Short-term loans carry hefty price

WASHINGTON - There are loans for just about everything these days, so why not loans against your tax refund?

Bad idea, say tax experts. Such loans provide quick cash at a hefty price.

An estimated 12 million taxpayers took out refund anticipation loans - or RALs - in 2004, the latest year for which there are comprehensive figures, according to the National Consumer Law Center. These mostly low- and moderate-income taxpayers paid a total of more than $1 billion in fees for their easy money.

RALs are a short-term cash advance using the expected tax refund as collateral. Taxpayers get the money before the Internal Revenue Service sends a refund; they sign over the actual refund to the lender. The typical loan period is seven to 14 days.

Many companies offer RALs, though they aren't always called that - look for phrases such as "fast cash refunds," "express money" or "instant refunds." Most carry a multitude of fees, sometimes hidden or not immediately obvious to the consumer.

In a 2006 report to Congress, the IRS' Taxpayer Advocate Office cited as typical a $3,000 RAL facilitated by tax-prep giant H&R Block through lender HSBC Bank. The loan carried a $24.95 bank account setup fee and a $75 finance charge - on top of an average $150 tax return preparation fee.

Last year, Block settled a number of class-action lawsuits over its RALs.

Company makes changes

The company has since lowered fees by 40 percent for its average RAL of $2,800, said spokeswoman Kate O'Neill Rauber. Such a loan could cost as low as $60 when combined with a bank account and Block's "Emerald Prepaid Card."

But that charge doesn't include a tax preparation fee, now averaging $160. Rauber said the lender, HBSC, "will only provide an RAL through a licensed tax professional," meaning that "to obtain an RAL from H&R Block, a client must have their taxes prepared by us."

Rauber says Block makes sure clients understand that an RAL is a loan and discloses all fees ahead of time.

"We've reached out to consumer advocate groups. We've enhanced our disclosures," she said.

She cites Block's RAL fact sheet to clients, which states they must repay the full amount of the loan "even if the IRS does not send all of your refund."


The brochure notes that taxpayers whose RAL applications aren't accepted by the lender-bank still must pay an account fee and adds: "The total cost of an RAL may be substantially higher than other kinds of credit, and you may want to consider other alternatives."

Jackson Hewitt Tax Service, the nation's second-largest tax preparer with more than 6,000 franchise sites, offers RALs of up to $9,999 through a bank lender that can be had in as little as a day, according to the company's Web site.

Fees are withheld from the loan proceeds, which can be loaded onto a prepaid "ipower CashCard." Fees can include a $30 bank load fee, a $20 "Jackson Hewitt Office Fee" and various other fees associated with the use of the CashCard, including a $15 "card closure/cancellation" fee.

The company did not respond to a reporter's repeated requests to make a representative available to discuss its RALs.

Critics of RALs, such as the National Consumer Law Center, say they amount to loan-sharking - easy cash at usurious rates. Though the volume of RALs appears to be leveling off - the IRS says it processed 9.6 million returns with RAL indicators in 2006, down slightly from previous years - opponents say such loans are still a problem for lower-income taxpayers.

"We're seeing trends in the right direction from at least some of the industry actors, whether due from lawsuits or public attention," said Chi Chi Wu, staff attorney at the NCLC in Boston. Nevertheless, RALs still present "huge public policy concerns" because they drain money from the working poor, she said.

Data collected by the IRS show that in the 2004 filing season, 56 percent of the 13.8 million RAL recipients - about 7.7 million - were also recipients of the Earned Income Tax Credit, the federal poverty assistance program for working families.

Eligible taxpayers typically need help in preparing the complex paperwork to claim the credit. That can leave them vulnerable to unscrupulous tax preparers, even as they urgently need cash to pay bills, unexpected expenses and tax prep fees.

The IRS does not endorse RALs and notes that with electronic filing of tax returns, taxpayers receive refunds in two weeks or less - though it can take six to eight weeks for those filing paper returns.

Last fall, the IRS reached an agreement with an alliance of tax software companies that provide free tax preparation and electronic filing for taxpayers with adjusted gross incomes of $52,000 or less. Under the agreement, the companies will no longer offer RALs to taxpayers who use that program.

The Taxpayer Advocate, an independent office within the IRS that helps taxpayers resolve tax problems, wants Congress and the agency to do more to stop abusive loans - including reducing the time it takes to get refunds and issuing refunds on U.S. debit cards that don't carry high transaction or processing fees.

In part to dampen RAL demand, the IRS this year will deposit a taxpayer's refund directly into as many as three financial accounts, such as checking, savings and retirement.

Still, many taxpayers who purchase RALs don't have a bank account in which to deposit a refund check or can't wait the time it would take to get an IRS check, Taxpayer Advocate Nina E. Olson noted in her 2006 report to Congress.

"It is in the best interest of taxpayers for the IRS and the Department of Treasury to create an environment where the demand for RALs is the absolute minimum," she wrote.