Spotlight: Beware the tax refund loan

By Ann Hardie

For the AJC

A tax refund for many Americans means replacing a leaky roof, buying a more reliable car or paying down a credit card.

And yet, 8.4 million low- and moderate-income taxpayers squandered a collective $806 million in 2008 for immediate access to their refunds, according to a new report from two national consumer advocacy groups.

Consumers shortchanged themselves by taking out short-term, high-cost refund anticipation loans, or RALs. With so many people desperate for cash, the loans likely will remain in demand this tax season.

If consumers were to hold out a bit, they could pocket all of their return at no cost. Volunteer groups offer free tax preparation services for low-income filers. The IRS partners with commercial companies to offer free online federal tax preparation and e-filing to most taxpayers. Taxpayers can receive their refund checks in the mail or with direct deposit and get their money even faster.

“If they wait one to two weeks, they can get their whole refund without paying anything,” said Chi Chi Wu, a staff attorney with the National Consumer Law Center (NCLC).

Last month, the Boston-based nonprofit and the Consumer Federation of America, in Washington, published their annual report, critical of RALs.

Here’s how the tax loans typically work: Consumers pay H&R Block, Jackson Hewitt or other tax preparation companies to do their returns. The preparers, which have partnerships with banks, then arrange for filers to take out 7-to-14 day loans against their expected refunds.

Although consumers get access to their money in one to two days, they can pay fees with effective annual interest rates that can run into the triple digits. The APR on a 10-day tax loan of $300 is nearly 500 percent, the consumer groups reported, while the APR for a typical RAL of $3,300 is 72 percent.

The recession’s stranglehold on the nation’s credit markets has affected the availability of the tax loans. In 2004, 12.4 million consumers took out RALs, 4 million more than in 2008, the most recent data available, according to the consumer groups.

But many tax preparation companies continue to offer the loans, they say, because consumers demand them.

“They are convenient. They are something people want,” said Nina Cunningham, a spokeswoman for Liberty Tax Service, a Virginia-based chain with 3,500 stores in the United States and Canada. “They are not something we steer people toward. We explain the terms and the options.”

The maximum annual interest rates on the loans arranged through Liberty have dropped to 24 percent, Cunningham said.

In recent years, all of the major tax preparation chains have dropped their costs due to market pressures. Jackson Hewitt and H&R Block, the largest tax preparers, did not respond to phone messages or e-mails.

Nevertheless, the loans remain a bad deal, Wu said.

“Even if the loans are less expensive, they still present risks. If your refund doesn’t show up or if something is wrong with it, you still are on the hook for that loan,” she said.

Some preparers tack on additional charges or other questionable fees.

Consumer advocates also fault the loans for draining funds from the Earned Income Tax Credit Benefits, a federal anti-poverty program that provides large tax refunds to the working poor.

“This is costing taxpayers money. It is hurting low-income families,” said Adam Rust, research director of the Community Reinvestment Association, a consumer group based in North Carolina.

In January, Rust visited a Raleigh area branch of Mo’ Money Taxes, a small chain that offers RALs with stores in southwest Atlanta, Decatur and Stone Mountain.

“I just wanted to understand their costs,” he said.

Mo’ Money wanted a hefty $315 to do his taxes, Rust said. It wanted an additional $103 in fees for a tax loan on a Rust’s refund, estimated at $3,415.

Calls to Mo’ Money’s corporate headquarters in Memphis were not returned.

How to get help

For a fast, free refund, visit the IRS Web site to learn how to file electronically or to locate a free online service.

Volunteer Income Tax Assistance (VITA) programs and AARP’s TaxAide offer free tax preparation for low-income taxpayers. Locate VITA sites online or by calling the IRS at 1-800-829-1040.

Here’s how refund anticipation loans work

Consumers who take out refund anticipation loans pay a hefty price to borrow their own money. The loans work like this: A consumer pays a tax preparer to do his or her return and determine the federal tax refund. The tax preparer then arranges for the consumer to borrow against that return from a bank that the preparer has partnered with. Consumers get their money quickly, typically in a day or two, but they also must pay high interest and other fees. A loan is repaid when the IRS refunds the consumer for overpaid taxes, usually within 14 days.

Check our sources

See the latest report on RALs online from the National Consumer Law Center and Consumer Federation of America.

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