Red Lake Nation News - Babaamaajimowinan (Telling of news in different places)

Tax-Preparation Companies Push High-Cost Loans Against Tax Refunds

First Nations Development Institute Releases New “More Tax Time Troubles” Report


LONGMONT, Colorado (October 15, 2012) – This past tax season, First Nations Development Institute (First Nations) carried out a “mystery shopper” study of for-profit, tax-preparation businesses serving Native American taxpayers. The study culminated in a report titled More Tax Time Troubles that identifies a number of issues encountered by Native American tax filers. Unfortunately, First Nations discovered that high-cost loans against tax refunds are still being aggressively marketed. Furthermore, some tax preparers manipulate taxpayers into signing up for costly bank products such as Refund Anticipation Checks in order to receive their tax refunds.

The 10 mystery shopper visits were conducted between November 28, 2011, and April 17, 2012, in towns across New Mexico, including Gallup, Espanola, Bernalillo, Farmington, Milan, Santa Fe and Albuquerque. With support from the Annie E. Casey Foundation and the W.K. Kellogg Foundation, this study was conducted to assess the quality of paid tax-preparation services to document whether these companies were steering individuals toward expensive products such as refund anticipation loans (RALs) or refund anticipation checks (RACs). This research builds on previous work conducted by First Nations that evaluated paid tax-preparation companies during the 2011 tax season.

The most troublesome finding was that some tax preparers use misinformation to manipulate clients into signing up for costly products like the RAC or RAL. Three of the 10 participants in the study were pushed to automatically sign up for a costly RAC to receive their refund. Tax preparers used several tactics to encourage people to use this product. In one case, the bank product was presented as the default option and the taxpayer was told he could not receive direct deposit into his bank account without paying a fee. In another case, a taxpayer was automatically rolled into a RAC product when her application for a RAL was denied.

Seven of the 10 shoppers were verbally encouraged to take out a RAL, and nearly all of the participants were surrounded by Republic Bank posters advertising RALs, including all three shoppers who were not verbally offered the option. Five mystery shoppers applied for a loan against their tax refunds, and three received at least one loan. Two loans were offered by Republic Bank, but the other loans were offered by consumer loan companies or pawnshop-type businesses.

First Nations’ research documented that tax-preparation firms employ a variety of techniques to urge people to use RAL-like credit products and then squeeze even more revenue out of RAL borrowers. For example, most tax-preparation firms required cash payment for tax-preparation fees, which may encourage more people to take out a loan-type product if they do not have cash on hand to pay for tax preparation. Once a taxpayer takes out a loan, the tax-preparation fees are often rolled into the cost of the loan, increasing the principal upon which interest is charged.

Additionally, the research identified that loan companies often employ questionable or illegal practices when managing the loan process or completing the loan agreements. For example, First Nations documented two cases where birth certificates and/or Social Security cards were used as collateral for a loan, even though they have limited financial value. It was very common to have people sign power of attorney forms without any explanation of what they were. First Nations was informed about one case where a tax-preparation firm had clients sign a 10-year power of attorney form, thus ensuring that the tax refund is returned to that business for the next 10 years no matter where the tax return was prepared. In addition, one company did not clearly disclose the annual percentage rate on the tax-time loan, in violation of New Mexico state law.

Sarah Dewees, First Nations’ senior director of research, policy and asset-building programs, said, “We acknowledge that tax-preparation firms can provide a valuable service, but we expect them to act ethically and in the best interest of their customers. Our research suggests this is not always the case, and instead tax preparers are taking advantage of some Native American tax filers.” Dewees will present the findings in San Antonio, Texas, on October 15, 2012, at the Ninth Annual Native Gathering during the Opportunity Finance Network conference.

One of the mystery shoppers, a single mother with three children, applied for a holiday loan against her tax refund in December and had to leave her children’s Social Security cards and birth certificates as “collateral.” She then had her taxes prepared in January and applied for a refund anticipation loan. She called the tax firm three weeks later to see if her refund had come in and was told it hadn’t, even though the IRS website indicated that it had (she was later told that the company needed 10 days to “process” the refund). Under economic pressure because she was recently unemployed, she applied for a third refund loan and ended up paying a total of 15%, or $1,318, in loan fees against her $8,000 refund. She finally got her children’s Social Security cards back in February, but was unable to participate in Toys for Tots during the holiday season because she did not have her children’s cards. This client later filed a complaint with the New Mexico Attorney General’s Office against the tax-preparation firm and received a payment from the firm for the fees associated with the third loan.

“It is disheartening to see that some businesses continue to prey on low-income populations who need their hard-earned refunds the most,” noted Shawn Spruce, a First Nations consultant who assisted with this project. Spruce presented the findings of the report to the New Mexico Indian Affairs Committee on September 26, 2012, in Gallup, New Mexico. The purpose was to make key legislators and tribal leaders (as well as tax-preparation businesses) aware of how firms take advantage of Native American taxpayers within and around communities with high Native populations.

“This presentation to the Indian Affairs Committee was crucial to fight for consumer protections for Native Americans,” said Michael E. Roberts, president of First Nations. “Our More Tax Time Troubles report provided legislators and tribal leaders with solid evidence that predatory lending continues to be a problem in many New Mexico communities.”

To access an electronic copy of the report, please visit First Nations' Knowledge Center here. To order a paper copy of the report, please contact Sarah Dewees at or by phone at (540) 371-5615.

About First Nations Development Institute

For more than 30 years, using a three-pronged strategy of educating grassroots practitioners, advocating for systemic change, and capitalizing Indian communities, First Nations has been working to restore Native American control and culturally-compatible stewardship of the assets they own – be they land, human potential, cultural heritage or natural resources – and to establish new assets for ensuring the long-term vitality of Native American communities. First Nations serves Native American communities throughout the United States. For more information about First Nations, visit


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