The federal January jobs report came in Feb. 1 with a surprising 304,000 jobs added for the month, and a labor participation rate of 63.2 percent. The unemployment rate of rose slight to 4 percent, but this is due to more people looking for work who had given up. All this occurred during the month of the longest federal government shutdown in history.
This shows that currently our economy is strong, resilient, and growing. However, the all-important Tax Season for automotive retailers may yet be affected by the government shutdown and the ability of the IRS to get back up to speed and send out refund checks to millions of consumers.
The checks for those that receive the Earned Income Tax Credit and the Additional Child Tax credit typically averaged about $2,500 in 2018, but can be much larger depending on the number of qualifying children the tax filers have. They can be $8,000 or more. It stands to reason that these filers file their taxes as soon as they can.
The federal government, however, passed the PATH (Protecting Americas from Tax Hikes) Act in 2015, which changed a number of tax laws pertaining to individuals, families, and businesses. One aspect of the law, designed to thwart fraudulent refunds by identity thieves, mandates that the IRS not process a tax return for those who claim the Earned Income Tax Credit or Additional Child Tax Credit until Feb. 15. Given that date, the overwhelming majority of these tax refunds are in consumers’ hands around Feb. 22-28, meaning that Tax Season, as it used to be, has changed dramatically.
The IRS has stated that there should be no delays in these filings, though they are catching up on a lot of business that was left unattended to the recent shutdown. For instance, the IRS provides data to the various tax software companies to allow them to correctly e-file returns. But due to the shutdown, the IRS was not getting updates done, and not communicating this to the various tax services. So many who use these third-party services to e-File their tax returns, may experience delays.
Auto lenders who provide subprime financing to customers have experienced a significant compression of tax season because of e-Filing and the PATH Act. What used to be a season that lasted from April through mid-May, is now a few weeks around the end of February and the beginning of March.
Both consumers and lenders have found ways around this. Lenders for instance have used third-party providers that pull tax refunds for a down payments with promises from the consumer to come back when their refund arrives and make an “irregular” payment. Several thousand auto lenders, including some of the major buy here-pay here chains, have had good success with program. Consumers, who want access to their money as soon as possible, can use a tax service to give them an advance on their refund for a fee.
Buy here-pay here dealers are counseled by their Twenty Group moderators not to change up their underwriting criteria based on getting a larger down payment. If a customer hasn’t had a long-term residence and seems incapable of holding a job for more than six months, dealers should still steer clear of them. They should not enter into a contract just because they get a $3,000 down payment. Another rule is to not take a consumer’s entire refund as a down payment. In the Northeast and Midwest electric bills and heating payment are higher, by late February, Christmas credit card bills are due, and there are other expenses that money need to be used for. In other words, being greedy with a customer’s tax refund, could result in a default down the road.
Because of a compressed tax season, may want to rethink how they stock up their inventory, in preparation of tax season. Instead of bulking up the lot in November and December, when wholesale prices should be lower, dealers have to consider floorplanning costs, and what happens if there is a delay in refunds. It becomes a math problem for each individual dealer as to whether any savings really exists for buying sooner and holding vehicles longer, or buying later and paying slightly more.
One thing that is certain, is that subprime customers come with significant risk, and that risk must be mitigated in order to insure profitability. Of course, protecting your collateral with GPS tracking devices has become the industry standard, and our new 4G no-hard wire Revo line of products can protect your collateral — now nearly effortlessly. These battery-powered devices use smart software and employ artificial intelligence to help locate a vehicle faster, often predicting where and when a vehicle will be at a specific location. Importantly, because the devices are not hard-wired to the vehicle, no installation necessary and securing the device in locations in the vehicle that are difficult to access, yet provide a clear signal to the 4G network.