If you take your taxes to a tax-in-the-box service, beware. I'm talking about those retail outlets in strip malls and department stores that are part of national chains. It doesn't matter which one you choose, they are all a bad idea.
I worked at a tax prep service for nine years, and the fee structure always troubled me. I told myself that it was just part of the job, that all tax prep service tactics were the same. They are, but that doesn't make their unethical tactics okay.
The bottom line is that no matter what you pay for tax prep at these places, you are getting ripped off. The service is designed that way. What I learned about how they operate is disturbing, and I think consumers ought to know.
Regardless of their advertising, tax prep services are NOT designed to serve you and your tax needs. They are designed to make as much money as possible off your need to have your taxes done. This seemingly innocent minor shift in focus makes a big difference in service and cost.
Here's why you should avoid using them.
Reason #1: You will be charged for "free gifts".
This season I came upon fee breakdown documentation at work that is not shared with the customer. It caused me to leave the office that day never to return.
The documentation clearly showed that what our company was advertising as a FREE $50 debit card "just for coming to see us" was actually being included in the tax prep fees. On the customer's distributions column it showed "Promo card - $50". On their fees column one of the line items was "Promo card - $50". Neither of these items appeared for a customer who declined the "free" card.
This means that we were charging for the "free" "gift" debit card. All our advertising stated otherwise, right down to the recorded greeting on our phones. We had been expressly trained to say the card was free, and when we asked, we were told that its cost was absolutely NOT built into the fees.
So the "free gift" isn't free; the customer is tricked into actually buying the debit card because the promo card charge is never included in the version of the fee breakdown shown to them.
False advertising? You bet! Welcome to the ugly world of tax prep service company tactics.
Reason #2: Your fees are completely arbitrary, and vary based on questionable business practices.
Tax prep service customers are told they are being charged for:
- Federal tax return prep
- State tax return prep
- Document storage
- A variety of optional add-on "services"
The tax preparer is trained to answer questions prompted by the company's software to fill out the return. Their training should make them knowledgeable about what the software is doing with their answers, but the software is by no means foolproof, and neither are they. Nonetheless, the tax preparers are expected to tell the customer their accuracy and knowledge is unassailable. The most recent phrasing we were instructed to use was "Your return will be 100% accurate. I guarantee it."
In most cases, the state tax return is populated primarily by numbers from the federal return. So the work there is done by a computer, and rarely requires human intervention. And yes, computer software and other overhead is part of the service, but my background in programming (I spent 15 years in the high tech industry before doing tax work) and experience with tax software led me to the impression that very little of any tax corporation's resources are dedicated to that part of their product.
The document storage fee is a similar kind of rip-off, because the files are stored on a computer, and the customer is told they can get a copy anytime "for free".
The optional add-on services include a refund disbursement charge, a charge for paying the fees from the refund (discussed below), and one or more accuracy guarantees. All of these are completely unnecessary to purchase.
The refund disbursement method charge occurs if a customer chooses to receive their refund in any way other than a direct deposit or a check mailed from the IRS. These methods include having the refund loaded on a debit card or picking up a check from the office, with associated fees starting at $15.
NEVER buy any tax prep service guarantee of any kind. These are tantamount to an extended warranty such as the ones you are encouraged to buy on furniture or new cars. Tax service guarantees are expressly designed to pay out only if the tax preparer makes a mistake. But you are encouraged to believe the tax preparer won't make mistakes, right? And anyway why would you be taking your taxes to a professional service if there was a reasonable chance of them making a mistake? If you are still not convinced, know that the tax prep service goes out of its way to avoid paying out on guarantees by making sure that all data on the return can be traced directly to the taxpayer, and not the preparer.
Tax prep service customers are actually charged for:
- Number of forms in the return
- How late they are filing
- Their ability to pay
- Annual fee increase
- Whether they are getting Earned Income Tax Credit (EITC)
The more forms required, the more complicated the return and thus the higher the fees. This may or may not be justified, depending on the nature of the forms. Many are exceedingly simple.
Similarly, the later in the year, the higher the fees, because the tax prep service knows you're desperate.
NEVER file with a tax-in-the-box service on the last day of tax season. Customers typically pay the highest prices on this day because the fees increase as the season progresses, while the company's inclination to work with customers on fees sharply decreases.
Not surprisingly, the higher your annual income the higher the fees because the tax service knows that you can afford it. That's the beauty of tax prep services, they can see what you earn. Remember, they are in business to make money off of your need, not to serve it.
If you are a returning customer and you ask for an estimate up front, tax prep service workers are trained to tell you that if nothing has changed your fees will be "about the same as last year". That means that you will be charged whatever you paid last year plus about $15 or more. The tax prep service is counting on your inability to remember an exact figure from a year ago, and your acceptance that everything gets more expensive over time. In reality, if nothing has changed your tax preparer actually has less work to do because all personal information is carried forward to the next year. The fee increase is just another way for them to increase their profits.
If you qualify for EITC, your fees will always be higher. The tax preparer will point out that your return required a couple extra forms to be filled out to receive the EITC as justification. Don't be fooled. Those forms are simple. Tax prep fees are higher for EITC recipients for two main reasons:
1. Psychology. Tax prep services take advantage of an EITC recipient's tendency to regard that part of their refund as free money from the government. Thus some one getting EITC is usually more likely to fork over part of it to a tax prep service because it isn't their hard-earned money anyway.
2. Fear. Tax prep services want to make you believe they do something magical to your return to get you the EITC. Something you couldn't do yourself, or that you might do wrong and the government will come and take it back from you. Taxpayers naturally look at free money from the government as too good to be true, and so are inclined to believe these things. And even though neither is true, why take a chance, right? Wrong.
Reason #3: The more you need the money, they more they charge you.
EITC is a federal program designed to provide relief to working taxpayers in the lower income ranges. You can read all about it here
. The idea is to help out workers, and in particular those with children, make ends meet. The program was never designed to support the tax prep industry, but that is exactly what it does.
In addition to the increased fees discussed above, EITC customers are fleeced in a second way. Often these customers cannot pay the steep fees out of pocket. So tax prep services provide "help" by allowing the customer to pay their fees from their refund. Essentially, they set up a bank intermediary to intercept the refund, send them the fees and then issue a check to the customer for the balance. This process is sold to the customer as a service, and that service comes with a heavy price. A price which is added to the fees, of course!
For example, it is not uncommon for a single working mother of three to get an EITC of $3000 in her refund. This is usually the biggest check of her year and badly needed for paying household bills. At a tax-in-the-box service her fees with be upwards of $400. A person in her position rarely has that kind of cash on hand, so she will choose to pay the fees out of her refund, and have a check issued to her for the balance. This can add as much as $100 to her fees, and she thereby surrenders $500, or 17% of her EITC just to get access to it.
This is perhaps the most insidious part of the tax prep service industry: EITC recipients are their bread and butter customers. Their business model is built around this type of customer for the above reasons, and more. That's because an EITC recipient is more likely to be lower on the income scale, and thus desperate for their refund. It's the perfect setup: target customers who are willing to pay almost any amount just to get the badly needed cash flow their tax refund provides.
This is all perfectly legal. And distinctly immoral.
You don't need a tax prep service to get EITC. In fact, your EITC refund will most likely be lower by several hundred dollars if you use a tax prep service.
You should not fear doing your own taxes. If you're getting EITC and your situation hasn't changed in the last year, take a look at your last return paperwork and see if you can replicate it using the latest numbers. If you have questions, contact local free tax preparation help often available through your county government. You shouldn't have to share your tax refund with anybody, and especially with not a parasitic tax prep "service".
Reason #4: "Special deal" pricing is a come-on, and even if you can get it you will be ripped off.
If you got a "deal", say only $88 for state and federal returns, it wasn't really a deal. Why? Because that price is only available for the simplest return: a single person with no dependents, no payroll deductions and only one W-2. That kind of return requires only three numbers from the taxpayer's W-2 (gross pay, federal taxes withheld and state taxes withheld). The return is so basic the taxpayer could have done it himself on a 1040EZ form for free. My 16-year-old filled out her own 1040EZ in just a few minutes; it's that simple. But if you are still unsure, use any of the free online services, including the one at the IRS website
If you paid more than the come-on price, it's an even bigger rip-off, as I explained above.
Reason #5: The faster you need the money, the more they will charge you.
Tax prep services will offer a range of rapid refund or immediate partial refund services. All of these come with a price, hidden or otherwise. The names and strategies around these "services" change every year because consumer protection agencies keep outlawing them.
No tax prep service can speed up your refund. Your tax return will be processed by the IRS at the same speed regardless of who sends it in. Once your return reaches the IRS, a tax prep service has absolutely no way to affect the rate at which it is processed.
A word about your preparer: This person is typically powerless to set or reduce your fees. Sometimes a preparer has the ability to reduce the fees by perhaps $10 or $15, but usually any fee reduction has to go through the management. This requires a phone call that delays completion of your return. It's the old "I have to talk to the management about that price" trick used by car salesman.
You should also know that your tax preparer is working a part-time seasonal job that starts at minimum wage with no benefits. They are expected to take classes and tests, obtain an annual license at their own expense, and learn all the new IRS rules, software updates, company processes and new product options in a short time preceding every season after eight months of being away. They are expected to apply a great deal of newly acquired complex knowledge to a person's sensitive personal finances in a way that generates as much money as is legally possible in refund while constantly under threat of being penalized in case fraud is overlooked. The preparer must also make the customer comfortable with an arcane tax code and paying as much as possible for the tax service, as well as sell that customer as many add-on products as possible.
So if you've read this far and you're still considering going to a tax prep service, be prepared. Examine the fees. Ask a lot of questions. Don't be in a hurry to get your return filed, and especially not in a hurry to get your refund. Never agree to purchase any optional services or warranties. And by all means, don't accept any "free gifts".
Just remember, they don't want to do your taxes. They want to do you.