Federal Reserve Fines Bank for Hidden Tax Prep Fees

The Federal Reserve System Board of Governors issued a cease-and-desist order and assessed a $44 million penalty against a bank with a subsidiary that contracted with a third-party tax preparer for deceiving customers by failing to clearly disclose fees associated with processing tax refunds.

The July 19 order and fine went to Green Dot Corporation, the holding company that owns Utah-based Green Dot Bank. According to an accompanying press release from the Board on Friday, the fine reflects “numerous deceptive practices and a deficient consumer compliance risk management program.”

Santa Barbara Tax Products Group (TPG), a Green Dot subsidiary, worked with an unnamed “major” third party in the tax preparation industry to facilitate payments for return preparation services. The order states that the “full cost” of the tax preparation services were not “clearly and conspicuously” disclosed to the third party’s customers on its website, which Green Dot is responsible for.

On the website was an option to “pay nothing out of pocket” by using a customer’s tax refund to absorb the cost of the tax preparation service. However, information on the processing fee at issue was hidden. “Consumers had to click on hyperlinks located at the bottom of web pages or click on drop-down menus to reveal a lengthy list of small-print statements including the disclosure of the separate tax refund processing fee,” read the order. TPG collected a share of the revenue from the fees.

Although the order does not identify the third party, the top players in commercial tax e-filing have faced pressure from government agencies, lawmakers, and the public for misrepresentations of the true costs of online products. In April, two H&R Block customers filed a complaint against the company in the US District Court for the Western District of Missouri. Their complaint alleged that customers are misled in thinking they can complete and submit their tax returns but face surprise charges at the end of the process as part of a “bait-and-switch” described by the plaintiffs’ attorneys.

For similar reasons, the Federal Trade Commission barred Intuit in January from advertising the “free” version of TurboTax without disclosing that only roughly a third of customers have “simple returns” eligible for cost-free filing. Intuit paid $141 million to its customers as part of a false advertising settlement.

As stated by the Federal Reserve Board, Green Dot also committed non-tax consumer law violations in how it marketed, sold, and provided service for its prepaid debit card products. “The firm also blocked access to accounts of legitimate customers receiving unemployment benefits and lacked reasonable policies and procedures to help those customers cure those blocks,” said the Board. “In addition, Green Dot did not maintain effective consumer compliance risk management and anti-money laundering programs.”

In a statement responding to the order, Green Dot CEO George Gresham said the company has been working with regulators and will comply with the consent order. According to Gresham, the practices highlighted by the Board were in place “years ago” and necessary changes are already in the works. Green Dot says it has taken “and will continue taking meaningful steps to correct and remediate those issues, including significant updates to our processes, our product packaging and marketing, our management team and our compliance programs.”