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There’s a Cost to “Free?”

Who doesn’t like getting something for free? And who dislikes doing their taxes? HR Block, Jackson Hewitt, and Walmart have packaged these two sentiments into a massive marketing campaign for free tax preparation. But is it really free? Not so much.

The truth is that the “free” program offered in Block and Jackson Hewitt stores, now with kiosks inside Walmart, is more of a ploy to get customers in the door than to offer them free assistance. To be clear, when asked, all three companies are pretty clear about that and what they are doing isn’t illegal. But is it deceptive? The program only covers the 1040 EZ form, as revealed in the fine print. Most families, especially those getting a tax refund because of the Earned Income Tax Credit (EITC), are not going to use that form. According to Block, only 16% of their clients were eligible for the 1040 EZ in 2010.

Most families do not know the nuances of the 1040 forms and enter the store thinking they are getting free tax preparation. The 1040 EZ does not cover: anyone with children who plans to claim them as dependents, anyone who wants to itemize deductions (homeowners usually), and anyone claiming student loan interest, health care credits, child credits, or retirement credits. And of course, the nation’s largest poverty relief program: the EITC. The cost of paid preparation for these items varies but the federal return ranges from $89 to $250 (not including state, local, e-filing, and other fees). Absent from this discussion and any of the marketing materials are the discussion of tax refund anticipation checks (RACs), which are the cousin of the almost disappeared tax refund anticipation loans (RALs). A RAC is a paper refund check after the cost of paid preparation is subtracted from the total IRS return.

 The limited group who qualifies for free tax prep will have to pay for state and local tax forms. The fine print indicates that with the free preparation - “Additional fees apply for state, local and more complex Federal tax returns, financial products and other services.” The value of these services are debatable as most states have free e-filing for state returns, which are also less complicated than Federal returns.

Another concern for consumers is how they get their tax refund. Walmart and the commercial tax preparers provide three options for getting a refund: direct deposit, paper check, and a prepaid card. Each company has its own card. Direct deposit is by far the best option, it is free, quick, and easier to put toward savings. To its credit, Walmart has a very low cost option for cashing the tax refund check when it arrives. Others will turn to the heavily marketed debit card. The prepaid card from Walmart isn’t the worst card out there, but it has fees and customers should take note. The fee schedule states that there is a $3 charge if $1,000 isn’t added to a card in a given month. There is a $2 charge to withdraw cash from an ATM (most low-income families are very much in a cash economy). There is a $1 fee to check your balance, each time. There are also appears to be $3 reload fees (waived for the tax refund) and $2 for over-the-counter transactions. This fee structure makes this an expensive substitute for a credit union or bank account (the obvious exception being the lack of an overdraft penalty).

If Walmart, HR Block, and Jackson Hewitt want to provide free tax preparation…they should do it. But free needs to mean free. Otherwise, the companies should change their marketing to indicate lower cost paid preparation. There are options that really are free to the taxpayer, the IRS' VITA Program, the Benefit Bank, and many others. There’s no problem with Block, Hewitt and Walmart making money off of tax preparation, it’s a service that people are willing to pay for (billions and billions altogether). The question is whether there’s a problem marketing something as “free” when it isn’t for 84% of your customers. The Consumer Financial Protection Bureau has a charge to “restrict unfair, deceptive, or abusive acts or practices.” Does this campaign cross that line? Here’s hoping we find out soon.