Bad News Before Christmas

All over the country, small tax offices and Jackson Hewitt franchisees received a nasty Christmas present 22 days before 2010 electronic filing begins.

On December 24th, Pacific Capital Bancorp announced that they want to sell their tax business to a private equity fund because regulators have barred it from originating any Refund Anticipation Loans in 2010. The thrust of the article is the impact on Jackson Hewitt which relies on Pacific Capital's tax business (Santa Barbara Bank and Trust) for 75% of their RAL funding. Beside Jackson Hewitt, SBB&T has a large part of the independent RAL market.

Another bank faces the piper for it's operating practices - so what? Because the service they offer is relied upon by small business owners all over the country. No matter what you think about RALs, millions of taxpayers use them and that is why JH, H&R Block and independents alike offer them. Had RALs been stopped across the board, taxpayers and business owners would have been effected but without the confusion and side effects this announcement could cause. If JH and Pacific Capital can't get this solved soon, we might see:

• Independents will be scrambling to find a new RAL bank. There are only a few options and from what I have heard, some might be in financial trouble too.
• Once the season begins, I think approvals will be down. If JH and many independents loose the ability to offer RALs, many clients will go to any tax office that can. The extra requests may put pressure on the remaining banks to be more cautious with money since they don't have a history with the new clients. This caution with funding has been happening already and one of the reasons I stopped offering RALs this year was the long time RAL clients who were denied a loan for no reason. The preparer will take the brunt of the taxpayer's anger at being denied.
• I think tax preparation prices will go up. The clients want RALs. There are limits to fees associated to them because of APR issues. The alternative is to raise tax preparation fees to take advantage of the demand. This effects all that preparer's clients not only the RAL client.
• As taxpayers look for a preparer who is still offering RALs, the no show dance will intensify. Joe wants a RAL but can't get in office A for 3 days. He makes an appointment and tries office B which has a wait of 2 days. Another appointment is made and a third office is tried. Of course no appointment is canceled. Those offices get a no show.

I could be wrong but if Pacific Capital and JH can't get this worked out soon, a lot of small business owners will not be seeing a happy new year as their income drops and clients are lost. These was shaping up to be a difficult tax season already but for some, this could be a killer.