Free Tax Help Vs. “Money Like Magic”

Volunteer tax preparers caution on Magic Johnson’s ad campaign



SAN FRANCISCO--Tax season is busy at the Chinese Newcomers Service Center in San Francisco, where the volunteer income tax assistance program — VITA—draws up to 1,600 clients a year seeking free help preparing their tax returns.

This year, the VITA centers have had to compete with the star-power of basketball legend Magic Johnson. Since November 2008, Johnson has appeared on billboards and in TV ad campaigns as the pitchman for Jackson Hewitt, the tax preparing company. His slogan, “It’s Money Like Magic,” is meant to lure customers to the company’s Money Loan Now product, a refund anticipation loan, or RAL. RALs are short-term loans secured by federal income tax refunds, which typically carry high interest rates — as much as 150 percent.

“I saw the ad with Magic Johnson on TV, and from a commercial point of view, it does attract clients, but I don’t endorse it,” said Alex Ng, VITA program manager at the center, which is endorsed by the IRS. “We educate our clients not to do the RAL because they might end up losing a lot of money, as well as interest, if they aren’t entitled to a refund. Then they would be in trouble. They should never turn to the RAL to get a faster refund when we can do the same by doing the e-filing.”

In economic hard times, Magic Johnson’s siren call of fast, easy money may be hard for many struggling families to resist, say consumer advocates, and that is worrisome. RALS are usually pitched to low-income clients who qualify for the federal Earned Income Tax Credit (EITC)—worth as much as $4,200 per family, depending on the number of children.

RALs and the companies, including Jackson Hewitt and H&R Block, that sell them have been the targets of state prosecution for fraud because customers often did not know they were taking out loans. In many cases, loans were based on inaccurate income reporting, locking people into repaying loans that were much higher than the actual tax refund. In 2007, Jackson Hewitt was fined $5 million by California Attorney General Jerry Brown for its RAL program, and now is under a strict injunction on how it can sell its loan products. And just this January, H&R Block settled a suit brought by Brown’s office for marketing RALs as tax refunds, agreeing to pay $4.85 million.

“For low- to moderate-income folks, where finances constrained, I don’t think there’s such thing as a good RAL product,” said Kimberly S. Jones, policy advocate with the California Reinvestment Coalition, a consumer advocacy group. If you’re making $60,000 or $70,000 as a single person or couple, maybe. But if not, why are you borrowing against money you’re being given as a pathway out of poverty?”

According to the Coalition, nearly 9 million taxpayers took out refund anticipation loans in 2007, which cost them almost $1 billion in fees. Most were borrowing against EITC. The advocates estimated that $523 million which was intended to aid these low-income families, was lost to RALs that year.

“A lot of people are losing their jobs so they were going after the money,” said Pat Contantine, director of the VITA center at the San Antonio Community Development Center in Oakland. “What they are doing is hard on the community. And then here comes Magic Johnson. I am so mad at him.” Constantine says that some paid tax preparers change clients’ W4 reported earnings to be higher in order to receive a higher RAL. That means they end up owing more money than they actually get refunded by the IRS. She and her volunteer preparers try to educate people about the realities of RALs.

“I am here all year round. I see clients and follow them all year. I’m able to talk to them and tell them, ‘Why go to H&R Block? They never understood it was a loan. They just thought it was the refund they are supposed to get and they get it early.”

Countering the Magic Johnson ads, the VITA program, which is supported by the United Way, has it’s own ad campaign: Earn It, Keep It, Save It! It encourages people to use the free tax preparing service, which is available to those earning $45,000 or less. But even a free service faces tough competition from Johnson.

“People are definitely listening to the lure,” said Maria Benjamin, director of the Family Economic Security Partnership in Richmond. “Last year we had a huge increases in our numbers of people coming to get taxes done for free because of the economic stimulus check. We were anticipating that those same people would come back, but our numbers went back to what they were before.” She thinks that many of them are going to paid tax services because of the advertising and their own economic needs. She also says her opinion of the basketball star has changed. “I was floored with the Magic Johnson campaign. I thought he was a nice guy,” she said. “But he was lured into this thing. It is so bad for working families. Did he not read before he agreed to do this?”

Benjamin says she wrote many letters to Magic Johnson Enterprises, the celebrity’s company, but never got a response. The public relations contact for Johnson did not respond to requests for comment for this article. Jackson Hewitt did not respond to similar requests for comment.

Jones, of the Coalition, says her group also tried to contact Magic Johnson about his promotion of RALs and other paid services to no avail. Then they learned that he has also become a spokesman for Rent-a-Center, a company that is a frequent target of consumer advocates, and she saw it as a teachable moment.

“In a way, Magic Johnson has been a gift in the advocacy community because a lot of people weren’t aware of RALs,” Jones said. “When we start to tell them about RALs, they still might not get it, but when we tell them that Magic Johnson announced his role at Rent-a-Center, it kind of shines a brighter light on the idea that Magic is associating with people who, by most consumer advocate accounts, are predators.”

Despite Johnson’s appeal and the visibility of Jackson Hewitt’s media campaign, Jones thinks that Bay Area consumers have been well educated about RALs and the availability of free VITA services.

“Especially in the Bay Area, in San Francisco or Alameda County, where you have the United Way’s Earn It, Keep It, Save It, it’s been a success story,” she said. “It’s getting harder to find people who are victims of predatory loans. VITA sites have been effective in getting the word out: if you’re going to get this EITC money, get all of it, don’t give some of it away to these predators. Go to a VITA center and get it done for free.”