[Senate Hearing 109-81]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 109-81
 
                     TAX RELATED FINANCIAL PRODUCTS
                             CAN BE COSTLY

=======================================================================

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 15, 2005

                               __________

                  FIELD HEARING IN ST. PAUL, MINNESOTA

                               __________

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs




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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

           Michael D. Bopp, Staff Director and Chief Counsel
   Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                      Amy B. Newhouse, Chief Clerk


                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                   NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska                  CARL LEVIN, Michigan
TOM COBURN, Oklahoma                 DANIEL K. AKAKA, Hawaii
LINCOLN D. CHAFEE, Rhode Island      THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia             MARK PRYOR, Arkansas

       Raymond V. Shepherd, III, Staff Director and Chief Counsel
                     C. Jay Jennings, Investigator
        Elise J. Bean, Minority Staff Director and Chief Counsel
                     Mary D. Robertson, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statement:
                                                                   Page
    Senator Coleman..............................................     1

                               WITNESSES
                         Friday, April 15, 2005

Pat Eckelberry, Former H&R Block Tax Preparer, Wayzata, Minnesota     4
Nila Grant, Former Jackson Hewitt Tax Preparer, New Hope, 
  Minnesota......................................................     6
Julie Burbach, H&R Block Client, St. Paul, Minnesota.............     8
Beth Haney, Ph.D., Research and Outreach Director, Children's 
  Defense Fund, St. Paul, Minnesota..............................    14
Bonnie Esposito, Executive Director, AccountAbility Minnesota, 
  St. Paul, Minnesota............................................    16
Gary P. Weinstein, Vice President, Legal and Government Affairs, 
  Jackson Hewitt Tax Services, Inc., Parsippany, New Jersey......    24
Robert A. Weinberger, Vice President, Government Relations, H&R 
  Block, Kansas City, Kansas.....................................    27

                     Alphabetical List of Witnesses

Burbach, Julie:
    Testimony....................................................     8
    Prepared statement...........................................    42
Eckelberry, Pat:
    Testimony....................................................     4
    Prepared statement...........................................    37
Esposito, Bonnie:
    Testimony....................................................    16
    Prepared statement with an attachment........................    57
Grant, Nila:
    Testimony....................................................     6
    Prepared statement...........................................    40
Haney, Beth, Ph.D.:
    Testimony....................................................    14
    Prepared statement with attachments..........................    44
Weinberger, Robert A.:
    Testimony....................................................    27
    Prepared statement with an attachment........................   161
Weinstein, Gary P.:
    Testimony....................................................    24
    Prepared statement with attachments..........................   141

                                EXHIBITS

 1. GRefund Anticipation Loan Process, chart prepared by the 
  Permanent Subcommittee on Investigations.......................   168

 2. GVoluntary Income Tax Assistance (VITA) Sites in Minnesota,  
  chart prepared by the Permanent Subcommittee on Investigations.   169

 3. GIRS Tax Assistance Centers in Minnesota, chart prepared by 
  the Permanent Subcommittee on Investigations...................   170

 4. GPrintout of IRS.gov Internet website, regarding Free File 
  Home--Your Link to Free Online Filing..........................   171

 5. GH&R Block Quality Interview--Value-Added Closing sheet 
  received from Pat Eckelberry, former H&R Block Tax Preparer....   172

 6. GH&R Block Intra-Company Correspondence, received by Pat 
  Eckelberry, former H&R Block Tax Preparer regarding Peace of 
  Mind guarantee.................................................   173

 7. GStatement for the Record of Maerine Henderson...............   174

 8. GStatement for the Record of Richard Turner, RAL Program 
  Director, Santa Barbara Bank of Trust..........................   176

 9. GStatement for the Record of HSBC Taxpayer Financial Services   179

10. GStatement for the Record of ACORN Financial Justice Center, 
  St. Paul, MN...................................................   189

11. GCorrespondence from Jackson Hewitt to the Permanent 
  Subcommittee on Investigations regarding percentage of Jackson 
  Hewitt customers who receive an Earned Income Tax Credit in 
  Minnesota and who also obtained a refund anticipation loan.....   191

12. GCorrespondence from H&R Block to the Permanent Subcommittee 
  on Investigations regarding questions for the record...........   192


                     TAX RELATED FINANCIAL PRODUCTS



                             CAN BE COSTLY

                              ----------                              


                         FRIDAY, APRIL 15, 2005

                                     U.S. Senate,  
              Permanent Subcommittee on Investigations,    
                           Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:02 p.m., in 
The Reading Room of the James J. Hill Reference Library, 80 
West Fourth Street, St. Paul, Minnesota, Hon. Norm Coleman, 
Chairman of the Subcommittee, presiding.
    Present: Senator Coleman.
    Staff Present: Jay Jennings, Investigator.

             OPENING STATEMENT OF CHAIRMAN COLEMAN

    Senator Coleman. This hearing of the Permanent Subcommittee 
on Investigations is called to order.
    Good afternoon and thank you for attending today's hearing. 
As Chairman of the Permanent Subcommittee on Investigations, I 
have investigated and conducted hearings on a wide variety of 
subjects related to fraud, waste and abuse, including consumer 
abuses in the credit counseling industry, Department of Defense 
contractors who owed over $3 billion in unpaid taxes, the 
safety and availability of imported prescription drugs, the 
abuse of tax shelters to evade paying billions of dollars in 
Federal taxes, and the Oil-for-Food program in which Saddam 
Hussein diverted billions of dollars to reward his friends, 
bribe U.N. member states, and rebuild his military. As your 
Senator, my primary responsibility is to represent the 
interests of the people of Minnesota.
    I have heard and read about Minnesotans' concerns related 
to the financial products that are offered by tax preparers, 
and particularly Refund Anticipation Loans, or RALs, as they 
are known. It is a pleasure to conduct this hearing in 
Minnesota so that I can determine whether there are abusive 
practices in the marketing of these products, what options 
exist to mitigate their high costs, and to ensure that there 
are appropriate checks and balances to promote fairness and 
integrity in the tax preparation industry.
    In addition to RALs, the other bank products include refund 
anticipation checks, refund transfers, debit cards, loans to 
pay taxes that are due, and in one case, advance loans that are 
offered in November and December for holiday needs.
    RALs are loans provided by banks, and I want to stress 
that. Loans provided by banks through tax preparers that are 
secured by the taxpayer's anticipated refund. These loans are 
considered high risk and carry an extraordinarily high annual 
percentage rate ranging from 28 to 424 percent. RALs may be 
offered as a same-day advance loan or as a payment that is made 
to the taxpayer within 2 days of filing their tax return. RALs 
are the fastest and most costly method of obtaining a refund in 
the form of a loan, and they may be appropriate for some 
taxpayers who are in extreme financial distress, lack a bank 
account, or cannot afford to pay their tax preparation fees.
    On the other hand, there were over 12 million tax-related 
financial products sold in 2003, of which almost 9 million were 
RALs. It is not clear whether the popularity of RALs is due to 
financial distress, taxpayer impatience, or aggressive 
marketing tactics.
    In addition to being costly to consumers, my investigation 
has determined that these products are highly profitable, 
generating over $200 million in revenue in 2004 for H&R Block 
and Jackson Hewitt, the two largest tax preparers in the 
country.
    Let me briefly review the RAL process. Take a look at 
Exhibit 1,\1\ which is on my right and your left. When a 
taxpayer is due a refund and wants a RAL, the taxpayer 
authorizes IRS to send their refund to the bank that is making 
the loan. IRS sends the taxpayer's refund to the bank. The bank 
deducts the tax preparation charges and the application fee, 
and sends that money to the tax preparer. The bank further 
deducts a bank account setup fee, the finance charge, and any 
outstanding balance due from a prior RAL. Whatever remains is 
provided to the taxpayer.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1, which appears in the Appendix on page 168.
---------------------------------------------------------------------------
    To promote the sale of their products, the banks also pay 
tax preparers like H&R Block and Jackson Hewitt refunds, 
incentives, and rebates.
    I am concerned that these promotional activities in certain 
circumstances could conflict with tax preparers' ethical 
obligations to place their clients' interest first. This could 
result in selling high-cost products to clients when there are 
less costly alternatives available. The trust relationship that 
exists between a taxpayer and a tax preparer should be no less 
sacrosanct than the trust relationship that exists between an 
attorney and client, or a doctor and patient. Consider that 
your tax preparer probably knows more about your personal life 
than your best friend. We cannot allow this kind of trust 
relationship to be betrayed by the tax preparer or the company 
for a financial gain that occurs at the expense of their 
client. And I plan to make sure that there are adequate checks 
and balances to ensure that if this occurs, there will be 
adverse consequences.
    There are less costly alternatives to a RAL, but they do 
not have the instant gratification that is often promised by a 
RAL. These alternatives include lower cost financial products 
and free tax preparation for lower income and elderly 
individuals. For example, a refund anticipation check, or RAC, 
is a bank product that costs less than a RAL because it is not 
a loan and therefore does not have a finance charge. RACs have 
account set-up and application fees, but can be used to defer 
the tax preparation fee and requires a wait of about 8 to 15 
days.
    Most clients are not thoroughly familiar with the variety 
of options offered by tax preparers. Where a tax preparer 
offers to serve their clients' best interests by finding every 
legitimate deduction and credit and minimizing the taxes that 
their clients pay, I believe they should have no less of an 
obligation to recommend the refund method that best suits their 
clients' needs.
    Another alternative to the high cost of a RAL is free tax 
preparation. In Minnesota, a taxpayer has three options: The 
Volunteer Income Tax Assistance, or VITA program, has 273 sites 
located throughout Minnesota that are staffed by volunteers who 
can prepare and e-file a tax return.\1\ In 2004, Minnesota's 
VITA sites prepared and filed 41,018 tax returns. The Internal 
Revenue Service operates tax assistance centers in Bloomington, 
Duluth, Mankato, Minneapolis, Rochester, St. Cloud, and St. 
Paul.\2\ IRS will complete and file a taxpayer's return at 
these centers. In 2004, these tax assistance centers prepared 
and filed 2,425 tax returns, of which 159 were EITC, Earned 
Income Tax Credit, returns.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 2, which appears in the Appendix on page 169.
    \2\ See Exhibit No. 3, which appears in the Appendix on page 170.
---------------------------------------------------------------------------
    This past week, IRS announced that it plans to close 105 of 
its 367 tax assistance centers nationwide, and I will discuss 
this with Commissioner Mark Everson to ensure that the IRS 
continues to provide assistance to Minnesota's taxpayers. I 
plan to meet with the commissioner next week to have this 
discussion.
    IRS also offers free filing to anyone with access to their 
World Wide Web site at irs.gov.\3\ In 2004, 3.5 million 
taxpayers filed their returns by using the IRS web site. While 
all of these options are free, it will take 8 to 15 days to 
receive your refund if it is directly deposited in your bank 
account. Other options may take longer, but clearly this is a 
situation where patience pays dividends.
---------------------------------------------------------------------------
    \3\ See Exhibit No. 4, which appears in the Appendix on page 171.
---------------------------------------------------------------------------
    Today we will hear testimony from tax preparers for H&R 
Block and Jackson Hewitt. They will share with us their tax 
preparation experiences. I'm also hoping to have the presence 
of former clients. We're still waiting for one to appear.
    We will also hear from consumer advocates based in 
Minnesota who will testify about free tax preparation and their 
outreach efforts to ensure that all Minnesotans who are 
eligible for the Earned Income Tax Credit file for and receive 
it. They will also describe the impact of RALs on low-income 
individuals.
    And, finally, we will hear from H&R Block and Jackson 
Hewitt, the two largest tax preparation services in the Nation, 
who will testify about the products they offer, their cost, 
their marketing, disclosure policies and practices, and their 
efforts to serve their clients' best interests.
    As I indicated, on Thursday of next week I'll be meeting 
with the IRS Commissioner, Mark Everson, to discuss what I 
learn here today. I look forward to today's testimony and I 
want to thank all of the witnesses who have come here for their 
cooperation with the Subcommittee in putting together today's 
hearing.
    Let me briefly reiterate that what we're talking about here 
is a situation where many of those who have the greatest 
financial need, who have great financial stresses are faced 
with a situation where they know they're going to get a refund, 
and they want it very quick, but there is an extraordinary cost 
for that. And I hope out of today's hearing at least that 
message goes out so people are in a position to make informed 
choices, and not to feel pressured or confused into making 
choices which in the end may not or are not in their best 
interest.
    I would like to welcome our first panel of witnesses for 
today's hearing. The first panel includes Pat Eckelberry, a 
former H&R Block tax preparer from Wayzata, Minnesota; Nila 
Grant, a former Jackson Hewitt tax preparer from New Hope, 
Minnesota. I appreciate your attendance at today's hearing and 
look forward to hearing about your experiences with H&R Block 
and Jackson Hewitt.
    Now, before we begin, pursuant to Rule 6, all witnesses 
testifying before this Subcommittee are required to be sworn. 
At this time I would ask you to please stand and raise your 
right hand.
    Do you swear the testimony you are about to give will be 
the whole truth, and nothing but the truth, so help you, God.
    Ms. Grant. I do.
    Mr. Eckelberry. I do.
    Senator Coleman. Thank you. We have a full schedule. And 
while your written testimony will be presented in the record in 
its entirety, we ask that you limit your oral testimony to no 
more than 5 minutes. When 5 minutes is expired, I will ask you 
to conclude your testimony.
    I would note in Washington we have a system of lights that 
make it easier to figure that out. Here we'll just have to go 
with verbal prompts.
    Why don't we begin with Mr. Eckelberry and then we'll 
proceed with Ms. Grant. Mr. Eckelberry.

TESTIMONY OF PAT ECKELBERRY,\1\ FORMER H&R BLOCK TAX PREPARER, 
                       WAYZATA, MINNESOTA

    Mr. Eckelberry. Good afternoon, Senator Coleman. My name is 
Pat Eckelberry. I presently have my own tax preparation 
business and am certified as an Enrolled Agent with the 
Internal Revenue Service. Tax preparation is actually my second 
career. In my first career, I was an electrical engineer for 
Honeywell.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Eckelberry appears in the 
Appendix on page 37.
---------------------------------------------------------------------------
    As I neared retirement with Honeywell, I began doing income 
tax preparation as a volunteer with a VITA affiliate, 
AccountAbility Minnesota, which I've continued to do. I've also 
worked for H&R Block, for a local firm, Tax Shop, and a CPA 
firm, Brunberg, Thorson and Diaby.
    Following my career with Honeywell, I first worked as a 
seasonal employee for H&R Block from December 12, 1996, until 
January 22, 2001.
    I found there were a number of positive aspects in working 
for H&R Block. For example, Block had an excellent tax 
education system. As an employee, I was able to take many 
courses offered by them covering most aspects of taxation and 
the specifics of preparing many different types of tax returns. 
I also found that many of H&R Block's tax preparers were 
conscientious and made a sincere effort to do the best job 
possible for their clients. It was evident that many tax 
preparers had developed a good working relationship with their 
clients who returned year after year and specifically requested 
those tax preparers.
    Throughout my tax preparation career, I found that there's 
an extremely strong trust relationship between the preparer and 
his or her client. It is my opinion that a tax preparer has a 
clear ethical obligation to ensure that their clients claim 
every legitimate credit and deduction to which they're 
entitled, and that the preparer ensure that their clients pay 
only the tax they are legally obligated to pay, and that the 
preparer offers advice on the refund method that best serves 
their client needs. However, this preparer-client trust 
relationship can present opportunities for abuse. While I was 
at H&R Block, management pushed very hard to require tax 
preparers to use the client-preparer trust relationship to sell 
such products as RALs, RACs, Peace of Mind, and other products.
    The RALs were particularly troubling to me because of their 
extremely high cost. We were strongly directed by Block 
District Management to push them, especially if the clients 
were going to have difficulty paying their tax preparation fee. 
The sales emphasis was on refund speed rather than client cost.
    In presenting RALs to clients, we were directed to point 
out that the client would receive their refund in days rather 
than weeks, and that they could have preparation costs 
subtracted from the refund, thus having their taxes filed 
without having to come up with any money out of pocket.
    While the paperwork disclosure of the fees and finance 
charges was thorough, it came after the verbal sales 
presentation. Their client had to sign a form indicating a 
willingness to obtain a RAL, and indicate that they understood 
it was a loan. The most negative aspect was that this product 
was often used by the type of client who could least afford it, 
who usually did not understand that they were applying for a 
loan, and who certainly, despite the written disclosures, did 
not understand the true cost of that loan. Most clients 
desperately needed every dollar of the refund they were 
entitled to, and I personally made every effort to fully 
disclose the true cost of the client. I would also suggest 
other less costly refund options such as e-filing with direct 
deposit, which can take as little as 8 days and costs nothing.
    I was not always successful in talking my clients out of 
taking a RAL. For example, one of my clients, a mother with ten 
children, wanted the refund as soon as possible in order to 
take advantage of clothing sales that were taking place at that 
time.
    Another product that I felt was a disservice to the client 
was called Peace of Mind. It was similar to selling a service 
contract with a purchase of a television or washer and dryer. 
Its stated purpose was to cover additional tax that the IRS 
would require if the IRS found an error committed by an H&R 
Block tax preparer or by the software program. As part of its 
tax preparation, Block provided coverage for interest and 
penalties for a Block-induced error at no additional cost. 
Because tax preparers typically do everything they can to 
prevent errors, the probability of the client needing 
additional insurance is extremely low.
    I've provided the Subcommittee with a copy of a Block memo 
sent to me and to all tax preparers in our district outlining 
the Peace of Mind sales procedure, and stating that we were to, 
``PERSONALLY endorse this OUTSTANDING product.'' We were next 
pitched this same message by the District Manager at a mid-
season meeting for all tax preparers.
    During the 4 years I was with Block, the level of intensity 
to push the Peace of Mind guarantee was very high and increased 
significantly each year.\1\ Initially, clients had to sign a 
release indicating they had been offered a product and had 
declined to accept it. Subsequently, Block included the Peace 
of Mind guarantee in the tax return preparation package, at a 
cost of $20, and only removed it if the client specifically 
noticed it and refused to accept it.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 6, which appears in the Appendix on page 173.
---------------------------------------------------------------------------
    H&R Block encouraged its employees to sell these additional 
products through financial incentives to the preparer, and 
through our tax preparer performance evaluations. Tax preparers 
received 15 percent of the system administration fee that was 
paid to H&R Block for completing the bank-related paperwork for 
a RAL. In addition, the number of RALs, RACs, etc., sold was 
part of our performance reviews.
    I've also provided a copy of my performance evaluation for 
the Subcommittee, which included a category for financial 
products such as RALs and RACs. As you can see from that, the 
evaluation reflects that sales of financial products was not 
one of my crowning achievements with H&R Block.
    Mr. Chairman, thank you for the opportunity to testify. I'm 
prepared to answer any questions you may have.
    Senator Coleman. Thank you, Mr. Eckelberry. Ms. Grant.

TESTIMONY OF NILA GRANT,\2\ FORMER JACKSON HEWITT TAX PREPARER, 
                      NEW HOPE, MINNESOTA

    Ms. Grant. Good afternoon, Senator Coleman. My name is Nila 
Grant, and I am presently employed as an associate analyst for 
United Healthcare Group. In 2003 and 2004, I worked as a tax 
preparer for Jackson Hewitt at the Uptown and North Broadway 
offices. I found my employment with Jackson Hewitt to be a 
rewarding experience. They provided excellent training that 
fully prepared me for my tax preparation responsibilities.
---------------------------------------------------------------------------
    \2\ The prepared statement of Ms. Grant appears in the Appendix on 
page 40.
---------------------------------------------------------------------------
    I have always walked my clients through the tax preparation 
process using Jackson Hewitt's tax preparation software. If my 
client was entitled to a refund, I explained the different 
options available for receiving the refund, including the time 
that it would be required and the associated costs of each 
option.
    The options include a direct deposit or a check from the 
IRS; a Refund Anticipation Loan or a Money Now loan; a refund 
anticipation check, which was referred to as Assisted Direct 
Deposit or an Assisted Check Refund. I did not push my clients 
toward any of these options, and Jackson Hewitt management did 
not encourage me or use pushy sales tactics to encourage 
clients to get a RAL or any other product offered by Jackson 
Hewitt.
    Most of my clients were low-income individuals or couples 
who specifically came to Jackson Hewitt to obtain a Refund 
Anticipation Loan. Many of my clients inquired about Refund 
Anticipation Loans before it was even presented to them. For 
example, Jackson Hewitt advertised the Money Now product on its 
office windows and people came in to ask how it worked. We 
could not guarantee that they would be approved for the loan or 
how much the total cost would be until we put their tax 
information into the computer because the rates varied based on 
the amount of the loan.
    I would always inform the client that they had the option 
to change their mind at the end of the process, but will be 
charged a fee of $20 for my time. Some clients will ask if it 
was expensive, and I would inform them that the average cost 
for a RAL was about $300. Many did not ask at all, but all of 
my clients had the option to change their minds at the end of 
the process before signing any forms.
    I believe many people would have liked to use other options 
but could not because they could not pay the tax preparation 
fee of $135 up front. Many simply did not have the funds to do 
that. Because the RAL deducts the fees from the anticipated 
refund, it made it easier to sell the RAL. At the end of the 
process, a few complained about the fee but mostly all took the 
loan if they qualified.
    My clients also had to sign forms saying that I had 
informed them about the loan and providing a breakdown of the 
actual fees associated with the loan. They also received copies 
of these forms. I have no doubt that my clients understood they 
were taking out a loan. Frankly, they did not care that it was 
a loan. They wanted the money as soon as they could get it. I 
realize that these loans have very high costs, but if my client 
was receiving a $3,500 refund, they did not mind paying $300 in 
tax preparation fees, finance charges, account setup, and 
administration fees.
    In the store where I worked, we also did not receive 
special recognition or other benefits for selling Jackson 
Hewitt's financial products. I was told about the $5 commission 
for every Gold Guarantee sold, but it was not aggressively 
pushed on me to sell it, nor did I aggressively push it on my 
clients. I did offer it, but most people declined it. We did 
receive a bonus at the end of the tax season that was based 
entirely on the number of tax returns we prepared.
    Upon occasion, I would recommend to clients they visit a 
free tax preparation site if it would not be in their best 
interest to use our services or tax preparation. When clients' 
incomes were below $10,000, I informed them of the free tax 
services and gave them contact information because the fees 
would probably have cost them half or more of their tax refund. 
I believe most clients were aware they could get their taxes 
prepared and filed for free, but chose to get them done faster 
because they did not want to wait and wanted money as soon as 
they could get it.
    In summary, there was no pressure or suggestive sales 
tactics. We didn't have to use them. The clients wanted money 
as soon as they could get it, and many came to us solely for 
that purpose.
    Senator Coleman. Thank you, Ms. Grant. I see Ms. Burbach 
has joined us, and we're very pleased. Welcome.
    Ms. Burbach. Thank you.
    Senator Coleman. Witnesses before this Subcommittee are 
required to be sworn so I would ask you if you would please 
stand and raise your right hand.
    Do you swear the testimony you are about to give before 
this Subcommittee will be the whole truth, and nothing but the 
truth, so help you, God.
    Ms. Burbach. Yes.
    Senator Coleman. Thank you very much, Ms. Burbach. Ms. 
Burbach, please proceed.

  TESTIMONY OF JULIE BURBACH,\1\ H&R BLOCK CLIENT, ST. PAUL, 
                           MINNESOTA

    Ms. Burbach. Mr. Chairman, Members of the Subcommittee, 
good afternoon. Thank you for the opportunity to share my 
experience with H&R Block with you today. My name is Julie 
Burbach and I'm a single parent raising an 8-year-old son. My 
gross income last year was $17,374. I have to stretch every 
dollar to make sure we have enough to get by.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Burbach appears in the Appendix 
on page 42.
---------------------------------------------------------------------------
    We live in an apartment in St. Paul. I quit my job last 
year with the State of Minnesota. I had worked for 17 years as 
a Human Services Technician at the Veterans Home. Since then, 
I've been working part-time and looking for another job.
    When it came time to file my Federal taxes this year I 
chose to go to H&R Block. I wanted my taxes done by an official 
tax preparation company. Because I had dipped into my 
retirement fund last year to cover expenses, I wanted to make 
sure my taxes were handled correctly.
    I filed my taxes in February. The whole process took 10 to 
15 minutes. The tax preparer did all of the preparation work 
and at the end told me that I was eligible to receive a refund. 
My Federal refund was for $2,454, including $927 from the 
Earned Income Tax Credit. My State income and property tax 
refund was $931.
    I had gotten Rapid Refund in the past and asked to get one 
at this time, to make sure I got my Federal refund as fast as 
possible. She asked me if I wanted Instant Money, or part of 
the money today. I said yes. I thought this meant I was getting 
a regular loan that had an early advance. At this point, the 
tax preparer appeared to complete the forms on the computer and 
printed them out. She showed me the costs. I was charged a 
total of $322.90. Of that, $203 was for tax preparation fees, 
and $119 was for bank fees.
    When I mentioned the cost, the $322 seemed high compared to 
last year when my total costs were $201.95. The tax preparer 
told me that was because last year was a trial period.
    I have since learned this is not true. While the tax 
preparation fees had gone up from last year to this year, the 
real extra cost was because I said yes to the Instant Money 
option. Rather than being given an advance on the loan, I was 
actually given two loans. This was the most expensive option. 
The APR for each was 129 percent, but the APR listed on the 
disclosure sheet required by State law said 122 percent.
    I felt that the total cost was quite expensive, but at this 
point I was confused and didn't feel like I could change my 
mind because she had already finished all the paperwork. I was 
also thinking about all the bills I had to pay and I agreed to 
the $322 fee.
    The tax preparer did not explain that I was taking out two 
loans. She also didn't suggest that I could change my mind 
right then and there, and that would be less expensive if I 
didn't take out the loans. She didn't explain I was taking the 
most expensive option. She also didn't tell me that if I signed 
the loan agreement, I still had 2 days in which I could change 
my mind and not get the loans.
    She briefly showed me the disclosure page before I signed 
at the bottom. She didn't explain what they meant, and I didn't 
ask any questions about it because this is why I was having my 
taxes done by a professional tax preparer in the first place, 
because I don't understand all the tax laws and financial 
wording and disclosures.
    If I understood all of my options about how to get my full 
refund to me, I would not have taken out a Refund Anticipation 
Loan. I received my State tax refund within 3 days in the mail.
    Now I understand more about Refund Anticipation Loans. All 
I really wanted was to get my taxes done well, and to get my 
refund so that I could pay my bills on time and do whatever 
would help me and my son the most. I understand that my refund 
is meant to help families like mine. That is why I don't think 
it's fair I should be charged so much money to get my taxes 
done and to get my refund quickly.
    Thank you for letting me share my story.
    Senator Coleman. Thank you very much, Ms. Burbach. And, by 
the way, thank you for your courage to come forward. It's hard 
enough when you do this as I do each and every day. But for an 
average citizen to come forward and to very openly say I was 
confused, I walked into a situation and it cost me money, a lot 
more than you felt it should have cost, so I appreciate your 
courage and your honesty.
    And I do hope with your testimony today that others will 
listen and will think twice, and will be in a position to 
understand that there are questions that should be asked, and 
perhaps there are tax preparer's questions that should be asked 
of you, so I really do believe something good will come out of 
this. So I want to say thank you.
    Mr. Eckelberry, Ms. Burbach talked about two loans. From 
what I understand, there's really one loan she got. She got 
instant cash, right, which is one fee, and then the RAL besides 
that. If you were her preparer, could you talk a little bit 
about her situation, what was she being offered and what might 
you have done if you wanted to explain it to her better?
    Mr. Eckelberry. Well, the instant loan is something that's 
been incorporated since I've been there so I'm not familiar 
with that either.
    But I surely would have explained to her that the 
opportunity to get your return very quickly existed without 
going through any process like that.
    Senator Coleman. Does it shock you that the APR was about 
129 percent?
    Mr. Eckelberry. I've seen it higher than that. We've seen 
percentages higher than that.
    Senator Coleman. And how high?
    Mr. Eckelberry. The number I recall is as high as 400 
percent.
    Senator Coleman. Do clients understand what a 400 percent 
APR means?
    Mr. Eckelberry. No. The situation is they don't have the 
money to pay for their return. They want it done. They want the 
refund as quickly as they can get it.
    Senator Coleman. And, Ms. Grant, I appreciate your 
perspective, that you didn't feel pressured to push these, that 
you weren't being evaluated on the basis of how many you made. 
On the other hand, do you believe your clients understand what 
a 300 APR is or a 400 APR is?
    Ms. Grant. No, not totally. When I explained, in breaking 
it down for them, that they had an understanding that they were 
paying high interest rates because we did show that to them, 
and some people did comment on it.
    Senator Coleman. Now, on the other hand, your clients came 
in you said looking for this. But in part, you're saying as 
they walked by, your advertisement promoted it.
    Ms. Grant. Right, correct.
    Senator Coleman. And out of curiosity, and I'll ask this 
both of Mr. Eckelberry and Ms. Grant, were you working for your 
client or were you working for H&R Block or Jackson Hewitt? Who 
do you feel your primary responsibility was at the time you 
were preparing these?
    Ms. Grant. I do feel it is to the client because it is 
their money. And to be honest about it, if they came in, and 
even if they signed the paper and they changed their mind, I 
would have tore it up.
    Senator Coleman. In your situation, Mr. Eckelberry--I don't 
have the exhibit up here--but I looked at your evaluations, 
you're being evaluated on the number of products that you 
sold.\1\
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    \1\ See Exhibit No. 5, which appears in the Appendix on page 172.
---------------------------------------------------------------------------
    Mr. Eckelberry. That's correct.
    Senator Coleman. Performance evaluation.
    Mr. Eckelberry. That is correct. It was part of our 
evaluation. At the meetings, it was made a big deal for the 
people who sold a lot of RALs or a lot of Peace of Minds, plus 
the financial remuneration.
    Senator Coleman. I don't know if you have a copy of your 
evaluation. I have one here.
    Mr. Eckelberry. Yes.
    Senator Coleman. Five is exceeds expectations, and you got 
fives across the board in terms of quality interviews. Where 
you got your three, your lowest evaluation, was in terms of 
RALs, successfully offered refund rewards. So you weren't as 
vigilant in offering those, were you, as in the other 
categories?
    Mr. Eckelberry. No, I was not. And to answer your earlier 
question to both of us on this, I really felt my responsibility 
was to the client. But my situation was a little different than 
many of the other tax preparers. The only way to make any real 
money working for Block as a tax preparer is to sell those 
products.
    Senator Coleman. And I appreciate that. As I listen, I 
appreciate from both of your perspectives saying that you 
believe that's what your obligation was. But my sense is in 
looking at a system that provides rewards for selling product, 
that promotes product sales, it appears to me that at that 
point your interest is to your employer who is paying you a 
paycheck, though personally it should be to your client. But if 
you're working in a system that's pushing product, then I 
question whether in fact you can be as true as one should be to 
your client.
    Mr. Eckelberry. Well, I felt I could be, but my situation 
was that I was retired and I wasn't dependent upon this income. 
But many of the other tax preparers depended on this additional 
income, and so they responded to the pushing by selling the 
stuff.
    Senator Coleman. Again, Mr. Eckelberry, Ms. Grant, and Ms. 
Burbach, very admittedly, the sense I got is that you were 
confused. Is that a fair statement?
    Ms. Burbach. Yes.
    Senator Coleman. Mr. Eckelberry, does that surprise you? 
There was a client getting the explanations and getting what 
she got and still being confused?
    Mr. Eckelberry. Not at all. In fact, I don't think most of 
them really didn't listen to the explanations. The only thing 
they heard was they could get their money in a few days. They 
didn't have to pay up front to get the job done.
    Senator Coleman. Ms. Grant, does that surprise you?
    Ms. Grant. I agree with that too because basically they 
were in a rush, and some of the sales in our office was based 
on how many tax preparations we did to get a bonus. So we did 
kind of rush through it or go through it rather quickly.
    The average tax preparation took about 20 to 30 minutes if 
it was fairly simple. And most people just sign the papers. We 
did show them what they were signing, but did they read it, no.
    Senator Coleman. When clients came in asking for the Refund 
Anticipation Loan, did you walk through them less costly 
alternatives that would serve their needs but would not cost 
them as much?
    Ms. Grant. When they walk in we have place mats that had 
each individual option that they had available to them. And a 
lot of people looked at it but they knew they wanted the Money 
Now loan.
    Senator Coleman. Mr. Eckelberry, same question.
    Mr. Eckelberry. I'm sorry.
    Senator Coleman. The question was, if somebody came in 
looking for a RAL, would it be practice for H&R Block to 
explain to them there were cheaper alternatives available that 
would best suit their needs?
    Mr. Eckelberry. It was definitely my practice to explain 
all the options. I definitely did do that. But I don't think 
that was necessarily standard practice. Like I said, my 
situation was very different than many of the other tax 
preparers.
    Senator Coleman. And your situation, in particular, you had 
concern over Peace of Mind, which is not the focus of this 
hearing. But again, that was another product, another 
additional fee for something that you felt was unnecessary.
    Mr. Eckelberry. That's right. And we were told to stick it 
in the return and only remove it if they saw it.
    Senator Coleman. And in fact, you were evaluated, 
specifically, one of the pieces of your evaluation, specific 
section has to do with Peace of Mind, whether you properly 
offered it, explained and accepted.
    Mr. Eckelberry. Yes.
    Senator Coleman. And then there was an option for the total 
number of them. So your performance was in part based on the 
number of products you sold.
    Mr. Eckelberry. That's correct.
    Senator Coleman. Rather than whether you met the needs of 
your client.
    Mr. Eckelberry. That's correct.
    Senator Coleman. One other question. In my opening 
statement I talked about RALs being high risk, but as I listen 
to the testimony, it appears to me that the risk would be very 
minimal, that in fact you know what the tax refund is going to 
be. The refund would cover the loan. The money comes back 
directly from the bank to you.
    If one of the justifications for high APR is high risk, 
what is the risk to the company, to the preparer? I mean, your 
fee is getting paid up front with the RALs. Am I mistaken in 
that?
    Mr. Eckelberry. The risk would be in that you wouldn't know 
if the client had some outstanding debt that might be covered 
by the refund that would be taken away. So if they got a check 
the day they were there, you wouldn't have known at that time 
that there was some risk involved.
    Senator Coleman. Some risk to the bank.
    Mr. Eckelberry. But not if they didn't get a check for 2 or 
3 days because by then you should have had that information.
    Senator Coleman. Ms. Grant.
    Ms. Grant. As far as I'm concerned, the risk, I'm unaware. 
Most of the loans or the APR finance charges were based on the 
amount of the loan. That's all I knew. So if they were high 
fees, it was based on the amount of the loans. That's about it.
    Senator Coleman. Ms. Burbach, did the preparer tell you 
that you had 2 days to rescind your RAL?
    Ms. Burbach. No. And if you owed anything back, it would 
come out of your State tax return, not your Federal. You were 
only getting a loan on your Federal. Your State comes to you in 
the mail.
    Mr. Eckelberry. That's a good point.
    Senator Coleman. So again, there is very little risk?
    Ms. Burbach. Right.
    Senator Coleman. Did anyone process--did your preparer tell 
you you didn't have to take out a RAL, that there were some 
other options that were less costly and would have suited your 
needs?
    Ms. Burbach. I guess I didn't--I was kind of at their 
mercy.
    Senator Coleman. And you wanted cash, got cash up front and 
you wanted it done quick.
    Ms. Burbach. Yes. And I wanted it done by a professional 
that I thought I could trust.
    Senator Coleman. Were you asked by the tax preparer the 
reason for why you needed it so quickly or what the nature of 
the obligation was? What the need for speed was?
    Ms. Burbach. No.
    Senator Coleman. If any.
    Ms. Burbach. None at all.
    Senator Coleman. Either Mr. Eckelberry or Ms. Grant, did 
you ever question clients about whether they really needed 
money so quickly?
    Mr. Eckelberry. Absolutely, because I didn't want them to 
do that.
    Senator Coleman. But again in your situation, what I 
understand your testimony as, I get the sense that you did not 
believe that was a standard practice among others working in 
your shop.
    Mr. Eckelberry. No.
    Senator Coleman. And again, your situation, because you're 
retired, this was a second income, you weren't being pushed to 
earn extra dollars by selling product.
    Mr. Eckelberry. Right.
    Senator Coleman. But as I understand your testimony, the 
testimony is that in fact within a shop, within the operation 
that was the standard practice and procedure.
    Mr. Eckelberry. I would say that.
    Senator Coleman. To the best of your knowledge.
    Mr. Eckelberry. Yes.
    Senator Coleman. Ms. Grant.
    Ms. Grant. Mainly--I'm sorry. I forgot. Could you just 
repeat the question again?
    Senator Coleman. I'm just trying to get a sense, did you 
inquire of your clients if they really needed the money today. 
And if they didn't, was there another path for them that was 
less expensive?
    Ms. Grant. Well, no, I didn't inquire, but a lot of people 
came in and told me. Some of them were looking for a new car or 
looking to pay off bills from Christmas.
    No, I didn't inquire a lot about why they needed it so 
quickly.
    Senator Coleman. But even looking for a car, paying bills, 
they probably could have waited 2, 3, or 4 days.
    Ms. Grant. Yes. They had the option because it was 
presented right there in front of them. And a lot of people did 
ask what is this one, what is this option, OK. And I explained 
it to them.
    Senator Coleman. When you say in front of you, it was in 
writing; is that correct?
    Ms. Grant. Yes.
    Senator Coleman. Do you think it would have been helpful if 
you had instructions to say in words some of those things that 
were in writing? Because as I understand, they were in front of 
the desk, they were standing right there. Do you think it would 
have been helpful to folks like Ms. Burbach if you would have 
taken the time to verbally explain what otherwise was sitting 
there in writing on your desk?
    Ms. Grant. Yes, I do believe so.
    Senator Coleman. Mr. Eckelberry.
    Mr. Eckelberry. Well, of course.
    Senator Coleman. And, Ms. Burbach, you wanted to say 
something. I'd love to hear it.
    Ms. Burbach. I was going to say, last year I got the loan 
again, and it had to clear through my bank for 7 days so I got 
this loan and I wasn't able to get my money for 7 days anyway. 
Now, if it's this big of a company, shouldn't it have like 
cleared right away? I don't understand why I had to wait. I 
paid all that money to get my loan that day, and then it was 7 
working days before I actually received the money.
    Senator Coleman. I take it that this year you're not 
looking for a Refund Anticipation Loan. A lesson learned, Ms. 
Burbach.
    I want to thank the panel. Is there anything else you 
wanted to add, Ms. Burbach? You came in a little late. Anything 
you want to say to others who are out there listening?
    Ms. Burbach. Be patient.
    Senator Coleman. Very sage advice. I want to thank you all 
for your testimony today, and this panel is excused.
    I would now like to welcome our second panel of witnesses. 
It is my pleasure to welcome Beth Haney, who is the Research 
and Outreach Director for Children's Defense Fund here in St. 
Paul.
    And Bonnie Esposito, the Executive Director of 
AccountAbility Minnesota, also here in St. Paul.
    I appreciate your attendance at today's hearing and look 
forward to hearing your testimony. It is especially important 
that we fully understand the impact of Refund Anticipation 
Loans on low-income and elderly Minnesotans and show how these 
costs can be minimized with the use of free tax services.
    As you've observed, pursuant to Rule 6, all witnesses 
before this Subcommittee are required to be sworn so I would 
ask you to stand and raise your right hand.
    Do you swear the testimony you are about to give before 
this Subcommittee will be the whole truth, and nothing but the 
truth, so help you, God.
    Ms. Haney. I do.
    Ms. Esposito. Yes.
    Senator Coleman. Thank you very much.
    Ms. Haney, we'll go with you first and follow with Ms. 
Esposito. After you finish with your testimony I'll have the 
opportunity to ask questions.
    Again I would ask that you try to limit your testimony to 
about 5 minutes. Your full statement will be presented into the 
record in its entirety. When the 5 minutes are up, I'll give 
you a verbal signal if that's needed.
    So let's begin with Ms. Haney and we'll follow up with Ms. 
Esposito.

   TESTIMONY OF BETH HANEY, PH.D., \1\ RESEARCH AND OUTREACH 
     DIRECTOR, CHILDREN'S DEFENSE FUND, ST. PAUL, MINNESOTA

    Ms. Haney. Thank you, Senator Coleman. Thank you for this 
opportunity to testify about Refund Anticipation Loans and 
their impact on working Minnesota families.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Haney with attachments appears in 
the Appendix on page 44.
---------------------------------------------------------------------------
    I'm the Research Director for Children's Defense Fund 
Minnesota. Children's Defense Fund is a private, nonprofit 
organization with a more than 30-year history advocating for 
children, particularly poor and minority children and those 
with disabilities. Our mission is to Leave No Child Behind, and 
to ensure that every child has a healthy start, a head start, a 
fair start, a safe start, and a moral start in life, as well as 
successful passage to adulthood with the help of caring 
families and communities.
    RALS are of vital interest to CDF because they dilute the 
efficacy of the Earned Income Tax Credit. The EITC arguably is 
this country's most effective and efficient anti-poverty tool, 
and we believe a potent force for enhancing child well-being. 
In 2002, it lifted almost 5 million working Americans out of 
poverty, more than half of them children.
    In Minnesota, more than 242,000 low- to moderate-income 
working families claimed approximately $378 million from the 
EITC in 2004. This part of the tax code rewards family's work 
efforts and helps keep the tax system more fair for them. 
Families spend the majority of their EITC refunds on basic 
needs like utility bills, rent, food and clothing for their 
children. Consequently, the EITC helps stabilize them and keeps 
them in the work force and off welfare.
    In addition, much of the money is spent immediately, 
boosting the local economy by benefiting grocers, retailers and 
other local businesses.
    However, the value of the EITC to families and the broader 
community is eroded by RALs. During the 2003 tax filing season, 
an estimated $5.1 million of Minnesota EITC refunds were 
diverted to pay for RALs, not meeting basic work family's 
needs.
    Our concerns with RALs include:
    First, they can be alarmingly expensive. We estimate the 
average cost to be about $100, which is about 6 percent of the 
average Minnesota EITC refund. This causes the average APR and 
average refund to be 234 percent. This predatory rate is more 
than ten times the APR ceiling Minnesota established to protect 
consumers. State law limits APRs on consumer loans to 21.75 
percent. However, RAL brokers circumvent State usury laws by 
partnering with federally-chartered banks, which are permitted 
to ignore State interest rate ceilings.
    Second, research shows that commercial tax preparers target 
their services to low-income tax neighborhoods, where financial 
literacy is often limited. According to one study, 
neighborhoods with more EITC filers have about 50 percent more 
electronic tax filing and preparation services than 
neighborhoods with fewer EITC filers. Statewide, only about one 
in five EITC filers got a RAL in 2003, but the percentage was 
significantly higher in our most impoverished communities. In 
four of the zip codes on Minnesota's northern Indian 
reservations, where more than half of all returns include the 
EITC, more than three-fourths of EITC families got a RAL. More 
than half of EITC claimants got a RAL in some of the poorest 
Twin Cities neighborhoods.
    Third, as a result of extensive protesting last tax season 
by the consumer advocacy group ACORN, H&R Block agreed to 
improve the disclosures it gives to customers about the costs 
and speed of refund options and to drop their administrative 
fee. However, we question how well the terms of this agreement 
are actually being implemented in local tax preparers' offices.
    This tax reason, advocates across the Nation have spoken 
with H&R Block clients, such as Julie, who say they were not 
provided with the improved disclosures informing them of each 
of their options. Many tax preparers push clients into taking 
out loans based on the profit they personally receive, as you 
so noted, not corporate policy.
    ACORN is currently negotiating a similar agreement with 
Jackson Hewitt, but other tax preparers, including Liberty Tax, 
and local independent tax preparers, even retailers and car 
dealerships, broker RALs. Thus, even the existence of 
agreements with the two largest companies does not fully 
address the full scale of the problem.
    Finally, there's evidence that many families do not 
comprehend they're initiating a loan when they opt for Instant 
Money, Money Now, or the other terms used to market RALs.
    According to a December 2004 poll, 70 percent of 
respondents who had gotten a RAL did not realize it was 
actually a loan. Furthermore, because many RAL users have 
limited literacy skills and/or English proficiency, even if 
they sign written disclosure forms, they might not fully 
comprehend them.
    It's not surprising that a public policy as effective as 
EITC has had strong bi-partisan support in Congress. Senator 
Coleman, we appreciate the backing you've shown the EITC, and 
we hope we can rely on you to champion it in the current 
Federal budget debate.
    The public funds dedicated to tax credits like the EITC are 
meant to strengthen low- to moderate-income families and reward 
them for their work effort, and this has been proven to work. 
The public funds were not meant to provide financial windfall 
for the tax preparation and banking industries. Loans using the 
EITC should not be allowed, for the same reason Social Security 
benefits cannot be used as collateral for a loan. The idea is 
that the benefits are too important to the recipients to let 
lenders take them to repay their debts.
    I believe it's a cruel paradox that because of their trust 
and relying on paid tax preparers, professionals, families 
believe are there to help them and they trust them, eligible 
working Minnesota families trying to claim their EITC and get 
ahead could end up in significantly worse financial jeopardy.
    I thank you again for the opportunity to testify, and 
further information regarding our stance toward RALs can be 
found in my written testimony.
    Senator Coleman. Thank you very much, Ms. Haney. Ms. 
Esposito.

     TESTIMONY OF BONNIE ESPOSITO,\1\ EXECUTIVE DIRECTOR, 
         ACCOUNTABILITY MINNESOTA, ST. PAUL, MINNESOTA

    Ms. Esposito. Senator Coleman, thank you for this 
opportunity to testify before you today on free tax assistance 
for low-income Minnesotans.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Esposito with an attachment 
appears in the Appendix on page 57.
---------------------------------------------------------------------------
    I'm the executive director of AccountAbility Minnesota, a 
nonprofit organization that does pro bono accounting and tax 
assistance by leveraging volunteer resources. Since 1971 
AccountAbility has managed a dedicated team of volunteer 
accountants and tax practitioners to help thousands of low-
income individuals navigate the tax reporting system so they 
may satisfy a tax liability, or realize benefits they're due.
    The Earned Income Tax Credit, as you just heard, and the 
Minnesota Working Family Credit offer essential assistance to 
thousands of Minnesota's working poor. The sum of these credits 
can potentially add 50 percent to a working family's annual 
income.
    To give you a sense of our work at AccountAbility, last 
year our volunteers at 40 tax sites statewide helped return 
$10.9 million in tax refunds to 9,500 low-income tax taxpayers.
    AccountAbility is one of many nonprofit organizations that 
offer free tax assistance through the IRS Voluntary Income Tax 
Assistance program, VITA, and Tax Counseling for the Elderly, 
or TCE program. This year in Minnesota, the Minnesota 
Department of Revenue reports there are 276 VITA and TCE sites, 
as you pointed out on the map in front of us.\1\ And as you 
mentioned, according to the IRS, 41,000 Federal returns were 
filed by free tax sites in 2004. Yet, over 200,000 low-income 
families claimed EITC, which means they were eligible for the 
free service, thus only a small fraction of the households 
eligible for the service take advantage of it.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 2, which appears in the Appendix on page 169.
---------------------------------------------------------------------------
    The tax code, especially the part governing the EITC, is 
complex. Rather than attempting to complete their taxes 
themselves, as you heard in earlier testimony, two-thirds of 
low-income Minnesotans pay to have their taxes prepared and 
filed. Children's Defense Fund estimates that low-income 
Minnesotans spend more than 7 percent, or about $120, of the 
average EITC refund just to claim it. In 2003, at least $18.5 
million of the Federal EITC dollars claimed in Minnesota were 
spent on tax preparation and filing costs.
    Why don't more low-income families take advantage of the 
free tax assistance? We believe there are a number of reasons. 
First of all, lack of capacity of the VITA program. VITA sites 
are usually filled to capacity with long waiting lines for 
service. People are frequently turned away, especially at this 
time of year. For example, this week at almost all the tax 
sessions that we operated, people were turned away.
    Also, due to funding cuts to the IRS they've had to cut 
back services substantially to the VITA program, and they're no 
longer able to recruit or train volunteers, or offer technical 
assistance at VITA sites as they used to. IRS walk-in centers 
used to be able to handle the most difficult tax problems, but 
again, due to constraints in funding, they're unable to do so. 
Last year, as you reported, the IRS prepared only 139 Federal 
returns at their walk-in centers for EITC eligible households. 
We find in Minnesota they're referring many of the taxpayers 
they used to help to our tax sites.
    A second reason we believe people don't come to the free 
tax sites is that they're often at inconvenient times or 
inconvenient locations to receive the service. Of the 276 dots 
on the map, only 15 to 20 percent are VITA sites. The rest are 
Tax Counseling For the Elderly, or TCE.
    Now, many TCE sites also help families, but that program is 
targeted to seniors. They're often in senior buildings, the 
sites are in senior centers, and they're open in the daytime, 
which is inconvenient for working families. Many of the TCE 
sites serve seniors first since they are run by the AARP, and 
help families only if the volunteers have time.
    In contrast, to make it convenient for working families, 
VITA sites are open evenings and weekends. They're also often 
located in community-based sites where families are used to 
going for other types of service. However, VITA tax sites are 
severely under-funded and are unable to serve more than 3 
percent of the eligible households.
    The third reason we believe people don't come is just plain 
lack of advertising dollars. H&R Block, Jackson Hewitt, and 
other commercial tax preparers have multi-million dollar 
budgets to aggressively market their instant refunds. Nonprofit 
organizations with limited dollars rely on grass-roots 
marketing and networking. Commercial ads lead people to believe 
they must use a commercial preparer to get their refund 
quickly. The public isn't aware how quickly you can get your 
money if you file electronically and have your refund direct 
deposited.
    AccountAbility Minnesota customers using direct deposit 
this tax season got their State refund in 3 days, only 1 day 
longer than the classic Refund Anticipation Loan. And they 
didn't have to pay over $120, plus $100 for the loan, to get 
their own money.
    We have some suggestions for improvement. First of all, 
organize and sponsor a major marketing campaign with a public/
private partnership among government, Minnesota's largest 
companies and employers, and major philanthropic partners to 
advertise not only the EITC, but also free tax assistance.
    Second, have the partners make a commitment to have their 
employees volunteer, thereby setting an example to spur 
additional recruitment.
    Third, have the businesses and philanthropic partners 
announce their investment in the VITA program through private 
grants.
    Fourth, Congress needs to contribute Federal funding 
through such legislation as the Taxpayer Protection and 
Assistance Act being introduced in Congress today. We 
understand this bill also mandates Treasury to do a public 
awareness campaign on RALs. This would be a perfect partner to 
a Minnesota campaign promoting free tax assistance. This type 
of campaign would help advertise the free service to people 
that need it. It could help recruit volunteers that are needed 
to expand the service, it would stimulate private funding to 
help non-profits that manage VITA sites increase their 
capacity, and offer more service.
    Senator Coleman, I ask that you consider being a champion 
for this campaign in Minnesota, and represent the government 
sector. And I invite you to volunteer at an AccountAbility 
Minnesota site next year.
    [Applause.]
    Thank you again for this opportunity to testify before you 
today.
    According to a study done by CDF Minnesota, low-income 
families paid over $23 million last year for tax preparation 
and Refund Anticipation Loans and fees, much of that going to 
out-of-state banks. Please help us keep more of those dollars 
in the pockets of the working poor in Minnesota by expanding 
free tax assistance.
    Senator Coleman. Thank you very much, Ms. Esposito. Ms. 
Haney, we talked a lot about EITC, the Earned Income Tax 
Credit. Would you for the record walk through a very brief 
explanation of what that is, and what that means?
    Ms. Haney. Sure. The Earned Income Tax Credit is a 
refundable type credit, which is an incredibly important part 
of it. Many tax credits are non-refundable, which basically 
mean they bring your tax liability down to zero. If they're 
refundable, that means if you're eligible for more than what 
brought your tax liability to zero, then that part is refunded 
to you or sent to you in a check.
    Most families that claim the EITC don't actually owe any 
income tax to the government and that's because when they take 
their standard deductions and exemptions, they haven't earned 
more than what none of us pay tax on, the first $15,000 to 
$18,000 that we earn. They are then eligible to receive that 
entire amount back in a refund.
    What I said before, it helps keep the tax code fair 
because, in part, they pay a disproportionate share of their 
income in other, sales tax, excise tax and payroll taxes, and 
so that helps refund to them part of what they're paying those 
other taxes as well.
    Senator Coleman. So in the end, they get cash in their 
pocket.
    Ms. Haney. Exactly.
    Senator Coleman. This is a big part of it.
    Ms. Haney. Exactly. It's an incredibly important part of 
it.
    Senator Coleman. I think Mr. Eckelberry left. I wanted to 
personally thank him. Today is April 15, he's a tax preparer, 
and he was here and he spent time being here. So my humble 
apologies. I'll send him a copy of this in the record, but I 
did want to thank Mr. Eckelberry for being here.
    Ms. Haney, did it surprise you that there were signs in the 
window promoting instant cash, as one of the witnesses 
testified to?
    Ms. Haney. Not at all. We've seen the signs ourselves. When 
I personally drive through the poor income neighborhoods, I see 
the billboards, I see the signs, so I'm not at all surprised.
    Senator Coleman. I asked the question about where's the 
principal responsibility? Is your principal responsibility to 
the client or is it to your firm?. And I appreciate the 
witnesses we had who, I think reflecting their ethical sense 
that it should be to the client, though my sense as I listened, 
they have a system set up that really is otherwise directed. 
You're going to be judged based on how many products you sold. 
Your obligation, obviously, is to the firm.
    Can you talk a little bit about what kind of ethical 
standards there are for tax preparers today, and what kind of 
ethical standards there should be? For both of you, Ms. Haney 
first and then Ms. Esposito.
    Ms. Haney. In Minnesota 2 years ago in 2003 we passed a 
State law that actually was for standard of conduct for tax 
preparers, and it's the first of its kind, I believe, across 
the Nation. That created some pretty simple standards as far as 
we were concerned in terms of pretty basic things that should 
be illegal anyway but we had to put it into law.
    And it was based completely on experiences that a lawyer, a 
colleague I work with, had with low-income clients. However, 
that law I don't believe addresses exactly what you're asking, 
which is to whom is the tax preparer working in the best 
interests of?
    I believe that when families walk in the door they're going 
to see a professional, in their opinion, and they totally and 
completely put their trust in that person. They do not 
understand the tax code. The EITC tax booklet is 53 pages long 
and it's tax language so I hardly understand it.
    I believe they go there to see a professional, and that 
there should be some way to ensure that professional is working 
in their best interest. I'm not again surprised, however, to 
hear that those tax preparers have a little bit of a conflict 
as to who exactly they should be helping, and which best self 
interest they should be working in.
    Senator Coleman. Ms. Esposito, could you respond to the 
question about ethical standards?
    Ms. Esposito. Absolutely. The majority of our volunteers in 
fact are CPAs, accountants. Many of them, as Mr. Eckelberry, do 
taxes themselves. And I can say 100 percent of them are 
appalled by RALs, because, in fact, what it does is take 
advantage of people when they are most vulnerable, especially 
now when people can get their refunds so quickly if they use e-
filing and direct deposit.
    Our experience with our own customers that come to us and 
maybe for years they've gone to H&R Block or others, and they 
just are so surprised when we look at their tax papers and 
point out, do you know you have a loan? And they disregard it. 
They said oh, no, I just got my money fast. So they're really 
taking advantage of a vulnerable population.
    And the idea that, while people need their money right 
away, as you said, gee, could they wait 3 or 4 days, the fact 
is if they are desperate for their money, say, their landlord 
is going to evict them, we can call the IRS and that is 
considered under--what's it called?
    Ms. Haney. I'm not sure.
    Ms. Esposito. It's like being under duress. A hardship 
case, that's what it's called. And they can go downtown St. 
Paul that afternoon or the next day and get the check. So it is 
possible, if they really need it, to get their money right 
away, even at our free clinics. So as the earlier person said, 
it is a matter of waiting.
    Our experience as far as ethical CPAs and tax practitioners 
are that all volunteers that work for us feel that it is 
unconscionable to take advantage of people.
    Senator Coleman. The testimony of the first panel talked 
about APRs up to 400 percent. I've actually read more in some 
other cases.
    First, can you explain what an APR is? And, second, do you 
believe that your clients, EITC clients think they understand, 
and are well briefed on what APRs are?
    Ms. Haney. Well, APR, the annualized percentage rate, which 
essentially is the total cost of the loan expressed over the 
cost of a year. And really you need to, even for a short loan 
like a RAL, you need to think of it that way because that's how 
you can compare apples to apples when comparing one loan 
product to another. So it's the standard in terms of the 
industry to create the APR.
    I should actually clarify in terms of Ms. Burbach's 
situation. I've actually seen her documentation from this year 
and she actually did take out two loans. At least she signed 
two loan disclosure forms. And for one of the loans it was 
129.61 percent and the other loan was expressed at APR of 
129.16 percent. And then again, the State disclosure form she 
signed said 122 percent.
    So I do not think they understand what an APR is. When I 
was doing this research, ``Oh, that interest rate thing,'' and 
I think that's how most people would talk about APRs. And they 
think that percent is the entire amount applied to it.
    The APR includes both any straight fee that you pay up 
front, plus any interest that would accrue if the loan was not 
repaid. But I don't think the general public understands that, 
and definitely I don't think the EITC families do.
    Senator Coleman. In addition to the APR, there appeared to 
be fees for setting up the bank account--there appeared to be a 
number of different fees along the way. Are they all included 
in the APR, fees from the bank, fees for the preparation, are 
they all one fee or are there additional charges in addition to 
the APR?
    Ms. Haney. I think it depends on who's calculating the APR. 
When I calculate in my research the APR, I look at the total 
cost of the loan so I don't include tax preparation fees. I do 
include any fees to set up the loan, any administrative fees, 
the finance charges themselves.
    I don't know if that's an industry standard, however. I 
have been told that sometimes the industry actually doesn't 
include some of those fees because they don't consider those to 
be part of the loan. They consider those to be something that 
you would need to pay to get your refund.
    Senator Coleman. Ms. Grant noted in her testimony, the 
former Jackson Hewitt tax preparer, she did indicate that on 
her desk were written materials that described some other 
alternatives other than RALs. Do you think that's sufficient 
notice to individuals coming in to make them fully aware of 
what other choices are out there? Is there a better way to do 
it than just simply having some written things on a desk?
    Ms. Haney. I believe requiring oral disclosure is a 
fantastic first step. We actually tried to put that into the 
legislation at the State level 2 years ago but weren't able to.
    But I know that a lot of the families who claim the EITC 
have English as a second language or literacy issues, so I 
really doubt if they took the time, they couldn't even read and 
understand exactly what they're being asked to sign.
    In addition, I think it's a very intimidating atmosphere. 
And when you're being rushed by your tax preparer and your tax 
preparer is saying sign this, sign this, it's very difficult at 
that moment to say just a minute, I want to sit down and read 
and understand everything, when you know there's a line of 
people waiting to have their taxes done.
    Senator Coleman. Ms. Esposito, you talked a little bit 
about the disclosure, what do you consider to be the best way 
to proceed with that.
    Ms. Esposito. Well, we of course deal with customers all 
the time in doing their taxes, and one of the reasons our tax 
sites are full and people are waiting is because we take the 
time necessary to explain. We really feel our job is not just 
to do the taxes but to empower the customers to understand 
taxes. Because eventually, they're working and they're working 
their way off being eligible for our program, and perhaps 
starting to do their own taxes 1, 2, or 3 years down the road. 
So our tax preparers really do take a lot of time. We don't 
give them a lot in writing.
    Our customers last year reported 76 different languages as 
their primary language. And, not only with English as a second 
language but other literacy problems, reading can be a problem. 
So we do as much as we can verbally and really take the time, 
even though people are waiting. But with each customer, it just 
takes time to explain it.
    Senator Coleman. You talked about hardship cases. Do you 
offer Refund Anticipation Loans or something similar to 
taxpayers, who were hardship cases? Tell me, how do you deal 
again with folks who have legitimate need for some quick 
dollars.
    Ms. Esposito. Actually it's not a loan. We call the IRS. We 
call the IRS advocate and they just respond fabulously. And 
people can actually go down and get a check the next day.
    And it's right from the IRS so they're getting their own 
refund because they can prove it's not for something minor like 
well, ``Gee, I want to go to Florida or something.'' It has to 
actually be a hardship. Maybe they're being evicted or 
something like that. But the IRS gives them their money so 
there's no loan involved.
    Senator Coleman. Ms. Haney, is it your testimony that RALs 
should not be available for folks who use EITC, or do you 
believe that there are ways in which you can reduce the cost of 
RALs and other financial products?
    Ms. Haney. Well, Senator Coleman, I'm optimistic. I believe 
both.
    Senator Coleman. Sign of a politician.
    Ms. Haney. I would rather there not be loans based on the 
EITC, quite honestly. As I said earlier, I believe the 
precedent is set in Social Security benefits, and I would like 
to see Federal legislation that does the same thing.
    That said, I guess I am a little bit more realistic and 
realize that might not necessarily come to pass. And so I do 
believe there are alternative ways we can make them more 
affordable.
    I also believe in the creativity of the industry, as well 
as the non-profits and the rest of the community, and I believe 
there are other ways that we can help families.
    I know there are some things that could be done to speed up 
the process. So, for example, the IRS is working and has been 
working for a long time on making those refunds come more 
quickly. I know there are some issues in terms of their funding 
right now, that they're not able to do that at the rate they 
wanted to, but I think there are many different ways we can 
look at this problem and make it better.
    Senator Coleman. I appreciate that optimism. And you'll see 
from the next panel where we have representatives from H&R 
Block and Jackson Hewitt that we are having discussions and we 
are getting levels of cooperation. So I would hope that would 
continue so that we could better address this.
    Ms. Esposito, your perspective on this? Should we simply 
ban RALs or are there ways we can reduce costs? When I say ban, 
ban in terms of not allowing Earned Income Tax Credit dollars 
to be factored off into the high cost of the RALs.
    Ms. Esposito. In a perfect world, I would want them to get 
100 percent of their refund like our customers do, without 
taking a loan. But the fact is there is a need there and the 
people do want the money right away. But we very much are 
working with the philanthropic community and credit unions to 
try and come up with alternatives. And there's demonstrations 
around the country through the National Community Tax Coalition 
to offer a better product, something that doesn't take 
advantage of people when they're vulnerable, and gets them 
their money quickly.
    But an important part of it needs to be that they establish 
an account with the bank. When they get a RAL, although they 
open this bank account, that's not their savings, that's not 
where they're going to go and bank next Tuesday or Wednesday, 
where if they got a product that was more reasonable, and it 
was their community credit union, then maybe they would leave 
some of that money in the savings account and start on that 
road to asset building and the whole idea of perhaps being able 
to buy a home, pay for college for their kids and so forth.
    Senator Coleman. So rather than just using the bank as a 
vehicle to process a loan for purposes of getting the RAL, what 
I'm hearing you say is perhaps you can use this process to set 
up a savings account and a banking relationship?
    Ms. Esposito. Exactly.
    Senator Coleman. A savings mentality and other things that 
could have some long-term positive benefits.
    Ms. Esposito. Exactly.
    Senator Coleman. Outstanding. I'll excuse this panel. I 
want to thank you very much for your testimony, and I 
appreciate your hard work in this area. It is greatly 
appreciated.
    Ms. Haney. Thank you.
    Ms. Esposito. Thank you. One thing I didn't mention, I did 
bring the list of the sites.\1\
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    \1\ The list of sites appears in the Appendix on page 59.
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    Senator Coleman. And we will take that and make sure those 
are entered into the record. Thank you very much, Ms. Esposito.
    We would now like to welcome our final witnesses for 
today's hearing, Gary Weinstein, Vice President of Legal and 
Government Affairs at Jackson Hewitt Tax Service; and Robert 
Weinberger, Vice President of Government Relations at H&R 
Block.
    I appreciate your attendance at today's hearing and look 
forward to hearing your testimony, as well as your response to 
the testimony for the first two panels. If RAL costs can be 
minimized, an effort must begin with obviously your respective 
companies.
    I do want to commend Jackson Hewitt for your efforts to 
make your products more consumer friendly. As I indicated to 
the previous panel, you've been having ongoing discussions with 
the Subcommittee. I do understand that there was a $10 
surcharge, and I think you'll talk about that, Mr. Weinstein, a 
$10 surcharge Jackson Hewitt had been using with the EITC 
recipients that I think will no longer be in effect, and we 
appreciate those efforts.
    Gentlemen, as you are well aware, pursuant to Rule 6, all 
witnesses before this Subcommittee is required to be sworn. At 
this time I ask you to please stand and raise your right hand.
    Do you swear the testimony you are about to give before 
this Subcommittee will be the truth, the whole truth, and 
nothing but the truth, so help you, God.
    Mr. Weinstein. Yes.
    Mr. Weinberger. Yes.
    Senator Coleman. Thank you very much. Mr. Weinstein, we 
will begin with you, followed by Mr. Weinberger. After we've 
heard all the testimony, we'll go to questions.
    As I indicated before, your printed testimony will be in 
the record in its entirety. We'd ask again that you limit your 
oral testimony to about 5 minutes. And about that time, if you 
run over that, we'll put up a little note that lets you know 
that. We're somewhat flexible in time today, and I think that's 
OK with the time we have.
    So with that, we will begin, as I said, with Mr. Weinstein. 
You may proceed.

 TESTIMONY OF GARY P. WEINSTEIN,\1\ VICE PRESIDENT, LEGAL AND 
     GOVERNMENT AFFAIRS, JACKSON HEWITT TAX SERVICE, INC., 
                     PARSIPPANY, NEW JERSEY

    Mr. Weinstein. Mr. Chairman, I want to thank you for giving 
me the opportunity to testify on behalf of Jackson Hewitt 
today. We welcome and support the Chairman's interest in, and 
attention to, tax-related financial products. As an industry 
leader, Jackson Hewitt is committed to continuously improving 
its policies, procedures and disclosures, as well as the 
products and services we and third-party banks offer to best 
serve our customers, and allow them to make fully informed 
choices about our products and services.
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    \1\ The prepared statement of Mr. Weinstein with attachments 
appears in the Appendix on page 141.
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    Our interaction with the Subcommittee's professional staff 
prior to this afternoon's hearing, as well as this hearing, are 
invaluable in helping us to continue these efforts. Thus, we 
are pleased to have the opportunity to discuss today our 
products and services, including those offered by the banks, 
the comprehensive disclosures we provide to our customers, as 
well as our training of tax preparers and our proprietary 
software system, all of which are designed to ensure that our 
customers are receiving full and fairly presented description 
of the information they need to make well- informed choices 
about tax-related financial products.
    As part of our ongoing commitment to continue our industry 
best practices, I am pleased today to announce the following 
actions for the 2006 tax season, noting that several of these 
initiatives have been developed as a result of our discussions 
with the Subcommittee staff under the direction of Senator 
Coleman.
    First, Jackson Hewitt has eliminated the application fee 
for Refund Anticipation Loans and other bank products in 
Jackson Hewitt company-owned locations, and is encouraging our 
franchisees to do the same.
    Second, Jackson Hewitt has sought and obtained the 
commitment of our banking partners to eliminate the $10 
additional finance fee for Refund Anticipation Loans for 
customers who receive an Earned Income Tax Credit.
    Third, Jackson Hewitt has also obtained a commitment of the 
banks that all customers will have the right to cancel a Refund 
Anticipation Loan within 48 hours.
    Fourth, Jackson Hewitt will be creating a comprehensive tax 
preparer code of ethics that further solidifies our existing 
policies, procedures, and expectations of tax preparer conduct.
    Fifth, we will provide our customers with a customer bill 
of rights setting forth Jackson Hewitt's public commitment to 
its customers, as well as providing basic information that all 
customers should know.
    Jackson Hewitt Tax Service is the second largest paid tax 
preparer in the United States. We have over 5,400 locations in 
49 States and the District of Columbia, most of which are 
franchised. In the 2004 tax filing season, Jackson Hewitt 
prepared approximately 3.1 million tax returns, which accounted 
for less than 5 percent of the paid tax preparer industry.
    In Minnesota, we have 8 franchisees with 41 locations 
collectively. Our franchisees are independently owned and 
operated small business entrepreneurs who live in, and employ 
people from, the local communities here in Minnesota, as well 
as throughout the country. For the 2004 tax filing season, 
these franchisees prepared approximately 13,000 tax returns for 
Minnesotans.
    Jackson Hewitt's principal business, which accounts for 
over 70 percent of our revenues, is the preparation of tax 
returns. Jackson Hewitt electronically files most of the 
returns it prepares under the IRS e-file program. Through e-
file, a customer can receive a refund directly to their bank 
account, or receive a check by mail, free of charge. This 
option is always the first choice presented to customers to 
obtain their refunds.
    In addition, Jackson Hewitt also facilitates the provision 
of certain financial products offered by two federally 
regulated banks, HSBC Bank USA and Santa Barbara Bank and 
Trust. In Minnesota, Jackson Hewitt franchises facilitate 
products offered by Santa Barbara.
    Refund Anticipation Loans offered by those banks have been 
the subject of a great deal of discussion today. Banks, not 
Jackson Hewitt, make the lending decisions for a RAL, set the 
finance charge, and make the loan.
    RALs, as loans, provided by banks are subject to numerous 
Federal laws including the Truth in Lending Act, Equal Credit 
Opportunity Act, Fair Credit Reporting Act, and Fair Debt 
Collection Practices Act, to ensure that every customer 
understands the terms and conditions of the loans and is 
treated in a fair, non-discriminatory manner.
    The banks are subject to regulation by the Office of the 
Comptroller of the Currency, which subjects the bank's Refund 
Anticipation Loan business to examination scrutiny.
    In addition, States such as Minnesota impose further 
requirements on disclosures for RALs. Finally, the IRS e-filing 
process involves registration, and background checks of 
electronic return originators. This is done to provide 
additional safeguards to taxpayers who utilize authorized e-
filers.
    Jackson Hewitt not only complies with all these disclosure 
requirements, but has implemented its own disclosures over and 
above the Federal and State requirements. Thus, in addition to 
the federally required disclosures of costs and terms that are 
a part of every RAL bank application and the Minnesota State 
required disclosure, Jackson Hewitt provides a series of 
disclosures that make clear that bank products are not 
mandatory, that a Refund Anticipation Loan is in fact a loan, 
and not a refund, and explain the cost of the bank products and 
their alternatives.
    These disclosures include a large type one-page disclosure 
form, acknowledged and signed by the customer, which clearly 
and simply explains the nature of a Refund Anticipation Loan, 
sets forth the APR for the loans sought, and warns that this 
APR may be high when compared to other sources of credit.
    We have large wall posters in our locations which show 
refund and loan options, as well as the costs and APR 
associated with six example loan amounts.
    We have desk maps on every tax preparer's desk, facing the 
customer, setting forth each product and service available at 
Jackson Hewitt, including the ability to transfer the tax 
return in connection with IRS e-filing at no additional cost.
    And we have prompts embedded in our proprietary decision 
tree computer software which requires our trained tax preparers 
to present timely information to customers about the range of 
available options.
    Further, we are continuously training our tax preparers, 
franchisees, office managers, and other employees to make sure 
a clear explanation of each product is provided so that a 
customer always makes the best decision for his or her own 
situation.
    In furtherance of our ongoing goal of best practices, we 
applaud the Chairman's efforts that we understand are underway 
to establish a code of ethics guided by IRS Publication 1345 
for the tax preparation and tax-related financial products 
industry.
    Jackson Hewitt will promulgate its own code of ethics 
guided by IRS Publication 1345 regardless of whether this 
becomes an industry-wide obligation.
    Senator Coleman, I have some continuing remarks, but in the 
interest of time, if the Subcommittee would like, I can 
conclude or----
    Senator Coleman. Why don't you conclude, because I have the 
written remarks, and I will enter them in the record. So if you 
can conclude your oral testimony in the interest of Mr. 
Weinberger and following questions.
    Mr. Weinstein. Thank you, Mr. Chairman. I would, in 
conclusion, I would like to highlight once more the steps that 
Jackson Hewitt is prepared to take:
    First, we are eliminating the application fee for Refund 
Anticipation Loans and other banks products at our company-
owned locations. We're encouraging our franchisees to do the 
same.
    We have sought and obtained the agreement of our banking 
partners to eliminate the $10 additional finance fee for Refund 
Anticipation Loans for customers who receive EITC. We've 
obtained commitment of the banks to allow 48-hour right of 
recisions.
    We will be creating a comprehensive tax preparer code of 
ethics, and we will be establishing a bill of rights.
    Mr. Chairman, thank you for the opportunity to testify.
    Senator Coleman. Thank you very much, Mr. Weinstein. Mr. 
Weinberger.

     TESTIMONY OF ROBERT A. WEINBERGER,\1\ VICE PRESIDENT, 
      GOVERNMENT RELATIONS, H&R BLOCK, KANSAS CITY, KANSAS

    Mr. Weinberger. Thank you, Mr. Chairman, for the 
opportunity to appear.
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    \1\ The prepared statement of Mr. Weinberger with an attachment 
appears in the Appendix on page 161.
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    Today H&R Block is closing out its 50th tax season as the 
Nation's largest tax return preparer. Over the last few weeks, 
167,000 Block associates at 11,000 offices across America have 
helped prepare returns for almost 20 million Americans.
    Here in Minnesota, 1,400 dedicated Block employees will 
help nearly a quarter million residents navigate the 
complexities of the tax code, claim their refunds, and 
importantly for us at H&R Block, get advice they need to 
improve the financial lives of their families. Still other 
Minnesotans are using H&R Block's free online filing program in 
the Free File Alliance with the IRS.
    We're proud of that 50-year history. We continue to evolve 
and improve to meet the needs of our clients. From a background 
in simply ``doing people's taxes,'' we're evolving into a ``tax 
and financial partner'' to our clients, providing not only tax 
services and advice, but also new financial products, like low-
cost retirement savings, transaction accounts, and home 
mortgages.
    Our focus is that client partnership. We succeed only when 
we earn the trust that keeps clients coming back year after 
year, as over 70 percent do.
    The title of this hearing is ``Tax-Related Financial 
Products Can Be Costly.'' It could just as easily have been 
``Tax-Related Financial Products Can Be Beneficial.''
    Of course there are costs for our products and services. 
Indeed, one reason we were founded was to offer middle American 
consumers lower cost alternatives to CPAs and attorneys in 
helping to prepare complex tax returns.
    If we didn't charge fair prices for our services, we 
wouldn't stay in business. But while there are costs, tax-
related financial products also have benefits. And consumers 
who use them find the benefits outweigh the costs and represent 
good value.
    Let me briefly highlight four products.
    First, Refund Anticipation Loans. Refund Anticipation Loans 
cost money, sometimes more than other kinds of credit. In our 
offices they cost between $29.95 and $109.95 for bank loans 
that range from $200 to $10,000. But they also provide added 
speed, convenience and security.
    Many consumers are financially stressed, especially at tax 
time, facing overdue holiday and heating bills, threats from 
creditors and medical or other emergencies. They often can't 
afford to wait the 2 to 8 weeks it takes the IRS to deliver a 
refund. Half of our RAL consumers don't have a checking 
account, so can't take advantage of the speed of IRS direct 
deposit.
    RALs are not right for all taxpayers and, indeed, eight out 
of ten Block clients don't use them. But those who need the 
product see it as a solution, not a problem, and it can 
represent a life-line for those in need.
    To ensure informed choice, all options are presented, 
including free IRS delivery options presented first, in 
disclosures developed with the help of the former head of the 
Bureau of Consumer Protection of the Federal Trade Commission 
and after consultation with consumer groups.
    A second product is Peace of Mind, an extension of our 
Standard Guarantee, which costs $27. What many of our customers 
see are: The benefits of professional representation in case of 
an IRS audit; the security of knowing that if we made an error, 
we will pay up to $5,000 in taxes owed as a result; and, quite 
literally, additional ``peace of mind,'' in contrast to anxiety 
as many taxpayers see the tax collector as not entirely benign.
    A third product is our express IRA. While it costs $15 to 
set up, this savings account has enabled thousands of taxpayers 
to save for retirement, many for the first time. Given an 
average refund of $2,100, tax time can be a teachable moment to 
help Americans save and take advantage of the incentives 
Congress has enacted to better their lives, including the 
little-known Retirement Savers Credit which partially matches 
IRA contributions. We are proud to have helped secure that 
credit for nearly a quarter of all those in America who claimed 
it in the last 2 years.
    Finally let me mention one product, the H&R Block 
Advantage, that doesn't cost our clients an extra dime. The 
Block Advantage statement contains actionable financial and tax 
advice tailored to each client's unique situation. We use it to 
connect people to government benefits for which they may be 
eligible but not receive, including food stamps, children's 
health insurance, and prescription drug discounts.
    We know from food stamp officials that calls to their 
hotline ``skyrocketed'' by over 300 percent when we first began 
our efforts.
    Mr. Chairman, our focus as a company is ``client first.'' 
Providing sound advice, not pushing products that are not in 
the best interest of our clients. That is a clear message from 
management and embedded in our culture. We are a value-driven 
and not a sales-driven company.
    Inevitably, we will not always get it right. But our 
shortcomings are those at execution, not intent.
    Mobilizing a field force of 167,000 people for a 3-month 
tax Olympiad is challenging, and not all of our 20 million 
clients will be happy with the services they receive. But our 
aspiration, and we hope our achievement, is to earn the respect 
of our clients, and to continually improve our training and 
compliance, our policies and procedures, to make our product 
offerings transparent and fair, and to ensure that our clients 
can make an informed choice about all of them.
    Our success comes from repeat business. Our interest, 
therefore, is in meeting our client's needs, adding value to 
their lives, and earning their trust, not selling products they 
don't need. If we do that, they won't come back, and we won't 
succeed.
    Mr. Chairman, thank you again for the opportunity to 
appear. We look forward to answering your specific questions, 
and commenting on the previous panelists.
    Senator Coleman. Thank you very much, Mr. Weinberger. 
Gentlemen, let me say a positive, as I said earlier, I want to 
particularly thank Jackson Hewitt for the cooperation we've 
received. It's certainly taking strong steps in the right 
direction.
    Mr. Weinberger, I will note, speaking with my staff, that 
your written disclosures are exceptional, and you outlined that 
in your testimony. I still think there is some room to bring 
verbal disclosure up to that same level, and I would hope that 
the end result of this hearing there would be some focus of 
discussion on that and how that can be achieved. But clearly as 
we've looked at the written disclosures, they certainly are 
well done.
    A couple questions, though. One, you mentioned, if I may, 
talking about RALs are not right for all taxpayers, and eight 
of ten don't use them. What percentage of folks who are 
eligible for the EITC, how many filers of EITC use RALs?
    Mr. Weinberger. I don't know, Mr. Chairman. But I do know 
any client who comes into an H&R Block office that's eligible 
for the EITC will get it. And except for the existence of 
commercial tax return preparers, millions of Americans wouldn't 
get the EITC, let alone the full value of the EITC to which 
they're entitled. H&R Black alone does 24 percent of all EITCs 
in America.
    Senator Coleman. Would you supply for the Subcommittee, see 
if you can get an answer to that question, what percentage of 
folks who file EITC also take out RALs? It would be very 
helpful.
    Mr. Weinberger. I will.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 12, which appears in the Appendix on page 192.
---------------------------------------------------------------------------
    Senator Coleman. Mr. Weinstein, I notice in your testimony 
that you did approximately 13,000 returns of Minnesotans and 
facilitated approximately 4,000 RALs. Do you know what 
percentage of those folks who are eligible for EITC also filed 
RALs?
    Mr. Weinstein. I do not have that information now, Mr. 
Chairman, but I would be happy to get back to the Subcommittee.
    Senator Coleman. That would be helpful. Also, Mr. 
Weinstein, just so I understand the relationship between the 
banks and the tax preparers, the RALs, they're bank loans. 
They're not Jackson Hewitt or H&R Block.
    But do you have a relationship, questions for both 
gentlemen, one, do you get any refunds or do you have any 
financial relationship with banks whereby you benefit to the 
number two question, the number of RALs done?
    And second, do you have any interest in RALs themselves, 
almost acting as a bank itself? Do you have any control or 
ownership over RALs? Mr. Weinstein and Mr. Weinberger.
    Mr. Weinstein. Mr. Chairman, may I take the questions in 
reverse order?
    Senator Coleman. Please.
    Mr. Weinstein. The second question relating to incentives, 
incentives to sell RALs. In our company-owned stores we do not 
have any incentives for tax preparers to sell RALs. In fact, 
we're not even aware of any of our franchisees who have similar 
incentives.
    I would ask that the Subcommittee keep in mind the 
application fee that is charged, regardless of whether the 
customer receives a RAL or an ACR or an ADD, remains the same. 
There is truly no financial incentive to direct a customer to 
one product or the other.
    And finally, the decision is, and has to be, the customers 
based on their own individual financial needs.
    Senator Coleman. But my question went to whether you have 
any relationship with the banks, not incentives from preparer 
to client; in other words, if the preparer is going to get more 
money.
    But do you have a relationship with the banks? Obviously 
you're directing a lot of business to them, substantial 
business. Is there a financial relationship with the banks 
whereby there's a benefit for the company for the volume of 
RALs produced?
    Mr. Weinstein. Mr. Coleman, this is perhaps getting to your 
first question. We do have a relationship with two banks, as I 
explained in my written testimony and my oral testimony, Santa 
Barbara Bank and Trust and HSBC.
    We earn a flat fee from the bank on RALs. We have a sharing 
provision that relates to the delinquency and loss arrangement, 
but this provision will likely not come into play because in 
the 2005 tax season we do not have a delinquency and loss 
amount that would trigger the implementation of this provision.
    We understand the concerns that have been raised here, and 
we certainly will consider those.
    Senator Coleman. Mr. Weinberger, do you have a relationship 
with the banks by which you get some financial return based on 
the amount and volume of RALs?
    Mr. Weinberger. Yes. We have a 10-year contract that was 
entered into in 1996 with Beneficial Bank, now succeeded by 
HSBC Bank Corporation, in which we purchased an interest in the 
refund loans that they make for H&R Block clients.
    Senator Coleman. Do you know what H&R Block earned last 
year from rebates, refunds, and incentives for selling RALs?
    Mr. Weinberger. Well, I know what we received in 
participation fees, which is in our annual report.
    My recollection, which I hope would be subject to 
correction, would be about $160 million in revenue.
    Senator Coleman. I think my notes indicate about $168 
million in revenue.
    The other question, you talked about Peace of Mind. And we 
noted, Mr. Eckelberry, that in part of his evaluation, the 
Peace of Mind product was one of those things he was evaluated 
on. And you've indicated that there is some value to that.
    My question, though, is in the value if someone is audited, 
if there's a mistake or something, it's on your shoulders and 
not on the taxpayer's. What percentage of Earned Income Tax 
Credit clients were audited last year?
    Mr. Weinberger. About three or four times the number of 
middle class taxpayers. So it is a group that is subject to 
elevated scrutiny and examination by the IRS.
    Senator Coleman. Do you know the percentage of filers, the 
number of folks subject to audits of your customers?
    Mr. Weinberger. I can get it for you.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 12, which appears in the Appendix on page 192.
---------------------------------------------------------------------------
    Senator Coleman. Could you give me a ballpark figure? Is it 
under 5 percent?
    Mr. Weinberger. Well, it's under 5 percent. But the average 
for middle class taxpayers would be considerably lower.
    Senator Coleman. Is it under 3 percent?
    Mr. Weinberger. I don't have the exact percentage.
    Senator Coleman. Obviously, my concern is that if 97 
percent to 98 percent of folks don't have a risk here, that if 
in fact you're selling a product, pushing a product, and 
evaluating performance on the basis of that product, then in 
the end, 90-something percent, and I am quite confident it's 
over 95, and could go I think higher than that, that raises the 
kind of questions that were raised by the prior panel, that you 
have folks who are low-income, obviously stressed, as you 
indicated. The IRS could be a big bogeyman in terms of fear of 
an audit. But if you walked in and said you had a 99 percent 
chance you're not going to be audited, you want to buy this 
product, it's a different response than giving Peace of Mind 
and it's going to cost you for this.
    Mr. Weinberger. Well, the IRS has a well-publicized 
enforcement campaign, and especially so with respect to the 
EITC where Congress has actually appropriated funds for EITC 
enforcement as a separate line item. And the Congress has put a 
considerable amount of pressure on the IRS because of the large 
amount of non-compliance in the EITC program.
    There is a rational reason for people being concerned about 
audit, but there's also an emotional element which relates to 
perceptions. And I think that's a reality in America.
    Senator Coleman. Again for the record, if you could provide 
us with a percentage of the EITC clients audited last year, 
that would be----
    Mr. Weinberger. We would not necessarily know which of our 
clients is audited.
    Senator Coleman. What percentage of those who bought Peace 
of Mind were audited, I would like that information. Those who 
purchased that policy, what percent of EITC actually used that 
policy. I think that would be useful information to have.
    Mr. Weinberger. OK.\1\
    Senator Coleman. So I understand the relationship between 
the companies and the franchises. Mr. Weinberger, you talked 
about eliminating the application fee--excuse me. Mr. 
Weinstein, you eliminated application fees and which you 
encourage franchisees to do that. What does that mean? What 
kind of encouragement do you offer, what kind of control do you 
have over the actions of the franchise operations when it comes 
to fees they charge or don't charge?
    And, Mr. Weinberger, I'd ask the same question.
    Mr. Weinstein. Thank you, Mr. Chairman. Jackson Hewitt is a 
franchise model, which means that franchisees make up the 
backbone of our tax preparation business. Each franchisee is an 
independently owned and operated small businessman and woman, 
and thus is able to competitively price their products.
    We have company-owned stores in addition to our franchise 
stores. Out of the 5,400 stores we have, the vast majority of 
them are franchise-owned.
    Senator Coleman. If I may interrupt. In Minnesota, what 
percentage are franchise operations and what percentage are 
company-owned?
    Mr. Weinstein. One hundred percent franchise-owned.
    Senator Coleman. So Minnesota franchise operations, talk to 
me about, if you eliminate application fees, how does that 
impact operations in Minnesota?
    Mr. Weinstein. Well, in fact, we have at the company-owned 
store level decided to begin to reduce and eliminate 
application fees this tax season, and we plan to completely 
eliminate application fees next tax season in our company-owned 
stores.
    Our franchisees, who may very well follow us in this 
approach, and as I stated in my opening statement, we will 
encourage them to follow us in that approach, will begin to 
reduce or eliminate the application fee in Minnesota for tax 
season 2006. And I believe that various franchisees across the 
country have already begun this process.
    Senator Coleman. I'm just trying to understand the nature 
of your ability to encourage your franchises. Do you have any 
control, do you have any saying, do you have anything within 
the relationship between you and the franchise operation that 
would provide that application fees are eliminated, or in fact 
is it simply up to the franchise operation to do what they wish 
to do, understanding that the company may encourage a certain 
course of action?
    Mr. Weinstein. As a franchiser, we cannot force the 
franchisee to take any particular action. But given the 
competitive landscape, the legislative landscape, and the 
regulatory landscape, we fully expect that our franchisees will 
follow us in our strong efforts to eliminate this application 
fee.
    Senator Coleman. Mr. Weinberger.
    Mr. Weinberger. H&R Block has already eliminated what it 
called a ``system administration fee'' in its company-owned 
offices throughout America.
    In Minnesota, we have 112 company-owned offices and 93 
franchised offices. There is no fee in the company-owned 
offices or in two-thirds of the franchise offices. In the 
remaining third, there is a $13 fee, which will be eliminated 
entirely next year.
    Senator Coleman. When you say eliminated, do you have the 
ability to have them eliminate it or is this simply voluntary 
action on the part of a franchisee in standing with the 
company's strongly recommending certain policy?
    Mr. Weinberger. I don't know the answer to that, but I've 
been assured the small number of remaining ones will be 
eliminated.
    Senator Coleman. I want to just go back to the testimony of 
Ms. Burbach. And I think it fairly typical, an average 
individual, financially strapped, came in, somewhat confused. I 
presume she had in front of her perhaps even verbal language--
not verbal, written disclosures, etc.
    One, as you kind of look at that individual, does it 
surprise you that she was confused? Do you think that her 
situation was unusual for someone in that position?
    Mr. Weinberger. Well, first let me say I feel bad about the 
circumstances that she described, and she was clearly stressed. 
And both I and the company regret that.
    We have a dilemma here because the tax code is quite 
explicit about not allowing us to discuss a person's tax return 
without their specific written consent for each use or 
disclosure. If she provides that consent, I would be happy to 
share, privately, with her permission and the opportunity to 
review it, the circumstances as best we can establish them.
    Senator Coleman. Would it be your testimony, though, that 
you are fairly confident that your tax preparers do explain 
that folks have the opportunity to cancel RALs within a couple 
days if they so desire?
    Mr. Weinberger. Yes. And I can speak to that, Mr. Chairman. 
We have considerably revamped over the last few years our 
training and compliance activities in this area.
    The tax return preparer who testified earlier, Mr. 
Eckelberry, last worked for H&R Block for a full year in the 
year 2000, 5 years ago. During the intervening time, a 
considerable amount of change has occurred.
    Tax clients who have a refund are fully--all of their 
options are explained to them. They receive a ``Facts About 
RALs'' document, which, by the way, does indicate that we may 
purchase an interest in the refund loan, which is disclosed, 
and which also specifically says that you can cancel your RAL 
transaction for up to 48 hours without being obligated for a 
finance charge connected with it. And I have blow-ups of those 
if it would be easier to illustrate.
    Senator Coleman. Can we have that entered into the 
record?\1\
---------------------------------------------------------------------------
    \1\ See attachment to Mr. Weinberger's statement which appears in 
the Appendix on page 167.
---------------------------------------------------------------------------
    Mr. Weinberger. We have worked with the former head of the 
Federal Trade Commission Bureau of Consumer Protection, and 
developed what we think are really best practices, and that is 
several layers of disclosure.
    First, in the welcoming brochure, the refund or settlement 
options are fully described, again with the IRS free options 
described first.
    Second, at the tax desk there is the ``Facts About RALs'' 
document, which on the reverse side has a chart showing the 
price of RALs and the annual percentage interest rate for 
various amounts, the time line of refund times from the IRS 
versus the time for bank products, and a run-through of a 
typical transaction so a client can see what is deducted and 
what the bottom line would be.
    Third, embedded in the computer program is a side-by-side 
comparison of all options, which takes the general information 
and makes it specific to the individual taxpayer, what their 
refund is and what any of the items will cost.
    Fourth, there's an extensive written application which 
contains various cautions in it, and further disclosures 
required under the Trade in Lending Act which are included in 
the signed loan agreement.
    And finally, then at the end of the process, is a Block 
Advantage Report. The first item included for people who use 
RALs is an indication of--and I will read it to the 
Subcommittee:
    ``Plan to keep more of your refund next year: A Refund 
Anticipation Loan is fast and easy, but it's also expensive 
because the lending bank charges you for this service. In 
addition, other institutions may charge you to cash your RAL 
check. Next year, why not file electronically and ask for your 
refund by direct deposit or IRS check? That way you can avoid 
RAL fees and still get your money in approximately 8 to 15 days 
by direct deposit, or 3 weeks via check. If you don't have a 
bank account, many banks, savings institutions and credit 
unions have low-cost solutions available. You'll gain better 
control of your finances, avoid check-cashing fees, and keep 
more of your refund in your own pocket.''
    So we've tried, I think, responsibly and ethically, to 
offer full disclosures of all options, and we believe this 
should enable a potential consumer of RALs to be fully informed 
before he or she makes a choice.
    Senator Coleman. And my concern, and I appreciate this, as 
I started this panel, with making progress, both certainly, 
even as we've approached this hearing and have historically 
looked back on what H&R Block has done, I continue to be 
troubled by a number of things here.
    One, that in effect, Mr. Weinberger, you are the lending 
bank. And you've got an interest in these loans. And I'm trying 
to think of some other client, patient-client situation where 
you have a financial interest in your client buying a product 
that has a very expensive product, may be more expensive than 
some other options that are out there, and you financially 
benefiting from that. I'm trying to understand.
    And we'll talk to the IRS about this situation where you 
have this kind of sacred trust, but in effect you are the 
lending bank today by your interest in the RALs themselves. And 
I find that concerning. I'm not sure where we go with it.
    But as I kind of listen to this, the disclosure to there, 
one of the critical things is you've got a direct stake and a 
financial interest in folks buying a product that has an 
extraordinarily high interest rate, a cost in relationship to 
the benefit the person gets.
    And I'm searching for some other analogies in law, in 
medicine, in accounting where that exists and how you deal with 
what appears to me to be a conflict.
    Mr. Weinberger. Well, several points in response. First, 
that we may purchase a loan is disclosed to the consumer.
    Second, we're not the lending bank, although we purchase an 
interest in the loans.
    Third, if the company--and I'm not sure if it's fair, but 
if the company has an interest in the product succeeding, that 
doesn't necessarily apply to the individual tax return preparer 
who does not receive any financial incentive whatsoever for 
offering a RAL or a RAC. And so at the street level where the 
contact is with the taxpayer, there is no financial incentive 
to offer the product.
    And in fact, given Mr. Eckelberry's earlier testimony, I 
would like permission to enter into the record our performance 
evaluation discussion sheet, which is currently in use, which I 
think again illustrates that we are a values-driven rather than 
a sales-driven culture at H&R Block. And we make it very clear 
that our return preparer's first obligation is to do right by 
the taxpayer. And I think that's very strongly the emphasis of 
the company.
    Senator Coleman. Mr. Weinstein, do you want to add to that 
response?
    Mr. Weinstein. I think that it's very important for Jackson 
Hewitt to have satisfied customers. And to the extent that we 
have taken great pains to make sure that our tax preparers are 
trained adequately (and I think we heard some testimony today 
from Ms. Grant which may support that), and to the extent that 
we can provide clear disclosure that is understood by the 
customer, that is a good thing for Jackson Hewitt. We want to 
retain these customers, we want them to return to our stores.
    Senator Coleman. Gentlemen, first, we will make sure that 
document is entered into the record.
    I do want to thank you for your testimony. And this 
Subcommittee will certainly continue to work with you on these 
issues. So thank you very much.
    With that, this hearing is adjourned.
    [Whereupon, at 2:52 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

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