Don’t Be Shortchanged by Tax Refund

Now here’s an offer you can refuse.

H & R Block Inc., the ubiquitous tax preparers, say they’re unhappy with President Bush’s plan to reduce federal withholding to give Americans more money during the year and less in tax refunds.

“We deal with more than 17 million taxpayers and we think we have a good idea of how they feel,” said Thomas M. Bloch, president of the Kansas City, Mo., tax filing firm. “Most of our customers, who represent most of middle America, want a refund.”

Even though consumers may enjoy having a bit more money in their pockets during 1992, the President’s plan will backfire when people realize that they’ll get smaller refunds in 1993, Bloch added.

The way to get a refund, of course, is to pay too much in federal tax during the year. Then the IRS returns your money, sans interest, at its leisure, sometime after you file your annual tax return. And H & R Block is willing to help you get this miserable deal by revising workers’ W-4 withholding forms so you’re sure to overpay.

“We feel so strongly about this that we are offering to provide this service free to taxpayers nationwide,” Bloch said. “Anyone who wants to make sure there will be a tax refund at this time next year can come to the nearest H & R Block office and ask us to fill out a new W-4 form.”

Now some might suspect this is all just a bit self-serving. After all, H & R Block does a land-office business with consumers so anxious to get their refunds that they’re willing to pay exorbitant fees to get the checks just a few weeks early.

Indeed, about 5 million of the 17 million individuals who have H & R Block handle their tax returns opted to file electronically, at a cost ranging from $25 to $35 a crack. (That’s just for electronic filing. Tax preparation is extra.) The IRS says that if you file electronically, you’ll usually get your refund two or three weeks quicker.

Conservatively, the electronic filing rush means $125 million in revenue for H & R Block.

Meanwhile, “a large portion” of those 5 million electronic filers also take out “refund anticipation loans,” Bloch acknowledged. These loans give taxpayers their refunds within a few working days, instead of having to wait three weeks or more for their IRS check. The cost? $29.

H & R Block doesn’t get all that money, though.

“It’s a bank fee,” Bloch said. However, the tax preparation firm does get a “license fee” from the banks involved, based on the amount of business Block offices send their way.

What does it mean for the consumer? Between electronic filing and refund anticipation loans, consumers will probably get their refund roughly one or two months--30 to 60 days--sooner than they could otherwise expect. (The later you file, the longer it takes.) For that they’ll have paid between $54 and $64 in “fees” (so-called because if it was called “interest,” it would be usurious and against the law).

To put it another way, if the refund was for $1,000, the $54 fee you paid to get it 30 days early would amount to paying a bank about 65% interest for a short-term loan. Good deal? Hardly.

Nevertheless, people pay these fees in droves. Why? They need the money.

Here are some better ideas. If you get a refund at the end of the year, adjust your W-4 form so that less is taken out during the year. You won’t need to wait for your refund, because you’ll already have it.

You want the money in a lump sum? See if your employer offers an automatic savings plan, that allows you to sock away a small portion of your paycheck each month before you get the check. Practically speaking, this works the same way as federal withholding. The money is taken out before you can get your greedy little hands on it.

The difference is, you’ll earn interest on the money and won’t need to pay anybody to give it to you when you want it.

If you normally get a $1,000 refund and you want to duplicate with your savings plan, you’d ask your employer to set aside about $19.25 per week--round that to $20--in the savings plan.

So now you put $20 away in the savings plan each week and earn 5% interest. Your savings will be worth about $1,070 at year-end-- the $1,040 you set aside, plus interest.

If you otherwise would have filed electronically and paid for the refund loan, you’re even better off because you didn’t pay the $54 to $64 to get your hands on your own money.

What if you don’t know how to adjust your withholding correctly? There are solutions. Your employer may be able to help. The IRS hot line--1-800-tax-1040--could help. Your regular tax preparer might help.

You can even ask H & R Block. Even though the point of its free service is to encourage consumers to over-withhold and get refunds, Thomas Bloch says the firm will help consumers with their W-4s whatever they want to do with their withholding. Free.

“We just want our customers to get what they want,” he said.

Kathy M. Kristof welcomes readers’ comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.