Bills were piling up for the mother of six from Silver Creek, N.Y., since her husband was laid off in April. She was counting on their federal tax return to “catch up” on their debt but needed the money immediately.
So the couple went to a national chain in January and paid more than $300 for tax preparation services and for a refund anticipation loan (RAL), which promises taxpayers the amount of their expected refund within a day or two.
But the next day, the woman says, the tax preparer called and told her she’d have to wait eight to 15 days for the refund—no explanation given. She was now out the $300 fee for the tax services that she could’ve gotten for free elsewhere because of her low-income status.
“We were counting on a fast refund,” says the woman, who wrote about her situation, along with dozens of others, at a website devoted to airing consumer complaints. “If I would have known this [would happen], I would have went to a place who could help me file for free.”
As the 2009 tax season draws near, consumer advocates are warning people like “mother of six” to avoid taking out short-term RALs offered by many tax preparers, because of the high cost.
The loan term usually runs between one and two weeks, with an annual percentage rate from 50 to 500 percent, depending on the size of the loan and the fees, which vary by company, says Jean Ann Fox, director of financial services for the CFA.
She says that the majority of people who use RALs are the working poor who qualify for the earned income tax credit.
Companies say the loans give consumers quick access to cash, but Fox says taxpayers who file electronically and have their refunds deposited directly can get the refunds in about two weeks, making costly RALs unnecessary.
Lenders reaped an additional $336 million in fees with a similar financial product called refund anticipation checks (RACs), the consumer groups said. With RACs, a bank partners with a tax preparer and opens a temporary account for the taxpayer. The IRS deposits the tax refund directly into the account and the bank issues a check to the taxpayer. The account is then closed.
“What a bad deal refund anticipation loans are for consumers,” Fox told AARP Bulletin Today. “It’s sold as a way to get your money right away, but it is, in fact, an expensive loan. And it takes money out of low- to moderate-income families’ pockets. It’s your own hard-earned money and you’re paying to borrow it.”
For those who do decide to get an RAL, the NCLC found that fees vary widely. A typical $3,000 loan at H&R Block costs about $62 (plus an additional $20 if a paper check is issued), while Jackson Hewitt’s fee is $106 to $110.
Taxpayers who want their money on the same day—an “instant” RAL—face another fee of $25 to $55.
One woman from San Francisco says she felt she was duped when she paid her tax preparer hefty fees for instant RALs year after year.
“I am a low-income worker and I feel I was charged very large fees to get my refund fast,” the woman wrote on the Consumeraffairs.com site. “They make it sound so tempting, to get our money back real fast—a matter of days to be exact. But in the long run, I was out a couple hundred dollars every year.”
Meanwhile, a coalition of consumer and financial groups is criticizing Santa Barbara Bank & Trust for reportedly using government Troubled Assets Relief Program (TARP) funds to provide RALs.
The TARP money was issued to banks to encourage them to resume lending levels seen before the mortgage crisis, both to each other and to consumers and businesses.
The Community Reinvestment Association of North Carolina, the California Reinvestment Coalition, the Woodstock Institute, the CFA and the NCLC blasted the bank after it said it would use some bailout money to fund RALs. The coalition said Santa Barbara Bank & Trust earned $118 million in RAL fees in 2007.
Calls to the bank’s parent company, Pacific Capital Bancorp, were not returned.
Alan Fisher, executive director of the California Reinvestment Coalition, called it disappointing to see a community bank “take federal money while continuing to offer predatory tax refund loans to earned income tax credit recipients and other Californians in financial need.”
Carole Fleck is a senior editor at the AARP Bulletin.