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Consumer Group to Taxpayers: Don’t Borrow Your Own Money

Tax Refund Loans "Should Be Outlawed"

April 5, 2006

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The National Consumers League (NCL) is urging American taxpayers to avoid borrowing their own money at exorbitant interest rates by applying for a Refund Anticipation Loan or RAL.

"These predatory lending practices of 'loaning' a taxpayer their own tax refund for between a 40 percent and 700 percent interest rate should be outlawed," said Linda Golodner, President of the National Consumers League.

According to IRS data, more than 12.38 million Americans applied for RALs in 2004 and spent $1.6 billion in fees just to access their own tax refunds two weeks earlier. The effective annual interest rate for a RAL varies based on the size of the refund -- from 40 percent on a refund up to $9,999 to over 700 percent for a $200 refund.

One out of every three taxpayers who claim the Earned Income Tax Credit (EITC), which is specifically for low-income working individuals and families, applied for a RAL.

"When tax preparers target EITC recipients for RALs, it robs hard-working taxpayers and their families of precious financial resources and erodes anti-poverty benefits," said Golodner. More than seven million EITC taxpayers paid $904 million in RAL fees just to get their refunds up to two weeks sooner.

"RALs are not only costly -- they also can be dangerous," continued Golodner. If a taxpayer’s refund is denied or recalculated at a smaller sum, the tax preparer that issued the RAL can:
• send the unpaid RAL to a debt collector;
• report the unpaid RAL to a credit reporting company; or
• seize a tax refund in future years to pay off the RAL.

"Filing your taxes can be difficult and confusing. When taxpayers seek assistance in filing, they should be able maximize their tax refunds. Avoiding costly RALs is critical, but they also need to be aware of all the free services available to lower- and middle-income taxpayers during this time of year," Golodner concluded.

Low and middle-income taxpayers should access free tax preparation services and e-file with direct deposit to ensure a speedy refund. Approximately 70 percent of American taxpayers are eligible for free federal tax return preparation through the Free File Alliance, a partnership between the Internal Revenue Service and private tax software companies, though this procedure is not without risk as many of the private companies are skilled in converting free filings to paid filings.

Taxpayers should visit www.irs.gov to determine eligibility. They can also access their state tax agency’s Web site to find out whether their state has a Free File Alliance that offers free tax services to eligible taxpayers.

In addition, taxpayers can obtain free tax preparation services in person at local Volunteer Income Tax Assistance (VITA) sites across the country. VITAs are sponsored by the Internal Revenue Service and are located in local community centers.

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