The issue: What are the restrictions on tax preparation firms that arrange loans in anticipation of clients’ tax refunds?
It’s an all-too-familiar tax season routine: Go to a storefront tax preparer and find you’re owed a refund. The preparer offers a quick refund if you sign some papers. Then in a few days, you have your cash.
This may sound good, but it’s a raw deal, say AARP attorneys. Instead of a quick refund, it is actually a cash advance called a refund anticipation loan (RAL), a short-term, high-interest loan with annual percentage rates as high as 600 percent. That refund doesn’t arrive much faster than one you’d get filing electronically with the Internal Revenue Service, which processes refunds within 10 days, said Julie Nepveu, senior AARP attorney. “It is an absolute travesty that the lowest-income taxpayers are losing money they need to live on when they could be getting their refund quickly for free,” she said.
Indeed, the fees are stiff (an average of $250 on a $1,000 refund), and many states limit the practice. The West Virginia Supreme Court is slated to hear a case this month involving thousands of residents, including Christian and Elizabeth Harper of Pliny. “The loans hurt vulnerable senior citizens and low-income individuals who can’t afford exorbitant fees,” said Eric Snyder of Bailey & Glasser in Charleston, an attorney in the lawsuit naming the national tax preparer Jackson Hewitt Inc.
AARP filed a friend of the court brief supporting the Harpers, who argued that Jackson Hewitt obtained a fee from a national bank, Santa Barbara Bank and Trust, a division of Pacific Capital Bancorp. Those fees violate the law, Snyder asserts in the brief, because Jackson Hewitt did not properly disclose its relationship with the bank, which provided the loan.
Cases challenging RALs are pending in several other states, including Missouri, Ohio and Maryland. Nationwide $1.5 billion in various fees is paid by low-income workers eligible for the earned income tax credit, according to the National Consumer Law Center. In West Virginia, those fees totaled $12.7 million.
According to the suit, tax preparers that provide full consumer services are designated by state law as credit service organizations (CSOs) and must make basic disclosures to consumers about RALs. In court papers, Jackson Hewitt has argued that it should not be considered a CSO and that it follows the law carefully. Today Christian Harper, a computer analyst, recognizes his error. “I would have waited the extra week for my refund and saved grocery money for two weeks, but they did not tell me that was an option. Ever since, that’s exactly what I’ve done,” he said.
What it means to you: If you need fast access to your tax refund, file electronically with the IRS. Free tax preparation services are available from AARP Foundation’s Tax-Aide or other volunteer tax preparation providers.
Emily Sachar is a journalist and author based in Brooklyn, N.Y.