to the taxpayer. --------------------------------------------------------------------------- \1\ See Exhibit No. 1, which appears in the Appendix on page 168. --------------------------------------------------------------------------- To promote the sale of their products, the banks also pay tax preparers like H&R Block and Jackson Hewitt refunds, incentives, and rebates. I am concerned that these promotional activities in certain circumstances could conflict with tax preparers' ethical obligations to place their clients' interest first. This could result in selling high-cost products to clients when there are less costly alternatives available. The trust relationship that exists between a taxpayer and a tax preparer should be no less sacrosanct than the trust relationship that exists between an attorney and client, or a doctor and patient. Consider that your tax preparer probably knows more about your personal life than your best friend. We cannot allow this kind of trust relationship to be betrayed by the tax preparer or the company for a financial gain that occurs at the expense of their client. And I plan to make sure that there are adequate checks and balances to ensure that if this occurs, there will be adverse consequences. There are less costly alternatives to a RAL, but they do not have the instant gratification that is often promised by a RAL. These alternatives include lower cost financial products and free tax preparation for lower income and elderly individuals. For example, a refund anticipation check, or RAC, is a bank product that costs less than a RAL because it is not a loan and therefore does not have a finance charge. RACs have account set-up and application fees, but can be used to defer the tax preparation fee and requires a wait of about 8 to 15 days. Most clients are not thoroughly familiar with the variety of options offered by tax preparers. Where a tax preparer offers to serve their clients' best interests by finding every legitimate deduction and credit and minimizing the taxes that their clients pay, I believe they should have no less of an obligation to recommend the refund method that best suits their clients' needs. Another alternative to the high cost of a RAL is free tax preparation. In Minnesota, a taxpayer has three options: The Volunteer Income Tax Assistance, or VITA program, has 273 sites located throughout Minnesota that are staffed by volunteers who can prepare and e-file a tax return.\1\ In 2004, Minnesota's VITA sites prepared and filed 41,018 tax returns. The Internal Revenue Service operates tax assistance centers in Bloomington, Duluth, Mankato, Minneapolis, Rochester, St. Cloud, and St. Paul.\2\ IRS will complete and file a taxpayer's return at these centers. In 2004, these tax assistance centers prepared and filed 2,425 tax returns, of which 159 were EITC, Earned Income Tax Credit, returns. --------------------------------------------------------------------------- \1\ See Exhibit No. 2, which appears in the Appendix on page 169. \2\ See Exhibit No. 3, which appears in the Appendix on page 170. --------------------------------------------------------------------------- This past week, IRS announced that it plans to close 105 of its 367 tax assistance centers nationwide, and I will discuss this with Commissioner Mark Everson to ensure that the IRS continues to provide assistance to Minnesota's taxpayers. I plan to meet with the commissioner next week to have this discussion. IRS also offers free filing to anyone with access to their World Wide Web site at irs.gov.\3\ In 2004, 3.5 million taxpayers filed their returns by using the IRS web site. While all of these options are free, it will take 8 to 15 days to receive your refund if it is directly deposited in your bank account. Other options may take longer, but clearly this is a situation where patience pays dividends. --------------------------------------------------------------------------- \3\ See Exhibit No. 4, which appears in the Appendix on page 171. --------------------------------------------------------------------------- Today we will hear testimony from tax preparers for H&R Block and Jackson Hewitt. They will share with us their tax preparation experiences. I'm also hoping to have the presence of former clients. We're still waiting for one to appear. We will also hear from consumer advocates based in Minnesota who will testify about free tax preparation and their outreach efforts to ensure that all Minnesotans who are eligible for the Earned Income Tax Credit file for and receive it. They will also describe the impact of RALs on low-income individuals. And, finally, we will hear from H&R Block and Jackson Hewitt, the two largest tax preparation services in the Nation, who will testify about the products they offer, their cost, their marketing, disclosure policies and practices, and their efforts to serve their clients' best interests. As I indicated, on Thursday of next week I'll be meeting with the IRS Commissioner, Mark Everson, to discuss what I learn here today. I look forward to today's testimony and I want to thank all of the witnesses who have come here for their cooperation with the Subcommittee in putting together today's hearing. Let me briefly reiterate that what we're talking about here is a situation where many of those who have the greatest financial need, who have great financial stresses are faced with a situation where they know they're going to get a refund, and they want it very quick, but there is an extraordinary cost for that. And I hope out of today's hearing at least that message goes out so people are in a position to make informed choices, and not to feel pressured or confused into making choices which in the end may not or are not in their best interest. I would like to welcome our first panel of witnesses for today's hearing. The first panel includes Pat Eckelberry, a former H&R Block tax preparer from Wayzata, Minnesota; Nila Grant, a former Jackson Hewitt tax preparer from New Hope, Minnesota. I appreciate your attendance at today's hearing and look forward to hearing about your experiences with H&R Block and Jackson Hewitt. Now, before we begin, pursuant to Rule 6, all witnesses testifying before this Subcommittee are required to be sworn. At this time I would ask you to please stand and raise your right hand. Do you swear the testimony you are about to give will be the whole truth, and nothing but the truth, so help you, God. Ms. Grant. I do. Mr. Eckelberry. I do. Senator Coleman. Thank you. We have a full schedule. And while your written testimony will be presented in the record in its entirety, we ask that you limit your oral testimony to no more than 5 minutes. When 5 minutes is expired, I will ask you to conclude your testimony. I would note in Washington we have a system of lights that make it easier to figure that out. Here we'll just have to go with verbal prompts. Why don't we begin with Mr. Eckelberry and then we'll proceed with Ms. Grant. Mr. Eckelberry. TESTIMONY OF PAT ECKELBERRY,\1\ FORMER H&R BLOCK TAX PREPARER, WAYZATA, MINNESOTA Mr. Eckelberry. Good afternoon, Senator Coleman. My name is Pat Eckelberry. I presently have my own tax preparation business and am certified as an Enrolled Agent with the Internal Revenue Service. Tax preparation is actually my second career. In my first career, I was an electrical engineer for Honeywell. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Eckelberry appears in the Appendix on page 37. --------------------------------------------------------------------------- As I neared retirement with Honeywell, I began doing income tax preparation as a volunteer with a VITA affiliate, AccountAbility Minnesota, which I've continued to do. I've also worked for H&R Block, for a local firm, Tax Shop, and a CPA firm, Brunberg, Thorson and Diaby. Following my career with Honeywell, I first worked as a seasonal employee for H&R Block from December 12, 1996, until January 22, 2001. I found there were a number of positive aspects in working for H&R Block. For example, Block had an excellent tax education system. As an employee, I was able to take many courses offered by them covering most aspects of taxation and the specifics of preparing many different types of tax returns. I also found that many of H&R Block's tax preparers were conscientious and made a sincere effort to do the best job possible for their clients. It was evident that many tax preparers had developed a good working relationship with their clients who returned year after year and specifically requested those tax preparers. Throughout my tax preparation career, I found that there's an extremely strong trust relationship between the preparer and his or her client. It is my opinion that a tax preparer has a clear ethical obligation to ensure that their clients claim every legitimate credit and deduction to which they're entitled, and that the preparer ensure that their clients pay only the tax they are legally obligated to pay, and that the preparer offers advice on the refund method that best serves their client needs. However, this preparer-client trust relationship can present opportunities for abuse. While I was at H&R Block, management pushed very hard to require tax preparers to use the client-preparer trust relationship to sell such products as RALs, RACs, Peace of Mind, and other products. The RALs were particularly troubling to me because of their extremely high cost. We were strongly directed by Block District Management to push them, especially if the clients were going to have difficulty paying their tax preparation fee. The sales emphasis was on refund speed rather than client cost. In presenting RALs to clients, we were directed to point out that the client would receive their refund in days rather than weeks, and that they could have preparation costs subtracted from the refund, thus having their taxes filed without having to come up with any money out of pocket. While the paperwork disclosure of the fees and finance charges was thorough, it came after the verbal sales presentation. Their client had to sign a form indicating a willingness to obtain a RAL, and indicate that they understood it was a loan. The most negative aspect was that this product was often used by the type of client who could least afford it, who usually did not understand that they were applying for a loan, and who certainly, despite the written disclosures, did not understand the true cost of that loan. Most clients desperately needed every dollar of the refund they were entitled to, and I personally made every effort to fully disclose the true cost of the client. I would also suggest other less costly refund options such as e-filing with direct deposit, which can take as little as 8 days and costs nothing. I was not always successful in talking my clients out of taking a RAL. For example, one of my clients, a mother with ten children, wanted the refund as soon as possible in order to take advantage of clothing sales that were taking place at that time. Another product that I felt was a disservice to the client was called Peace of Mind. It was similar to selling a service contract with a purchase of a television or washer and dryer. Its stated purpose was to cover additional tax that the IRS would require if the IRS found an error committed by an H&R Block tax preparer or by the software program. As part of its tax preparation, Block provided coverage for interest and penalties for a Block-induced error at no additional cost. Because tax preparers typically do everything they can to prevent errors, the probability of the client needing additional insurance is extremely low. I've provided the Subcommittee with a copy of a Block memo sent to me and to all tax preparers in our district outlining the Peace of Mind sales procedure, and stating that we were to, ``PERSONALLY endorse this OUTSTANDING product.'' We were next pitched this same message by the District Manager at a mid- season meeting for all tax preparers. During the 4 years I was with Block, the level of intensity to push the Peace of Mind guarantee was very high and increased significantly each year.\1\ Initially, clients had to sign a release indicating they had been offered a product and had declined to accept it. Subsequently, Block included the Peace of Mind guarantee in the tax return preparation package, at a cost of $20, and only removed it if the client specifically noticed it and refused to accept it. --------------------------------------------------------------------------- \1\ See Exhibit No. 6, which appears in the Appendix on page 173. --------------------------------------------------------------------------- H&R Block encouraged its employees to sell these additional products through financial incentives to the preparer, and through our tax preparer performance evaluations. Tax preparers received 15 percent of the system administration fee that was paid to H&R Block for completing the bank-related paperwork for a RAL. In addition, the number of RALs, RACs, etc., sold was part of our performance reviews. I've also provided a copy of my performance evaluation for the Subcommittee, which included a category for financial products such as RALs and RACs. As you can see from that, the evaluation reflects that sales of financial products was not one of my crowning achievements with H&R Block. Mr. Chairman, thank you for the opportunity to testify. I'm prepared to answer any questions you may have. Senator Coleman. Thank you, Mr. Eckelberry. Ms. Grant. TESTIMONY OF NILA GRANT,\2\ FORMER JACKSON HEWITT TAX PREPARER, NEW HOPE, MINNESOTA Ms. Grant. Good afternoon, Senator Coleman. My name is Nila Grant, and I am presently employed as an associate analyst for United Healthcare Group. In 2003 and 2004, I worked as a tax preparer for Jackson Hewitt at the Uptown and North Broadway offices. I found my employment with Jackson Hewitt to be a rewarding experience. They provided excellent training that fully prepared me for my tax preparation responsibilities. --------------------------------------------------------------------------- \2\ The prepared statement of Ms. Grant appears in the Appendix on page 40. --------------------------------------------------------------------------- I have always walked my clients through the tax preparation process using Jackson Hewitt's tax preparation software. If my client was entitled to a refund, I explained the different options available for receiving the refund, including the time that it would be required and the associated costs of each option. The options include a direct deposit or a check from the IRS; a Refund Anticipation Loan or a Money Now loan; a refund anticipation check, which was referred to as Assisted Direct Deposit or an Assisted Check Refund. I did not push my clients toward any of these options, and Jackson Hewitt management did not encourage me or use pushy sales tactics to encourage clients to get a RAL or any other product offered by Jackson Hewitt. Most of my clients were low-income individuals or couples who specifically came to Jackson Hewitt to obtain a Refund Anticipation Loan. Many of my clients inquired about Refund Anticipation Loans before it was even presented to them. For example, Jackson Hewitt advertised the Money Now product on its office windows and people came in to ask how it worked. We could not guarantee that they would be approved for the loan or how much the total cost would be until we put their tax information into the computer because the rates varied based on the amount of the loan. I would always inform the client that they had the option to change their mind at the end of the process, but will be charged a fee of $20 for my time. Some clients will ask if it was expensive, and I would inform them that the average cost for a RAL was about $300. Many did not ask at all, but all of my clients had the option to change their minds at the end of the process before signing any forms. I believe many people would have liked to use other options but could not because they could not pay the tax preparation fee of $135 up front. Many simply did not have the funds to do that. Because the RAL deducts the fees from the anticipated refund, it made it easier to sell the RAL. At the end of the process, a few complained about the fee but mostly all took the loan if they qualified. My clients also had to sign forms saying that I had informed them about the loan and providing a breakdown of the actual fees associated with the loan. They also received copies of these forms. I have no doubt that my clients understood they were taking out a loan. Frankly, they did not care that it was a loan. They wanted the money as soon as they could get it. I realize that these loans have very high costs, but if my client was receiving a $3,500 refund, they did not mind paying $300 in tax preparation fees, finance charges, account setup, and administration fees. In the store where I worked, we also did not receive special recognition or other benefits for selling Jackson Hewitt's financial products. I was told about the $5 commission for every Gold Guarantee sold, but it was not aggressively pushed on me to sell it, nor did I aggressively push it on my clients. I did offer it, but most people declined it. We did receive a bonus at the end of the tax season that was based entirely on the number of tax returns we prepared. Upon occasion, I would recommend to clients they visit a free tax preparation site if it would not be in their best interest to use our services or tax preparation. When clients' incomes were below $10,000, I informed them of the free tax services and gave them contact information because the fees would probably have cost them half or more of their tax refund. I believe most clients were aware they could get their taxes prepared and filed for free, but chose to get them done faster because they did not want to wait and wanted money as soon as they could get it. In summary, there was no pressure or suggestive sales tactics. We didn't have to use them. The clients wanted money as soon as they could get it, and many came to us solely for that purpose. Senator Coleman. Thank you, Ms. Grant. I see Ms. Burbach has joined us, and we're very pleased. Welcome. Ms. Burbach. Thank you. Senator Coleman. Witnesses before this Subcommittee are required to be sworn so I would ask you if you would please stand and raise your right hand. Do you swear the testimony you are about to give before this Subcommittee will be the whole truth, and nothing but the truth, so help you, God. Ms. Burbach. Yes. Senator Coleman. Thank you very much, Ms. Burbach. Ms. Burbach, please proceed. TESTIMONY OF JULIE BURBACH,\1\ H&R BLOCK CLIENT, ST. PAUL, MINNESOTA Ms. Burbach. Mr. Chairman, Members of the Subcommittee, good afternoon. Thank you for the opportunity to share my experience with H&R Block with you today. My name is Julie Burbach and I'm a single parent raising an 8-year-old son. My gross income last year was $17,374. I have to stretch every dollar to make sure we have enough to get by. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Burbach appears in the Appendix on page 42. --------------------------------------------------------------------------- We live in an apartment in St. Paul. I quit my job last year with the State of Minnesota. I had worked for 17 years as a Human Services Technician at the Veterans Home. Since then, I've been working part-time and looking for another job. When it came time to file my Federal taxes this year I chose to go to H&R Block. I wanted my taxes done by an official tax preparation company. Because I had dipped into my retirement fund last year to cover expenses, I wanted to make sure my taxes were handled correctly. I filed my taxes in February. The whole process took 10 to 15 minutes. The tax preparer did all of the preparation work and at the end told me that I was eligible to receive a refund. My Federal refund was for $2,454, including $927 from the Earned Income Tax Credit. My State income and property tax refund was $931. I had gotten Rapid Refund in the past and asked to get one at this time, to make sure I got my Federal refund as fast as possible. She asked me if I wanted Instant Money, or part of the money today. I said yes. I thought this meant I was getting a regular loan that had an early advance. At this point, the tax preparer appeared to complete the forms on the computer and printed them out. She showed me the costs. I was charged a total of $322.90. Of that, $203 was for tax preparation fees, and $119 was for bank fees. When I mentioned the cost, the $322 seemed high compared to last year when my total costs were $201.95. The tax preparer told me that was because last year was a trial period. I have since learned this is not true. While the tax preparation fees had gone up from last year to this year, the real extra cost was because I said yes to the Instant Money option. Rather than being given an advance on the loan, I was actually given two loans. This was the most expensive option. The APR for each was 129 percent, but the APR listed on the disclosure sheet required by State law said 122 percent. I felt that the total cost was quite expensive, but at this point I was confused and didn't feel like I could change my mind because she had already finished all the paperwork. I was also thinking about all the bills I had to pay and I agreed to the $322 fee. The tax preparer did not explain that I was taking out two loans. She also didn't suggest that I could change my mind right then and there, and that would be less expensive if I didn't take out the loans. She didn't explain I was taking the most expensive option. She also didn't tell me that if I signed the loan agreement, I still had 2 days in which I could change my mind and not get the loans. She briefly showed me the disclosure page before I signed at the bottom. She didn't explain what they meant, and I didn't ask any questions about it because this is why I was having my taxes done by a professional tax preparer in the first place, because I don't understand all the tax laws and financial wording and disclosures. If I understood all of my options about how to get my full refund to me, I would not have taken out a Refund Anticipation Loan. I received my State tax refund within 3 days in the mail. Now I understand more about Refund Anticipation Loans. All I really wanted was to get my taxes done well, and to get my refund so that I could pay my bills on time and do whatever would help me and my son the most. I understand that my refund is meant to help families like mine. That is why I don't think it's fair I should be charged so much money to get my taxes done and to get my refund quickly. Thank you for letting me share my story. Senator Coleman. Thank you very much, Ms. Burbach. And, by the way, thank you for your courage to come forward. It's hard enough when you do this as I do each and every day. But for an average citizen to come forward and to very openly say I was confused, I walked into a situation and it cost me money, a lot more than you felt it should have cost, so I appreciate your courage and your honesty. And I do hope with your testimony today that others will listen and will think twice, and will be in a position to understand that there are questions that should be asked, and perhaps there are tax preparer's questions that should be asked of you, so I really do believe something good will come out of this. So I want to say thank you. Mr. Eckelberry, Ms. Burbach talked about two loans. From what I understand, there's really one loan she got. She got instant cash, right, which is one fee, and then the RAL besides that. If you were her preparer, could you talk a little bit about her situation, what was she being offered and what might you have done if you wanted to explain it to her better? Mr. Eckelberry. Well, the instant loan is something that's been incorporated since I've been there so I'm not familiar with that either. But I surely would have explained to her that the opportunity to get your return very quickly existed without going through any process like that. Senator Coleman. Does it shock you that the APR was about 129 percent? Mr. Eckelberry. I've seen it higher than that. We've seen percentages higher than that. Senator Coleman. And how high? Mr. Eckelberry. The number I recall is as high as 400 percent. Senator Coleman. Do clients understand what a 400 percent APR means? Mr. Eckelberry. No. The situation is they don't have the money to pay for their return. They want it done. They want the refund as quickly as they can get it. Senator Coleman. And, Ms. Grant, I appreciate your perspective, that you didn't feel pressured to push these, that you weren't being evaluated on the basis of how many you made. On the other hand, do you believe your clients understand what a 300 APR is or a 400 APR is? Ms. Grant. No, not totally. When I explained, in breaking it down for them, that they had an understanding that they were paying high interest rates because we did show that to them, and some people did comment on it. Senator Coleman. Now, on the other hand, your clients came in you said looking for this. But in part, you're saying as they walked by, your advertisement promoted it. Ms. Grant. Right, correct. Senator Coleman. And out of curiosity, and I'll ask this both of Mr. Eckelberry and Ms. Grant, were you working for your client or were you working for H&R Block or Jackson Hewitt? Who do you feel your primary responsibility was at the time you were preparing these? Ms. Grant. I do feel it is to the client because it is their money. And to be honest about it, if they came in, and even if they signed the paper and they changed their mind, I would have tore it up. Senator Coleman. In your situation, Mr. Eckelberry--I don't have the exhibit up here--but I looked at your evaluations, you're being evaluated on the number of products that you sold.\1\ --------------------------------------------------------------------------- \1\ See Exhibit No. 5, which appears in the Appendix on page 172. --------------------------------------------------------------------------- Mr. Eckelberry. That's correct. Senator Coleman. Performance evaluation. Mr. Eckelberry. That is correct. It was part of our evaluation. At the meetings, it was made a big deal for the people who sold a lot of RALs or a lot of Peace of Minds, plus the financial remuneration. Senator Coleman. I don't know if you have a copy of your evaluation. I have one here. Mr. Eckelberry. Yes. Senator Coleman. Five is exceeds expectations, and you got fives across the board in terms of quality interviews. Where you got your three, your lowest evaluation, was in terms of RALs, successfully offered refund rewards. So you weren't as vigilant in offering those, were you, as in the other categories? Mr. Eckelberry. No, I was not. And to answer your earlier question to both of us on this, I really felt my responsibility was to the client. But my situation was a little different than many of the other tax preparers. The only way to make any real money working for Block as a tax preparer is to sell those products. Senator Coleman. And I appreciate that. As I listen, I appreciate from both of your perspectives saying that you believe that's what your obligation was. But my sense is in looking at a system that provides rewards for selling product, that promotes product sales, it appears to me that at that point your interest is to your employer who is paying you a paycheck, though personally it should be to your client. But if you're working in a system that's pushing product, then I question whether in fact you can be as true as one should be to your client. Mr. Eckelberry. Well, I felt I could be, but my situation was that I was retired and I wasn't dependent upon this income. But many of the other tax preparers depended on this additional income, and so they responded to the pushing by selling the stuff. Senator Coleman. Again, Mr. Eckelberry, Ms. Grant, and Ms. Burbach, very admittedly, the sense I got is that you were confused. Is that a fair statement? Ms. Burbach. Yes. Senator Coleman. Mr. Eckelberry, does that surprise you? There was a client getting the explanations and getting what she got and still being confused? Mr. Eckelberry. Not at all. In fact, I don't think most of them really didn't listen to the explanations. The only thing they heard was they could get their money in a few days. They didn't have to pay up front to get the job done. Senator Coleman. Ms. Grant, does that surprise you? Ms. Grant. I agree with that too because basically they were in a rush, and some of the sales in our office was based on how many tax preparations we did to get a bonus. So we did kind of rush through it or go through it rather quickly. The average tax preparation took about 20 to 30 minutes if it was fairly simple. And most people just sign the papers. We did show them what they were signing, but did they read it, no. Senator Coleman. When clients came in asking for the Refund Anticipation Loan, did you walk through them less costly alternatives that would serve their needs but would not cost them as much? Ms. Grant. When they walk in we have place mats that had each individual option that they had available to them. And a lot of people looked at it but they knew they wanted the Money Now loan. Senator Coleman. Mr. Eckelberry, same question. Mr. Eckelberry. I'm sorry. Senator Coleman. The question was, if somebody came in looking for a RAL, would it be practice for H&R Block to explain to them there were cheaper alternatives available that would best suit their needs? Mr. Eckelberry. It was definitely my practice to explain all the options. I definitely did do that. But I don't think that was necessarily standard practice. Like I said, my situation was very different than many of the other tax preparers. Senator Coleman. And your situation, in particular, you had concern over Peace of Mind, which is not the focus of this hearing. But again, that was another product, another additional fee for something that you felt was unnecessary. Mr. Eckelberry. That's right. And we were told to stick it in the return and only remove it if they saw it. Senator Coleman. And in fact, you were evaluated, specifically, one of the pieces of your evaluation, specific section has to do with Peace of Mind, whether you properly offered it, explained and accepted. Mr. Eckelberry. Yes. Senator Coleman. And then there was an option for the total number of them. So your performance was in part based on the number of products you sold. Mr. Eckelberry. That's correct. Senator Coleman. Rather than whether you met the needs of your client. Mr. Eckelberry. That's correct. Senator Coleman. One other question. In my opening statement I talked about RALs being high risk, but as I listen to the testimony, it appears to me that the risk would be very minimal, that in fact you know what the tax refund is going to be. The refund would cover the loan. The money comes back directly from the bank to you. If one of the justifications for high APR is high risk, what is the risk to the company, to the preparer? I mean, your fee is getting paid up front with the RALs. Am I mistaken in that? Mr. Eckelberry. The risk would be in that you wouldn't know if the client had some outstanding debt that might be covered by the refund that would be taken away. So if they got a check the day they were there, you wouldn't have known at that time that there was some risk involved. Senator Coleman. Some risk to the bank. Mr. Eckelberry. But not if they didn't get a check for 2 or 3 days because by then you should have had that information. Senator Coleman. Ms. Grant. Ms. Grant. As far as I'm concerned, the risk, I'm unaware. Most of the loans or the APR finance charges were based on the amount of the loan. That's all I knew. So if they were high fees, it was based on the amount of the loans. That's about it. Senator Coleman. Ms. Burbach, did the preparer tell you that you had 2 days to rescind your RAL? Ms. Burbach. No. And if you owed anything back, it would come out of your State tax return, not your Federal. You were only getting a loan on your Federal. Your State comes to you in the mail. Mr. Eckelberry. That's a good point. Senator Coleman. So again, there is very little risk? Ms. Burbach. Right. Senator Coleman. Did anyone process--did your preparer tell you you didn't have to take out a RAL, that there were some other options that were less costly and would have suited your needs? Ms. Burbach. I guess I didn't--I was kind of at their mercy. Senator Coleman. And you wanted cash, got cash up front and you wanted it done quick. Ms. Burbach. Yes. And I wanted it done by a professional that I thought I could trust. Senator Coleman. Were you asked by the tax preparer the reason for why you needed it so quickly or what the nature of the obligation was? What the need for speed was? Ms. Burbach. No. Senator Coleman. If any. Ms. Burbach. None at all. Senator Coleman. Either Mr. Eckelberry or Ms. Grant, did you ever question clients about whether they really needed money so quickly? Mr. Eckelberry. Absolutely, because I didn't want them to do that. Senator Coleman. But again in your situation, what I understand your testimony as, I get the sense that you did not believe that was a standard practice among others working in your shop. Mr. Eckelberry. No. Senator Coleman. And again, your situation, because you're retired, this was a second income, you weren't being pushed to earn extra dollars by selling product. Mr. Eckelberry. Right. Senator Coleman. But as I understand your testimony, the testimony is that in fact within a shop, within the operation that was the standard practice and procedure. Mr. Eckelberry. I would say that. Senator Coleman. To the best of your knowledge. Mr. Eckelberry. Yes. Senator Coleman. Ms. Grant. Ms. Grant. Mainly--I'm sorry. I forgot. Could you just repeat the question again? Senator Coleman. I'm just trying to get a sense, did you inquire of your clients if they really needed the money today. And if they didn't, was there another path for them that was less expensive? Ms. Grant. Well, no, I didn't inquire, but a lot of people came in and told me. Some of them were looking for a new car or looking to pay off bills from Christmas. No, I didn't inquire a lot about why they needed it so quickly. Senator Coleman. But even looking for a car, paying bills, they probably could have waited 2, 3, or 4 days. Ms. Grant. Yes. They had the option because it was presented right there in front of them. And a lot of people did ask what is this one, what is this option, OK. And I explained it to them. Senator Coleman. When you say in front of you, it was in writing; is that correct? Ms. Grant. Yes. Senator Coleman. Do you think it would have been helpful if you had instructions to say in words some of those things that were in writing? Because as I understand, they were in front of the desk, they were standing right there. Do you think it would have been helpful to folks like Ms. Burbach if you would have taken the time to verbally explain what otherwise was sitting there in writing on your desk? Ms. Grant. Yes, I do believe so. Senator Coleman. Mr. Eckelberry. Mr. Eckelberry. Well, of course. Senator Coleman. And, Ms. Burbach, you wanted to say something. I'd love to hear it. Ms. Burbach. I was going to say, last year I got the loan again, and it had to clear through my bank for 7 days so I got this loan and I wasn't able to get my money for 7 days anyway. Now, if it's this big of a company, shouldn't it have like cleared right away? I don't understand why I had to wait. I paid all that money to get my loan that day, and then it was 7 working days before I actually received the money. Senator Coleman. I take it that this year you're not looking for a Refund Anticipation Loan. A lesson learned, Ms. Burbach. I want to thank the panel. Is there anything else you wanted to add, Ms. Burbach? You came in a little late. Anything you want to say to others who are out there listening? Ms. Burbach. Be patient. Senator Coleman. Very sage advice. I want to thank you all for your testimony today, and this panel is excused. I would now like to welcome our second panel of witnesses. It is my pleasure to welcome Beth Haney, who is the Research and Outreach Director for Children's Defense Fund here in St. Paul. And Bonnie Esposito, the Executive Director of AccountAbility Minnesota, also here in St. Paul. I appreciate your attendance at today's hearing and look forward to hearing your testimony. It is especially important that we fully understand the impact of Refund Anticipation Loans on low-income and elderly Minnesotans and show how these costs can be minimized with the use of free tax services. As you've observed, pursuant to Rule 6, all witnesses before this Subcommittee are required to be sworn so I would ask you to stand and raise your right hand. Do you swear the testimony you are about to give before this Subcommittee will be the whole truth, and nothing but the truth, so help you, God. Ms. Haney. I do. Ms. Esposito. Yes. Senator Coleman. Thank you very much. Ms. Haney, we'll go with you first and follow with Ms. Esposito. After you finish with your testimony I'll have the opportunity to ask questions. Again I would ask that you try to limit your testimony to about 5 minutes. Your full statement will be presented into the record in its entirety. When the 5 minutes are up, I'll give you a verbal signal if that's needed. So let's begin with Ms. Haney and we'll follow up with Ms. Esposito. TESTIMONY OF BETH HANEY, PH.D., \1\ RESEARCH AND OUTREACH DIRECTOR, CHILDREN'S DEFENSE FUND, ST. PAUL, MINNESOTA Ms. Haney. Thank you, Senator Coleman. Thank you for this opportunity to testify about Refund Anticipation Loans and their impact on working Minnesota families. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Haney with attachments appears in the Appendix on page 44. --------------------------------------------------------------------------- I'm the Research Director for Children's Defense Fund Minnesota. Children's Defense Fund is a private, nonprofit organization with a more than 30-year history advocating for children, particularly poor and minority children and those with disabilities. Our mission is to Leave No Child Behind, and to ensure that every child has a healthy start, a head start, a fair start, a safe start, and a moral start in life, as well as successful passage to adulthood with the help of caring families and communities. RALS are of vital interest to CDF because they dilute the efficacy of the Earned Income Tax Credit. The EITC arguably is this country's most effective and efficient anti-poverty tool, and we believe a potent force for enhancing child well-being. In 2002, it lifted almost 5 million working Americans out of poverty, more than half of them children. In Minnesota, more than 242,000 low- to moderate-income working families claimed approximately $378 million from the EITC in 2004. This part of the tax code rewards family's work efforts and helps keep the tax system more fair for them. Families spend the majority of their EITC refunds on basic needs like utility bills, rent, food and clothing for their children. Consequently, the EITC helps stabilize them and keeps them in the work force and off welfare. In addition, much of the money is spent immediately, boosting the local economy by benefiting grocers, retailers and other local businesses. However, the value of the EITC to families and the broader community is eroded by RALs. During the 2003 tax filing season, an estimated $5.1 million of Minnesota EITC refunds were diverted to pay for RALs, not meeting basic work family's needs. Our concerns with RALs include: First, they can be alarmingly expensive. We estimate the average cost to be about $100, which is about 6 percent of the average Minnesota EITC refund. This causes the average APR and average refund to be 234 percent. This predatory rate is more than ten times the APR ceiling Minnesota established to protect consumers. State law limits APRs on consumer loans to 21.75 percent. However, RAL brokers circumvent State usury laws by partnering with federally-chartered banks, which are permitted to ignore State interest rate ceilings. Second, research shows that commercial tax preparers target their services to low-income tax neighborhoods, where financial literacy is often limited. According to one study, neighborhoods with more EITC filers have about 50 percent more electronic tax filing and preparation services than neighborhoods with fewer EITC filers. Statewide, only about one in five EITC filers got a RAL in 2003, but the percentage was significantly higher in our most impoverished communities. In four of the zip codes on Minnesota's northern Indian reservations, where more than half of all returns include the EITC, more than three-fourths of EITC families got a RAL. More than half of EITC claimants got a RAL in some of the poorest Twin Cities neighborhoods. Third, as a result of extensive protesting last tax season by the consumer advocacy group ACORN, H&R Block agreed to improve the disclosures it gives to customers about the costs and speed of refund options and to drop their administrative fee. However, we question how well the terms of this agreement are actually being implemented in local tax preparers' offices. This tax reason, advocates across the Nation have spoken with H&R Block clients, such as Julie, who say they were not provided with the improved disclosures informing them of each of their options. Many tax preparers push clients into taking out loans based on the profit they personally receive, as you so noted, not corporate policy. ACORN is currently negotiating a similar agreement with Jackson Hewitt, but other tax preparers, including Liberty Tax, and local independent tax preparers, even retailers and car dealerships, broker RALs. Thus, even the existence of agreements with the two largest companies does not fully address the full scale of the problem. Finally, there's evidence that many families do not comprehend they're initiating a loan when they opt for Instant Money, Money Now, or the other terms used to market RALs. According to a December 2004 poll, 70 percent of respondents who had gotten a RAL did not realize it was actually a loan. Furthermore, because many RAL users have limited literacy skills and/or English proficiency, even if they sign written disclosure forms, they might not fully comprehend them. It's not surprising that a public policy as effective as EITC has had strong bi-partisan support in Congress. Senator Coleman, we appreciate the backing you've shown the EITC, and we hope we can rely on you to champion it in the current Federal budget debate. The public funds dedicated to tax credits like the EITC are meant to strengthen low- to moderate-income families and reward them for their work effort, and this has been proven to work. The public funds were not meant to provide financial windfall for the tax preparation and banking industries. Loans using the EITC should not be allowed, for the same reason Social Security benefits cannot be used as collateral for a loan. The idea is that the benefits are too important to the recipients to let lenders take them to repay their debts. I believe it's a cruel paradox that because of their trust and relying on paid tax preparers, professionals, families believe are there to help them and they trust them, eligible working Minnesota families trying to claim their EITC and get ahead could end up in significantly worse financial jeopardy. I thank you again for the opportunity to testify, and further information regarding our stance toward RALs can be found in my written testimony. Senator Coleman. Thank you very much, Ms. Haney. Ms. Esposito. TESTIMONY OF BONNIE ESPOSITO,\1\ EXECUTIVE DIRECTOR, ACCOUNTABILITY MINNESOTA, ST. PAUL, MINNESOTA Ms. Esposito. Senator Coleman, thank you for this opportunity to testify before you today on free tax assistance for low-income Minnesotans. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Esposito with an attachment appears in the Appendix on page 57. --------------------------------------------------------------------------- I'm the executive director of AccountAbility Minnesota, a nonprofit organization that does pro bono accounting and tax assistance by leveraging volunteer resources. Since 1971 AccountAbility has managed a dedicated team of volunteer accountants and tax practitioners to help thousands of low- income individuals navigate the tax reporting system so they may satisfy a tax liability, or realize benefits they're due. The Earned Income Tax Credit, as you just heard, and the Minnesota Working Family Credit offer essential assistance to thousands of Minnesota's working poor. The sum of these credits can potentially add 50 percent to a working family's annual income. To give you a sense of our work at AccountAbility, last year our volunteers at 40 tax sites statewide helped return $10.9 million in tax refunds to 9,500 low-income tax taxpayers. AccountAbility is one of many nonprofit organizations that offer free tax assistance through the IRS Voluntary Income Tax Assistance program, VITA, and Tax Counseling for the Elderly, or TCE program. This year in Minnesota, the Minnesota Department of Revenue reports there are 276 VITA and TCE sites, as you pointed out on the map in front of us.\1\ And as you mentioned, according to the IRS, 41,000 Federal returns were filed by free tax sites in 2004. Yet, over 200,000 low-income families claimed EITC, which means they were eligible for the free service, thus only a small fraction of the households eligible for the service take advantage of it. --------------------------------------------------------------------------- \1\ See Exhibit No. 2, which appears in the Appendix on page 169. --------------------------------------------------------------------------- The tax code, especially the part governing the EITC, is complex. Rather than attempting to complete their taxes themselves, as you heard in earlier testimony, two-thirds of low-income Minnesotans pay to have their taxes prepared and filed. Children's Defense Fund estimates that low-income Minnesotans spend more than 7 percent, or about $120, of the average EITC refund just to claim it. In 2003, at least $18.5 million of the Federal EITC dollars claimed in Minnesota were spent on tax preparation and filing costs. Why don't more low-income families take advantage of the free tax assistance? We believe there are a number of reasons. First of all, lack of capacity of the VITA program. VITA sites are usually filled to capacity with long waiting lines for service. People are frequently turned away, especially at this time of year. For example, this week at almost all the tax sessions that we operated, people were turned away. Also, due to funding cuts to the IRS they've had to cut back services substantially to the VITA program, and they're no longer able to recruit or train volunteers, or offer technical assistance at VITA sites as they used to. IRS walk-in centers used to be able to handle the most difficult tax problems, but again, due to constraints in funding, they're unable to do so. Last year, as you reported, the IRS prepared only 139 Federal returns at their walk-in centers for EITC eligible households. We find in Minnesota they're referring many of the taxpayers they used to help to our tax sites. A second reason we believe people don't come to the free tax sites is that they're often at inconvenient times or inconvenient locations to receive the service. Of the 276 dots on the map, only 15 to 20 percent are VITA sites. The rest are Tax Counseling For the Elderly, or TCE. Now, many TCE sites also help families, but that program is targeted to seniors. They're often in senior buildings, the sites are in senior centers, and they're open in the daytime, which is inconvenient for working families. Many of the TCE sites serve seniors first since they are run by the AARP, and help families only if the volunteers have time. In contrast, to make it convenient for working families, VITA sites are open evenings and weekends. They're also often located in community-based sites where families are used to going for other types of service. However, VITA tax sites are severely under-funded and are unable to serve more than 3 percent of the eligible households. The third reason we believe people don't come is just plain lack of advertising dollars. H&R Block, Jackson Hewitt, and other commercial tax preparers have multi-million dollar budgets to aggressively market their instant refunds. Nonprofit organizations with limited dollars rely on grass-roots marketing and networking. Commercial ads lead people to believe they must use a commercial preparer to get their refund quickly. The public isn't aware how quickly you can get your money if you file electronically and have your refund direct deposited. AccountAbility Minnesota customers using direct deposit this tax season got their State refund in 3 days, only 1 day longer than the classic Refund Anticipation Loan. And they didn't have to pay over $120, plus $100 for the loan, to get their own money. We have some suggestions for improvement. First of all, organize and sponsor a major marketing campaign with a public/ private partnership among government, Minnesota's largest companies and employers, and major philanthropic partners to advertise not only the EITC, but also free tax assistance. Second, have the partners make a commitment to have their employees volunteer, thereby setting an example to spur additional recruitment. Third, have the businesses and philanthropic partners announce their investment in the VITA program through private grants. Fourth, Congress needs to contribute Federal funding through such legislation as the Taxpayer Protection and Assistance Act being introduced in Congress today. We understand this bill also mandates Treasury to do a public awareness campaign on RALs. This would be a perfect partner to a Minnesota campaign promoting free tax assistance. This type of campaign would help advertise the free service to people that need it. It could help recruit volunteers that are needed to expand the service, it would stimulate private funding to help non-profits that manage VITA sites increase their capacity, and offer more service. Senator Coleman, I ask that you consider being a champion for this campaign in Minnesota, and represent the government sector. And I invite you to volunteer at an AccountAbility Minnesota site next year. [Applause.] Thank you again for this opportunity to testify before you today. According to a study done by CDF Minnesota, low-income families paid over $23 million last year for tax preparation and Refund Anticipation Loans and fees, much of that going to out-of-state banks. Please help us keep more of those dollars in the pockets of the working poor in Minnesota by expanding free tax assistance. Senator Coleman. Thank you very much, Ms. Esposito. Ms. Haney, we talked a lot about EITC, the Earned Income Tax Credit. Would you for the record walk through a very brief explanation of what that is, and what that means? Ms. Haney. Sure. The Earned Income Tax Credit is a refundable type credit, which is an incredibly important part of it. Many tax credits are non-refundable, which basically mean they bring your tax liability down to zero. If they're refundable, that means if you're eligible for more than what brought your tax liability to zero, then that part is refunded to you or sent to you in a check. Most families that claim the EITC don't actually owe any income tax to the government and that's because when they take their standard deductions and exemptions, they haven't earned more than what none of us pay tax on, the first $15,000 to $18,000 that we earn. They are then eligible to receive that entire amount back in a refund. What I said before, it helps keep the tax code fair because, in part, they pay a disproportionate share of their income in other, sales tax, excise tax and payroll taxes, and so that helps refund to them part of what they're paying those other taxes as well. Senator Coleman. So in the end, they get cash in their pocket. Ms. Haney. Exactly. Senator Coleman. This is a big part of it. Ms. Haney. Exactly. It's an incredibly important part of it. Senator Coleman. I think Mr. Eckelberry left. I wanted to personally thank him. Today is April 15, he's a tax preparer, and he was here and he spent time being here. So my humble apologies. I'll send him a copy of this in the record, but I did want to thank Mr. Eckelberry for being here. Ms. Haney, did it surprise you that there were signs in the window promoting instant cash, as one of the witnesses testified to? Ms. Haney. Not at all. We've seen the signs ourselves. When I personally drive through the poor income neighborhoods, I see the billboards, I see the signs, so I'm not at all surprised. Senator Coleman. I asked the question about where's the principal responsibility? Is your principal responsibility to the client or is it to your firm?. And I appreciate the witnesses we had who, I think reflecting their ethical sense that it should be to the client, though my sense as I listened, they have a system set up that really is otherwise directed. You're going to be judged based on how many products you sold. Your obligation, obviously, is to the firm. Can you talk a little bit about what kind of ethical standards there are for tax preparers today, and what kind of ethical standards there should be? For both of you, Ms. Haney first and then Ms. Esposito. Ms. Haney. In Minnesota 2 years ago in 2003 we passed a State law that actually was for standard of conduct for tax preparers, and it's the first of its kind, I believe, across the Nation. That created some pretty simple standards as far as we were concerned in terms of pretty basic things that should be illegal anyway but we had to put it into law. And it was based completely on experiences that a lawyer, a colleague I work with, had with low-income clients. However, that law I don't believe addresses exactly what you're asking, which is to whom is the tax preparer working in the best interests of? I believe that when families walk in the door they're going to see a professional, in their opinion, and they totally and completely put their trust in that person. They do not understand the tax code. The EITC tax booklet is 53 pages long and it's tax language so I hardly understand it. I believe they go there to see a professional, and that there should be some way to ensure that professional is working in their best interest. I'm not again surprised, however, to hear that those tax preparers have a little bit of a conflict as to who exactly they should be helping, and which best self interest they should be working in. Senator Coleman. Ms. Esposito, could you respond to the question about ethical standards? Ms. Esposito. Absolutely. The majority of our volunteers in fact are CPAs, accountants. Many of them, as Mr. Eckelberry, do taxes themselves. And I can say 100 percent of them are appalled by RALs, because, in fact, what it does is take advantage of people when they are most vulnerable, especially now when people can get their refunds so quickly if they use e- filing and direct deposit. Our experience with our own customers that come to us and maybe for years they've gone to H&R Block or others, and they just are so surprised when we look at their tax papers and point out, do you know you have a loan? And they disregard it. They said oh, no, I just got my money fast. So they're really taking advantage of a vulnerable population. And the idea that, while people need their money right away, as you said, gee, could they wait 3 or 4 days, the fact is if they are desperate for their money, say, their landlord is going to evict them, we can call the IRS and that is considered under--what's it called? Ms. Haney. I'm not sure. Ms. Esposito. It's like being under duress. A hardship case, that's what it's called. And they can go downtown St. Paul that afternoon or the next day and get the check. So it is possible, if they really need it, to get their money right away, even at our free clinics. So as the earlier person said, it is a matter of waiting. Our experience as far as ethical CPAs and tax practitioners are that all volunteers that work for us feel that it is unconscionable to take advantage of people. Senator Coleman. The testimony of the first panel talked about APRs up to 400 percent. I've actually read more in some other cases. First, can you explain what an APR is? And, second, do you believe that your clients, EITC clients think they understand, and are well briefed on what APRs are? Ms. Haney. Well, APR, the annualized percentage rate, which essentially is the total cost of the loan expressed over the cost of a year. And really you need to, even for a short loan like a RAL, you need to think of it that way because that's how you can compare apples to apples when comparing one loan product to another. So it's the standard in terms of the industry to create the APR. I should actually clarify in terms of Ms. Burbach's situation. I've actually seen her documentation from this year and she actually did take out two loans. At least she signed two loan disclosure forms. And for one of the loans it was 129.61 percent and the other loan was expressed at APR of 129.16 percent. And then again, the State disclosure form she signed said 122 percent. So I do not think they understand what an APR is. When I was doing this research, ``Oh, that interest rate thing,'' and I think that's how most people would talk about APRs. And they think that percent is the entire amount applied to it. The APR includes both any straight fee that you pay up front, plus any interest that would accrue if the loan was not repaid. But I don't think the general public understands that, and definitely I don't think the EITC families do. Senator Coleman. In addition to the APR, there appeared to be fees for setting up the bank account--there appeared to be a number of different fees along the way. Are they all included in the APR, fees from the bank, fees for the preparation, are they all one fee or are there additional charges in addition to the APR? Ms. Haney. I think it depends on who's calculating the APR. When I calculate in my research the APR, I look at the total cost of the loan so I don't include tax preparation fees. I do include any fees to set up the loan, any administrative fees, the finance charges themselves. I don't know if that's an industry standard, however. I have been told that sometimes the industry actually doesn't include some of those fees because they don't consider those to be part of the loan. They consider those to be something that you would need to pay to get your refund. Senator Coleman. Ms. Grant noted in her testimony, the former Jackson Hewitt tax preparer, she did indicate that on her desk were written materials that described some other alternatives other than RALs. Do you think that's sufficient notice to individuals coming in to make them fully aware of what other choices are out there? Is there a better way to do it than just simply having some written things on a desk? Ms. Haney. I believe requiring oral disclosure is a fantastic first step. We actually tried to put that into the legislation at the State level 2 years ago but weren't able to. But I know that a lot of the families who claim the EITC have English as a second language or literacy issues, so I really doubt if they took the time, they couldn't even read and understand exactly what they're being asked to sign. In addition, I think it's a very intimidating atmosphere. And when you're being rushed by your tax preparer and your tax preparer is saying sign this, sign this, it's very difficult at that moment to say just a minute, I want to sit down and read and understand everything, when you know there's a line of people waiting to have their taxes done. Senator Coleman. Ms. Esposito, you talked a little bit about the disclosure, what do you consider to be the best way to proceed with that. Ms. Esposito. Well, we of course deal with customers all the time in doing their taxes, and one of the reasons our tax sites are full and people are waiting is because we take the time necessary to explain. We really feel our job is not just to do the taxes but to empower the customers to understand taxes. Because eventually, they're working and they're working their way off being eligible for our program, and perhaps starting to do their own taxes 1, 2, or 3 years down the road. So our tax preparers really do take a lot of time. We don't give them a lot in writing. Our customers last year reported 76 different languages as their primary language. And, not only with English as a second language but other literacy problems, reading can be a problem. So we do as much as we can verbally and really take the time, even though people are waiting. But with each customer, it just takes time to explain it. Senator Coleman. You talked about hardship cases. Do you offer Refund Anticipation Loans or something similar to taxpayers, who were hardship cases? Tell me, how do you deal again with folks who have legitimate need for some quick dollars. Ms. Esposito. Actually it's not a loan. We call the IRS. We call the IRS advocate and they just respond fabulously. And people can actually go down and get a check the next day. And it's right from the IRS so they're getting their own refund because they can prove it's not for something minor like well, ``Gee, I want to go to Florida or something.'' It has to actually be a hardship. Maybe they're being evicted or something like that. But the IRS gives them their money so there's no loan involved. Senator Coleman. Ms. Haney, is it your testimony that RALs should not be available for folks who use EITC, or do you believe that there are ways in which you can reduce the cost of RALs and other financial products? Ms. Haney. Well, Senator Coleman, I'm optimistic. I believe both. Senator Coleman. Sign of a politician. Ms. Haney. I would rather there not be loans based on the EITC, quite honestly. As I said earlier, I believe the precedent is set in Social Security benefits, and I would like to see Federal legislation that does the same thing. That said, I guess I am a little bit more realistic and realize that might not necessarily come to pass. And so I do believe there are alternative ways we can make them more affordable. I also believe in the creativity of the industry, as well as the non-profits and the rest of the community, and I believe there are other ways that we can help families. I know there are some things that could be done to speed up the process. So, for example, the IRS is working and has been working for a long time on making those refunds come more quickly. I know there are some issues in terms of their funding right now, that they're not able to do that at the rate they wanted to, but I think there are many different ways we can look at this problem and make it better. Senator Coleman. I appreciate that optimism. And you'll see from the next panel where we have representatives from H&R Block and Jackson Hewitt that we are having discussions and we are getting levels of cooperation. So I would hope that would continue so that we could better address this. Ms. Esposito, your perspective on this? Should we simply ban RALs or are there ways we can reduce costs? When I say ban, ban in terms of not allowing Earned Income Tax Credit dollars to be factored off into the high cost of the RALs. Ms. Esposito. In a perfect world, I would want them to get 100 percent of their refund like our customers do, without taking a loan. But the fact is there is a need there and the people do want the money right away. But we very much are working with the philanthropic community and credit unions to try and come up with alternatives. And there's demonstrations around the country through the National Community Tax Coalition to offer a better product, something that doesn't take advantage of people when they're vulnerable, and gets them their money quickly. But an important part of it needs to be that they establish an account with the bank. When they get a RAL, although they open this bank account, that's not their savings, that's not where they're going to go and bank next Tuesday or Wednesday, where if they got a product that was more reasonable, and it was their community credit union, then maybe they would leave some of that money in the savings account and start on that road to asset building and the whole idea of perhaps being able to buy a home, pay for college for their kids and so forth. Senator Coleman. So rather than just using the bank as a vehicle to process a loan for purposes of getting the RAL, what I'm hearing you say is perhaps you can use this process to set up a savings account and a banking relationship? Ms. Esposito. Exactly. Senator Coleman. A savings mentality and other things that could have some long-term positive benefits. Ms. Esposito. Exactly. Senator Coleman. Outstanding. I'll excuse this panel. I want to thank you very much for your testimony, and I appreciate your hard work in this area. It is greatly appreciated. Ms. Haney. Thank you. Ms. Esposito. Thank you. One thing I didn't mention, I did bring the list of the sites.\1\ --------------------------------------------------------------------------- \1\ The list of sites appears in the Appendix on page 59. --------------------------------------------------------------------------- Senator Coleman. And we will take that and make sure those are entered into the record. Thank you very much, Ms. Esposito. We would now like to welcome our final witnesses for today's hearing, Gary Weinstein, Vice President of Legal and Government Affairs at Jackson Hewitt Tax Service; and Robert Weinberger, Vice President of Government Relations at H&R Block. I appreciate your attendance at today's hearing and look forward to hearing your testimony, as well as your response to the testimony for the first two panels. If RAL costs can be minimized, an effort must begin with obviously your respective companies. I do want to commend Jackson Hewitt for your efforts to make your products more consumer friendly. As I indicated to the previous panel, you've been having ongoing discussions with the Subcommittee. I do understand that there was a $10 surcharge, and I think you'll talk about that, Mr. Weinstein, a $10 surcharge Jackson Hewitt had been using with the EITC recipients that I think will no longer be in effect, and we appreciate those efforts. Gentlemen, as you are well aware, pursuant to Rule 6, all witnesses before this Subcommittee is required to be sworn. At this time I ask you to please stand and raise your right hand. Do you swear the testimony you are about to give before this Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you, God. Mr. Weinstein. Yes. Mr. Weinberger. Yes. Senator Coleman. Thank you very much. Mr. Weinstein, we will begin with you, followed by Mr. Weinberger. After we've heard all the testimony, we'll go to questions. As I indicated before, your printed testimony will be in the record in its entirety. We'd ask again that you limit your oral testimony to about 5 minutes. And about that time, if you run over that, we'll put up a little note that lets you know that. We're somewhat flexible in time today, and I think that's OK with the time we have. So with that, we will begin, as I said, with Mr. Weinstein. You may proceed. TESTIMONY OF GARY P. WEINSTEIN,\1\ VICE PRESIDENT, LEGAL AND GOVERNMENT AFFAIRS, JACKSON HEWITT TAX SERVICE, INC., PARSIPPANY, NEW JERSEY Mr. Weinstein. Mr. Chairman, I want to thank you for giving me the opportunity to testify on behalf of Jackson Hewitt today. We welcome and support the Chairman's interest in, and attention to, tax-related financial products. As an industry leader, Jackson Hewitt is committed to continuously improving its policies, procedures and disclosures, as well as the products and services we and third-party banks offer to best serve our customers, and allow them to make fully informed choices about our products and services. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Weinstein with attachments appears in the Appendix on page 141. --------------------------------------------------------------------------- Our interaction with the Subcommittee's professional staff prior to this afternoon's hearing, as well as this hearing, are invaluable in helping us to continue these efforts. Thus, we are pleased to have the opportunity to discuss today our products and services, including those offered by the banks, the comprehensive disclosures we provide to our customers, as well as our training of tax preparers and our proprietary software system, all of which are designed to ensure that our customers are receiving full and fairly presented description of the information they need to make well- informed choices about tax-related financial products. As part of our ongoing commitment to continue our industry best practices, I am pleased today to announce the following actions for the 2006 tax season, noting that several of these initiatives have been developed as a result of our discussions with the Subcommittee staff under the direction of Senator Coleman. First, Jackson Hewitt has eliminated the application fee for Refund Anticipation Loans and other bank products in Jackson Hewitt company-owned locations, and is encouraging our franchisees to do the same. Second, Jackson Hewitt has sought and obtained the commitment of our banking partners to eliminate the $10 additional finance fee for Refund Anticipation Loans for customers who receive an Earned Income Tax Credit. Third, Jackson Hewitt has also obtained a commitment of the banks that all customers will have the right to cancel a Refund Anticipation Loan within 48 hours. Fourth, Jackson Hewitt will be creating a comprehensive tax preparer code of ethics that further solidifies our existing policies, procedures, and expectations of tax preparer conduct. Fifth, we will provide our customers with a customer bill of rights setting forth Jackson Hewitt's public commitment to its customers, as well as providing basic information that all customers should know. Jackson Hewitt Tax Service is the second largest paid tax preparer in the United States. We have over 5,400 locations in 49 States and the District of Columbia, most of which are franchised. In the 2004 tax filing season, Jackson Hewitt prepared approximately 3.1 million tax returns, which accounted for less than 5 percent of the paid tax preparer industry. In Minnesota, we have 8 franchisees with 41 locations collectively. Our franchisees are independently owned and operated small business entrepreneurs who live in, and employ people from, the local communities here in Minnesota, as well as throughout the country. For the 2004 tax filing season, these franchisees prepared approximately 13,000 tax returns for Minnesotans. Jackson Hewitt's principal business, which accounts for over 70 percent of our revenues, is the preparation of tax returns. Jackson Hewitt electronically files most of the returns it prepares under the IRS e-file program. Through e- file, a customer can receive a refund directly to their bank account, or receive a check by mail, free of charge. This option is always the first choice presented to customers to obtain their refunds. In addition, Jackson Hewitt also facilitates the provision of certain financial products offered by two federally regulated banks, HSBC Bank USA and Santa Barbara Bank and Trust. In Minnesota, Jackson Hewitt franchises facilitate products offered by Santa Barbara. Refund Anticipation Loans offered by those banks have been the subject of a great deal of discussion today. Banks, not Jackson Hewitt, make the lending decisions for a RAL, set the finance charge, and make the loan. RALs, as loans, provided by banks are subject to numerous Federal laws including the Truth in Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, and Fair Debt Collection Practices Act, to ensure that every customer understands the terms and conditions of the loans and is treated in a fair, non-discriminatory manner. The banks are subject to regulation by the Office of the Comptroller of the Currency, which subjects the bank's Refund Anticipation Loan business to examination scrutiny. In addition, States such as Minnesota impose further requirements on disclosures for RALs. Finally, the IRS e-filing process involves registration, and background checks of electronic return originators. This is done to provide additional safeguards to taxpayers who utilize authorized e- filers. Jackson Hewitt not only complies with all these disclosure requirements, but has implemented its own disclosures over and above the Federal and State requirements. Thus, in addition to the federally required disclosures of costs and terms that are a part of every RAL bank application and the Minnesota State required disclosure, Jackson Hewitt provides a series of disclosures that make clear that bank products are not mandatory, that a Refund Anticipation Loan is in fact a loan, and not a refund, and explain the cost of the bank products and their alternatives. These disclosures include a large type one-page disclosure form, acknowledged and signed by the customer, which clearly and simply explains the nature of a Refund Anticipation Loan, sets forth the APR for the loans sought, and warns that this APR may be high when compared to other sources of credit. We have large wall posters in our locations which show refund and loan options, as well as the costs and APR associated with six example loan amounts. We have desk maps on every tax preparer's desk, facing the customer, setting forth each product and service available at Jackson Hewitt, including the ability to transfer the tax return in connection with IRS e-filing at no additional cost. And we have prompts embedded in our proprietary decision tree computer software which requires our trained tax preparers to present timely information to customers about the range of available options. Further, we are continuously training our tax preparers, franchisees, office managers, and other employees to make sure a clear explanation of each product is provided so that a customer always makes the best decision for his or her own situation. In furtherance of our ongoing goal of best practices, we applaud the Chairman's efforts that we understand are underway to establish a code of ethics guided by IRS Publication 1345 for the tax preparation and tax-related financial products industry. Jackson Hewitt will promulgate its own code of ethics guided by IRS Publication 1345 regardless of whether this becomes an industry-wide obligation. Senator Coleman, I have some continuing remarks, but in the interest of time, if the Subcommittee would like, I can conclude or---- Senator Coleman. Why don't you conclude, because I have the written remarks, and I will enter them in the record. So if you can conclude your oral testimony in the interest of Mr. Weinberger and following questions. Mr. Weinstein. Thank you, Mr. Chairman. I would, in conclusion, I would like to highlight once more the steps that Jackson Hewitt is prepared to take: First, we are eliminating the application fee for Refund Anticipation Loans and other banks products at our company- owned locations. We're encouraging our franchisees to do the same. We have sought and obtained the agreement of our banking partners to eliminate the $10 additional finance fee for Refund Anticipation Loans for customers who receive EITC. We've obtained commitment of the banks to allow 48-hour right of recisions. We will be creating a comprehensive tax preparer code of ethics, and we will be establishing a bill of rights. Mr. Chairman, thank you for the opportunity to testify. Senator Coleman. Thank you very much, Mr. Weinstein. Mr. Weinberger. TESTIMONY OF ROBERT A. WEINBERGER,\1\ VICE PRESIDENT, GOVERNMENT RELATIONS, H&R BLOCK, KANSAS CITY, KANSAS Mr. Weinberger. Thank you, Mr. Chairman, for the opportunity to appear. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Weinberger with an attachment appears in the Appendix on page 161. --------------------------------------------------------------------------- Today H&R Block is closing out its 50th tax season as the Nation's largest tax return preparer. Over the last few weeks, 167,000 Block associates at 11,000 offices across America have helped prepare returns for almost 20 million Americans. Here in Minnesota, 1,400 dedicated Block employees will help nearly a quarter million residents navigate the complexities of the tax code, claim their refunds, and importantly for us at H&R Block, get advice they need to improve the financial lives of their families. Still other Minnesotans are using H&R Block's free online filing program in the Free File Alliance with the IRS. We're proud of that 50-year history. We continue to evolve and improve to meet the needs of our clients. From a background in simply ``doing people's taxes,'' we're evolving into a ``tax and financial partner'' to our clients, providing not only tax services and advice, but also new financial products, like low- cost retirement savings, transaction accounts, and home mortgages. Our focus is that client partnership. We succeed only when we earn the trust that keeps clients coming back year after year, as over 70 percent do. The title of this hearing is ``Tax-Related Financial Products Can Be Costly.'' It could just as easily have been ``Tax-Related Financial Products Can Be Beneficial.'' Of course there are costs for our products and services. Indeed, one reason we were founded was to offer middle American consumers lower cost alternatives to CPAs and attorneys in helping to prepare complex tax returns. If we didn't charge fair prices for our services, we wouldn't stay in business. But while there are costs, tax- related financial products also have benefits. And consumers who use them find the benefits outweigh the costs and represent good value. Let me briefly highlight four products. First, Refund Anticipation Loans. Refund Anticipation Loans cost money, sometimes more than other kinds of credit. In our offices they cost between $29.95 and $109.95 for bank loans that range from $200 to $10,000. But they also provide added speed, convenience and security. Many consumers are financially stressed, especially at tax time, facing overdue holiday and heating bills, threats from creditors and medical or other emergencies. They often can't afford to wait the 2 to 8 weeks it takes the IRS to deliver a refund. Half of our RAL consumers don't have a checking account, so can't take advantage of the speed of IRS direct deposit. RALs are not right for all taxpayers and, indeed, eight out of ten Block clients don't use them. But those who need the product see it as a solution, not a problem, and it can represent a life-line for those in need. To ensure informed choice, all options are presented, including free IRS delivery options presented first, in disclosures developed with the help of the former head of the Bureau of Consumer Protection of the Federal Trade Commission and after consultation with consumer groups. A second product is Peace of Mind, an extension of our Standard Guarantee, which costs $27. What many of our customers see are: The benefits of professional representation in case of an IRS audit; the security of knowing that if we made an error, we will pay up to $5,000 in taxes owed as a result; and, quite literally, additional ``peace of mind,'' in contrast to anxiety as many taxpayers see the tax collector as not entirely benign. A third product is our express IRA. While it costs $15 to set up, this savings account has enabled thousands of taxpayers to save for retirement, many for the first time. Given an average refund of $2,100, tax time can be a teachable moment to help Americans save and take advantage of the incentives Congress has enacted to better their lives, including the little-known Retirement Savers Credit which partially matches IRA contributions. We are proud to have helped secure that credit for nearly a quarter of all those in America who claimed it in the last 2 years. Finally let me mention one product, the H&R Block Advantage, that doesn't cost our clients an extra dime. The Block Advantage statement contains actionable financial and tax advice tailored to each client's unique situation. We use it to connect people to government benefits for which they may be eligible but not receive, including food stamps, children's health insurance, and prescription drug discounts. We know from food stamp officials that calls to their hotline ``skyrocketed'' by over 300 percent when we first began our efforts. Mr. Chairman, our focus as a company is ``client first.'' Providing sound advice, not pushing products that are not in the best interest of our clients. That is a clear message from management and embedded in our culture. We are a value-driven and not a sales-driven company. Inevitably, we will not always get it right. But our shortcomings are those at execution, not intent. Mobilizing a field force of 167,000 people for a 3-month tax Olympiad is challenging, and not all of our 20 million clients will be happy with the services they receive. But our aspiration, and we hope our achievement, is to earn the respect of our clients, and to continually improve our training and compliance, our policies and procedures, to make our product offerings transparent and fair, and to ensure that our clients can make an informed choice about all of them. Our success comes from repeat business. Our interest, therefore, is in meeting our client's needs, adding value to their lives, and earning their trust, not selling products they don't need. If we do that, they won't come back, and we won't succeed. Mr. Chairman, thank you again for the opportunity to appear. We look forward to answering your specific questions, and commenting on the previous panelists. Senator Coleman. Thank you very much, Mr. Weinberger. Gentlemen, let me say a positive, as I said earlier, I want to particularly thank Jackson Hewitt for the cooperation we've received. It's certainly taking strong steps in the right direction. Mr. Weinberger, I will note, speaking with my staff, that your written disclosures are exceptional, and you outlined that in your testimony. I still think there is some room to bring verbal disclosure up to that same level, and I would hope that the end result of this hearing there would be some focus of discussion on that and how that can be achieved. But clearly as we've looked at the written disclosures, they certainly are well done. A couple questions, though. One, you mentioned, if I may, talking about RALs are not right for all taxpayers, and eight of ten don't use them. What percentage of folks who are eligible for the EITC, how many filers of EITC use RALs? Mr. Weinberger. I don't know, Mr. Chairman. But I do know any client who comes into an H&R Block office that's eligible for the EITC will get it. And except for the existence of commercial tax return preparers, millions of Americans wouldn't get the EITC, let alone the full value of the EITC to which they're entitled. H&R Black alone does 24 percent of all EITCs in America. Senator Coleman. Would you supply for the Subcommittee, see if you can get an answer to that question, what percentage of folks who file EITC also take out RALs? It would be very helpful. Mr. Weinberger. I will.\1\ --------------------------------------------------------------------------- \1\ See Exhibit No. 12, which appears in the Appendix on page 192. --------------------------------------------------------------------------- Senator Coleman. Mr. Weinstein, I notice in your testimony that you did approximately 13,000 returns of Minnesotans and facilitated approximately 4,000 RALs. Do you know what percentage of those folks who are eligible for EITC also filed RALs? Mr. Weinstein. I do not have that information now, Mr. Chairman, but I would be happy to get back to the Subcommittee. Senator Coleman. That would be helpful. Also, Mr. Weinstein, just so I understand the relationship between the banks and the tax preparers, the RALs, they're bank loans. They're not Jackson Hewitt or H&R Block. But do you have a relationship, questions for both gentlemen, one, do you get any refunds or do you have any financial relationship with banks whereby you benefit to the number two question, the number of RALs done? And second, do you have any interest in RALs themselves, almost acting as a bank itself? Do you have any control or ownership over RALs? Mr. Weinstein and Mr. Weinberger. Mr. Weinstein. Mr. Chairman, may I take the questions in reverse order? Senator Coleman. Please. Mr. Weinstein. The second question relating to incentives, incentives to sell RALs. In our company-owned stores we do not have any incentives for tax preparers to sell RALs. In fact, we're not even aware of any of our franchisees who have similar incentives. I would ask that the Subcommittee keep in mind the application fee that is charged, regardless of whether the customer receives a RAL or an ACR or an ADD, remains the same. There is truly no financial incentive to direct a customer to one product or the other. And finally, the decision is, and has to be, the customers based on their own individual financial needs. Senator Coleman. But my question went to whether you have any relationship with the banks, not incentives from preparer to client; in other words, if the preparer is going to get more money. But do you have a relationship with the banks? Obviously you're directing a lot of business to them, substantial business. Is there a financial relationship with the banks whereby there's a benefit for the company for the volume of RALs produced? Mr. Weinstein. Mr. Coleman, this is perhaps getting to your first question. We do have a relationship with two banks, as I explained in my written testimony and my oral testimony, Santa Barbara Bank and Trust and HSBC. We earn a flat fee from the bank on RALs. We have a sharing provision that relates to the delinquency and loss arrangement, but this provision will likely not come into play because in the 2005 tax season we do not have a delinquency and loss amount that would trigger the implementation of this provision. We understand the concerns that have been raised here, and we certainly will consider those. Senator Coleman. Mr. Weinberger, do you have a relationship with the banks by which you get some financial return based on the amount and volume of RALs? Mr. Weinberger. Yes. We have a 10-year contract that was entered into in 1996 with Beneficial Bank, now succeeded by HSBC Bank Corporation, in which we purchased an interest in the refund loans that they make for H&R Block clients. Senator Coleman. Do you know what H&R Block earned last year from rebates, refunds, and incentives for selling RALs? Mr. Weinberger. Well, I know what we received in participation fees, which is in our annual report. My recollection, which I hope would be subject to correction, would be about $160 million in revenue. Senator Coleman. I think my notes indicate about $168 million in revenue. The other question, you talked about Peace of Mind. And we noted, Mr. Eckelberry, that in part of his evaluation, the Peace of Mind product was one of those things he was evaluated on. And you've indicated that there is some value to that. My question, though, is in the value if someone is audited, if there's a mistake or something, it's on your shoulders and not on the taxpayer's. What percentage of Earned Income Tax Credit clients were audited last year? Mr. Weinberger. About three or four times the number of middle class taxpayers. So it is a group that is subject to elevated scrutiny and examination by the IRS. Senator Coleman. Do you know the percentage of filers, the number of folks subject to audits of your customers? Mr. Weinberger. I can get it for you.\1\ --------------------------------------------------------------------------- \1\ See Exhibit No. 12, which appears in the Appendix on page 192. --------------------------------------------------------------------------- Senator Coleman. Could you give me a ballpark figure? Is it under 5 percent? Mr. Weinberger. Well, it's under 5 percent. But the average for middle class taxpayers would be considerably lower. Senator Coleman. Is it under 3 percent? Mr. Weinberger. I don't have the exact percentage. Senator Coleman. Obviously, my concern is that if 97 percent to 98 percent of folks don't have a risk here, that if in fact you're selling a product, pushing a product, and evaluating performance on the basis of that product, then in the end, 90-something percent, and I am quite confident it's over 95, and could go I think higher than that, that raises the kind of questions that were raised by the prior panel, that you have folks who are low-income, obviously stressed, as you indicated. The IRS could be a big bogeyman in terms of fear of an audit. But if you walked in and said you had a 99 percent chance you're not going to be audited, you want to buy this product, it's a different response than giving Peace of Mind and it's going to cost you for this. Mr. Weinberger. Well, the IRS has a well-publicized enforcement campaign, and especially so with respect to the EITC where Congress has actually appropriated funds for EITC enforcement as a separate line item. And the Congress has put a considerable amount of pressure on the IRS because of the large amount of non-compliance in the EITC program. There is a rational reason for people being concerned about audit, but there's also an emotional element which relates to perceptions. And I think that's a reality in America. Senator Coleman. Again for the record, if you could provide us with a percentage of the EITC clients audited last year, that would be---- Mr. Weinberger. We would not necessarily know which of our clients is audited. Senator Coleman. What percentage of those who bought Peace of Mind were audited, I would like that information. Those who purchased that policy, what percent of EITC actually used that policy. I think that would be useful information to have. Mr. Weinberger. OK.\1\ Senator Coleman. So I understand the relationship between the companies and the franchises. Mr. Weinberger, you talked about eliminating the application fee--excuse me. Mr. Weinstein, you eliminated application fees and which you encourage franchisees to do that. What does that mean? What kind of encouragement do you offer, what kind of control do you have over the actions of the franchise operations when it comes to fees they charge or don't charge? And, Mr. Weinberger, I'd ask the same question. Mr. Weinstein. Thank you, Mr. Chairman. Jackson Hewitt is a franchise model, which means that franchisees make up the backbone of our tax preparation business. Each franchisee is an independently owned and operated small businessman and woman, and thus is able to competitively price their products. We have company-owned stores in addition to our franchise stores. Out of the 5,400 stores we have, the vast majority of them are franchise-owned. Senator Coleman. If I may interrupt. In Minnesota, what percentage are franchise operations and what percentage are company-owned? Mr. Weinstein. One hundred percent franchise-owned. Senator Coleman. So Minnesota franchise operations, talk to me about, if you eliminate application fees, how does that impact operations in Minnesota? Mr. Weinstein. Well, in fact, we have at the company-owned store level decided to begin to reduce and eliminate application fees this tax season, and we plan to completely eliminate application fees next tax season in our company-owned stores. Our franchisees, who may very well follow us in this approach, and as I stated in my opening statement, we will encourage them to follow us in that approach, will begin to reduce or eliminate the application fee in Minnesota for tax season 2006. And I believe that various franchisees across the country have already begun this process. Senator Coleman. I'm just trying to understand the nature of your ability to encourage your franchises. Do you have any control, do you have any saying, do you have anything within the relationship between you and the franchise operation that would provide that application fees are eliminated, or in fact is it simply up to the franchise operation to do what they wish to do, understanding that the company may encourage a certain course of action? Mr. Weinstein. As a franchiser, we cannot force the franchisee to take any particular action. But given the competitive landscape, the legislative landscape, and the regulatory landscape, we fully expect that our franchisees will follow us in our strong efforts to eliminate this application fee. Senator Coleman. Mr. Weinberger. Mr. Weinberger. H&R Block has already eliminated what it called a ``system administration fee'' in its company-owned offices throughout America. In Minnesota, we have 112 company-owned offices and 93 franchised offices. There is no fee in the company-owned offices or in two-thirds of the franchise offices. In the remaining third, there is a $13 fee, which will be eliminated entirely next year. Senator Coleman. When you say eliminated, do you have the ability to have them eliminate it or is this simply voluntary action on the part of a franchisee in standing with the company's strongly recommending certain policy? Mr. Weinberger. I don't know the answer to that, but I've been assured the small number of remaining ones will be eliminated. Senator Coleman. I want to just go back to the testimony of Ms. Burbach. And I think it fairly typical, an average individual, financially strapped, came in, somewhat confused. I presume she had in front of her perhaps even verbal language-- not verbal, written disclosures, etc. One, as you kind of look at that individual, does it surprise you that she was confused? Do you think that her situation was unusual for someone in that position? Mr. Weinberger. Well, first let me say I feel bad about the circumstances that she described, and she was clearly stressed. And both I and the company regret that. We have a dilemma here because the tax code is quite explicit about not allowing us to discuss a person's tax return without their specific written consent for each use or disclosure. If she provides that consent, I would be happy to share, privately, with her permission and the opportunity to review it, the circumstances as best we can establish them. Senator Coleman. Would it be your testimony, though, that you are fairly confident that your tax preparers do explain that folks have the opportunity to cancel RALs within a couple days if they so desire? Mr. Weinberger. Yes. And I can speak to that, Mr. Chairman. We have considerably revamped over the last few years our training and compliance activities in this area. The tax return preparer who testified earlier, Mr. Eckelberry, last worked for H&R Block for a full year in the year 2000, 5 years ago. During the intervening time, a considerable amount of change has occurred. Tax clients who have a refund are fully--all of their options are explained to them. They receive a ``Facts About RALs'' document, which, by the way, does indicate that we may purchase an interest in the refund loan, which is disclosed, and which also specifically says that you can cancel your RAL transaction for up to 48 hours without being obligated for a finance charge connected with it. And I have blow-ups of those if it would be easier to illustrate. Senator Coleman. Can we have that entered into the record?\1\ --------------------------------------------------------------------------- \1\ See attachment to Mr. Weinberger's statement which appears in the Appendix on page 167. --------------------------------------------------------------------------- Mr. Weinberger. We have worked with the former head of the Federal Trade Commission Bureau of Consumer Protection, and developed what we think are really best practices, and that is several layers of disclosure. First, in the welcoming brochure, the refund or settlement options are fully described, again with the IRS free options described first. Second, at the tax desk there is the ``Facts About RALs'' document, which on the reverse side has a chart showing the price of RALs and the annual percentage interest rate for various amounts, the time line of refund times from the IRS versus the time for bank products, and a run-through of a typical transaction so a client can see what is deducted and what the bottom line would be. Third, embedded in the computer program is a side-by-side comparison of all options, which takes the general information and makes it specific to the individual taxpayer, what their refund is and what any of the items will cost. Fourth, there's an extensive written application which contains various cautions in it, and further disclosures required under the Trade in Lending Act which are included in the signed loan agreement. And finally, then at the end of the process, is a Block Advantage Report. The first item included for people who use RALs is an indication of--and I will read it to the Subcommittee: ``Plan to keep more of your refund next year: A Refund Anticipation Loan is fast and easy, but it's also expensive because the lending bank charges you for this service. In addition, other institutions may charge you to cash your RAL check. Next year, why not file electronically and ask for your refund by direct deposit or IRS check? That way you can avoid RAL fees and still get your money in approximately 8 to 15 days by direct deposit, or 3 weeks via check. If you don't have a bank account, many banks, savings institutions and credit unions have low-cost solutions available. You'll gain better control of your finances, avoid check-cashing fees, and keep more of your refund in your own pocket.'' So we've tried, I think, responsibly and ethically, to offer full disclosures of all options, and we believe this should enable a potential consumer of RALs to be fully informed before he or she makes a choice. Senator Coleman. And my concern, and I appreciate this, as I started this panel, with making progress, both certainly, even as we've approached this hearing and have historically looked back on what H&R Block has done, I continue to be troubled by a number of things here. One, that in effect, Mr. Weinberger, you are the lending bank. And you've got an interest in these loans. And I'm trying to think of some other client, patient-client situation where you have a financial interest in your client buying a product that has a very expensive product, may be more expensive than some other options that are out there, and you financially benefiting from that. I'm trying to understand. And we'll talk to the IRS about this situation where you have this kind of sacred trust, but in effect you are the lending bank today by your interest in the RALs themselves. And I find that concerning. I'm not sure where we go with it. But as I kind of listen to this, the disclosure to there, one of the critical things is you've got a direct stake and a financial interest in folks buying a product that has an extraordinarily high interest rate, a cost in relationship to the benefit the person gets. And I'm searching for some other analogies in law, in medicine, in accounting where that exists and how you deal with what appears to me to be a conflict. Mr. Weinberger. Well, several points in response. First, that we may purchase a loan is disclosed to the consumer. Second, we're not the lending bank, although we purchase an interest in the loans. Third, if the company--and I'm not sure if it's fair, but if the company has an interest in the product succeeding, that doesn't necessarily apply to the individual tax return preparer who does not receive any financial incentive whatsoever for offering a RAL or a RAC. And so at the street level where the contact is with the taxpayer, there is no financial incentive to offer the product. And in fact, given Mr. Eckelberry's earlier testimony, I would like permission to enter into the record our performance evaluation discussion sheet, which is currently in use, which I think again illustrates that we are a values-driven rather than a sales-driven culture at H&R Block. And we make it very clear that our return preparer's first obligation is to do right by the taxpayer. And I think that's very strongly the emphasis of the company. Senator Coleman. Mr. Weinstein, do you want to add to that response? Mr. Weinstein. I think that it's very important for Jackson Hewitt to have satisfied customers. And to the extent that we have taken great pains to make sure that our tax preparers are trained adequately (and I think we heard some testimony today from Ms. Grant which may support that), and to the extent that we can provide clear disclosure that is understood by the customer, that is a good thing for Jackson Hewitt. We want to retain these customers, we want them to return to our stores. Senator Coleman. Gentlemen, first, we will make sure that document is entered into the record. I do want to thank you for your testimony. And this Subcommittee will certainly continue to work with you on these issues. So thank you very much. With that, this hearing is adjourned. 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