Good Riddance to Tax Refund Loans?

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If the only two certainties in life are death and taxes, what about the death of the tax-refund anticipation loan?

The Internal Revenue Service is considering putting restrictions on this loan, a product that tax preparation specialists such as H&R Block (NYSE: HRB) and Jackson Hewitt (NYSE: JTX) have been promoting for years.

The convenience of receiving less money up front, rather than a full refund in weeks or months, has been a blessing for cash-strapped filers. But the IRS is concerned about possible fraud and a practice that lends itself to unreasonably high rates.

I can vouch for the fraud part. Someone stepped into an H&R Block office last February to file a bogus tax return in my name and a second one in my wife's name. Taking advantage of H&R Block's Instant Money service, they walked out of the office with hundreds of dollars on a pre-paid debit card from HSBC.

Even after clearing the matter, we were unable to file our legitimate taxes electronically last year and had to endure months of harassing phone calls from HSBC.

Identity theft cases like ours are rare, apparently. The real fraud typically occurs thanks to shady preparers who try to pump up fees by inflating expected returns.

There is also the matter of the high percentage rates -- on an annualized basis -- that creditors charge to take on the task of waiting for Uncle Sam to clear the tab. They're not as outrageous as rates from payday advance outfits such as Advance America (NYSE: AEA), Dollar Financial (Nasdaq: DLLR), Cash America (NYSE: CSH), and EZCORP (Nasdaq: EZPW); those anticipation loans can fetch fees equivalent to more than 200% on an annualized basis. However, it's hard to shake the IRS off your tail when it doesn't like what it smells.

The news was enough to send Jackson Hewitt's shares free-falling 23% lower. H&R Block's stock took a mere 5% hit, but those shares have been battered badly enough to hit a fresh five-year low on the news. It's still not a done deal, and even if refund anticipation loans are restricted, the move won't take effect until next year at the earliest.

However, Jackson Hewitt's statement, issued after last night's close, addressed only the fact that IRS will spend the next three months accepting opinions on the matter before finalizing its decision for next year. Investors would have probably been more relieved to hear how Jackson Hewitt can thrive even if that revenue stream is cut off.

These are taxing times indeed for the tax preparers.