The Costs of Instant Tax Refunds

March 1, 2006

ABC News has a a new video news report detailing how costly those instant refund programs that you see advertised for during tax season can be to taxpayers. The report on these instant refunds:

“It is a good deal for the tax company, not for you. These instant rebates are actually loans and you get stuck paying fees on top of high interest charges.”

These refunds often target lower-income earners who have big refunds coming, typically as a result of the earned income credit (EIC), which is a program that attempts to encourage people to work by offering them refundable tax credits.

Many believe that running an income transfer program like EIC through the tax code and letting the IRS handle it is superior to establishing a welfare program and having it ran through some agency like HHS. But as this report demonstrates, administering it through the tax code has its costs too and may lead to results inferior to the desired social outcome. Specifically, a large portion of the gains from EIC are going to tax preparation agencies, leaving the intended recipients with significantly less. This is in addition to the heavy administrative costs that EIC creates for the IRS.

Moreover, these two issues of administrative costs and benefit allocation are not independent either. Recall a recent article that demonstrated the large number of delayed (frozen) EIC refunds due to IRS auditing. If individuals begin to expect large wait times for their refunds as a result of the IRS reviews (which is itself a result of the huge complexities of EIC), they will be more likely to demand these instant refund programs from companies like H&R Block and Jackson-Hewitt. In summary, the costs of complexity are compounding.

For more on the complexity in the tax code, check out the Tax Foundation’s section on compliance costs.


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