you want your tax refund right away this year, be prepared to pay. For
years, consumer advocacy groups have warned against so-called "instant"
or "same-day" refunds. The reason: these refunds are actually bank
loans, and they often bring exorbitant fees. In some cases, that means
a mind-boggling 1,300 percent when calculated like a credit-card annual
With tax season under way, advocates are once
again warning consumers against them and state officials are pressing
for better disclosure on the part of tax preparers.
mid-February, the Alabama state senate voted 25 to 0 to create the
Alabama Board of Individual Tax Preparers, which would require
commercial tax companies to disclose costs on the arrangements
underlying instant refunds as well have their preparers pass a test.
that, New Jersey cited 38 companies for false advertising in connection
with "same-day refund" postings purporting to offer instant IRS refunds
– which are actually high-interest loans.
Michigan lawmakers are also readying a bill that would force disclosure of interest rates and fees.
controversy surrounding what tax preparers call "refund anticipation
loans" is not new. In 2006, California Attorney General Edmund G.
"Jerry" Brown sued major tax preparers to stop marketing the loans as
refunds. In January, he announced a $4.85 million settlement with tax
giant H&R Block. Another major tax preparer, Jackson Hewitt,
settled in 2007. Other, smaller suits have been settled in recent years.
the eye-popping rates, nearly 1 in 15 taxpayers opted for an early
refund in 2007 – a total of $900 million spent to get paid an average
of 10 days early, according to Americans for Fairness in Lending, a
nonprofit advocacy group in Boston. The majority of those were
lower-income families who received the Earned-Income Tax Credit, the
Refund anticipation loans (RALs) are a significant
piece of the overall tax-preparation pie. In federal tax filings,
industry giant H&R Block reported revenues of $190.2 million last
year through RAL arrangements with its partner, the bank HSBC. That is
more than 4 percent of the company's total revenues.
players walk the line between meeting what they say is a strong demand
for RALs and ensuring that customers are aware of the costs.
agree that the best thing is for taxpayers to e-file and get their
refunds direct-deposited by the IRS," says Nancy Mays, spokesperson for
H&R Block based in Kansas City, Mo. "We are on the same page with
the advocates.... Our tax professionals are trained to tell clients
that e-filing is the least expensive and entails a reasonable waiting
Even so, about 20 percent of H&R Block customers
choose RALs. They "say they have an urgent money need hanging over
their head – overdue rent, a broken car. That's what people tell us,"
Ms. Mays says. Many don't have bank accounts.
She touts the fact
that such "unbanked" customers can transfer the money onto the
company's Emerald Card – that's a prepaid MasterCard – and save about
40 percent of an RAL's cost elsewhere.
This effort doesn't have
consumer advocates extolling the company and its RALs this tax season.
If anything, they are more critical in this year's dramatically
worsened economic climate.
"In the current political climate,
people are not particularly sympathetic to banks and purveyors of these
loans," says Jim Campen, executive director of Americans for Fairness
in Lending. "Over the years, they've become more aware of the
exploitative nature of these loans, and that will be all the more
evident in this economy," he says.
A few years from now, the
point may be moot. The Internal Revenue Service is developing a filing
system called the Customer Account Data Engine, which the IRS says will
dramatically shorten refund wait times.
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