Changes are coming to the quickie tax refund loan business.
Santa Barbara Bank & Trust, which is one of the three biggest refund anticipation loan (RAL) lenders, has been ordered out of the RAL business by its federal regulator. SBBT provided the bulk of Jackson Hewitt's RALs, leaving that company without a RAL source for over half of its stores.
Another RAL lender, Republic Bank & Trust, has dropped the price of its RALs to the same levels as H&R; Block and JPMorgan Chase. This reduction means the vast majority of RALs now have reduced prices. Even with lower prices, however, consumer advocates urged taxpayers to avoid RALs.
Some of America's most financially vulnerable taxpayers -- those from low- and moderate-income families -- lost about $800 million from their refunds in the latest year recorded RALs, an often unnecessary and risky product.
In fact, new figures reveal that RALs drained the refunds of about 8.4 million American taxpayers in 2008, costing them in the neighborhood of $738 million in loan fees, plus over $68 million in other fees. In addition, another 12 million taxpayers spent $360 million on related financial products to receive their refunds.
As tax season gets started, consumer advocates at the National Consumer Law Center (NCLC) and Consumer Federation of America (CFA) are warning taxpayers to stay away from RALs.
"Taxpayers can save themselves loan fees altogether by just saying 'no' to quick refund loans," advised NCLC Staff Attorney Chi Chi Wu. "Taxpayers shouldn't forget that these are loans, and they carry the risk of loans, including unmanageable debt if your refund doesn't arrive as expected."
Furthermore, consumer advocates pointed out that some tax preparers may charge extra "add-on" fees for RALs, anywhere from $25 to several hundred dollars. The major chains generally do not charge these add-on fees, but other preparers may, which can easily double or triple the price of a RAL.
RALs Examined
RALs are bank loans secured by the taxpayer's expected refund -- loans that last about 7-14 days until the actual IRS refund repays the loan. That's a good indication of just how needless most RALs are: Most taxpayers could have their refund in two weeks or less even without the costly loan. "In tough economic times, quick money may be tempting. But American taxpayers need every dollar of their refunds, and waiting just a week or two will put more money in their pockets," says Jean Ann Fox, Director of Financial Services for CFA.
Using the most recent data available from the IRS, the consumer groups calculate that about 8.4 million taxpayers received RALs in the 2008 tax-filing season (for tax year 2007). For that year alone, about 1 in 17 tax returns involved a RAL.
Refund anticipation checks (RACs) are another product offered by tax preparers and their partner banks. In 2008, about 12 million taxpayers received a RAC, at a cost of about $336 million. Taxpayers who have a bank account can avoid the expense of a RAC (generally about $30) by having their refunds direct deposited into their account, which is just as fast. H&R; Block customers who received the Block Emerald Card in a prior year can have their refunds direct deposited onto those cards, and avoid a RAL or RAC.
"If you want your refund fast, file electronically and have your refund direct deposited to your own bank account," noted NCLC's Wu, "You'll generally receive your refund in 8 to 15 days, or even faster."
Mary of Greensboro, NC doesn't have a lot of use for the Block Emerald Card. "I went to H & R Block after they sent me an invitation to receive an Emerald advance," she tells ConsumerAffairs.com. "I received 900 dollars, as usual, cool. When I went to file my W-2 I was very specific at the fact that I only wanted to file my return electronically because they stated they could get me more money. I did not want to participate in anything, JUST GIVE ME MY MONEY!"
Mary says the Block filer was an incompetent who "charged me twice for my Emerald advance, did not give me a card, did not sign the tax preparer slot, did not discuss my return, didn't do squat."
On the other hand, Ashley of San Bernardino, CA, thinks RALs are a wonderful thing.
"My husband and I both have very horrible credit, and we have always been told before we leave the office whether we were approved for the RAL or not," she tells ConsumerAffairs.com.
"This year our refund was close to $6000.00 and we got the 1-2 day RAL. Well our money was on our card sometime during the night, and we filed our taxes around 6 or 7 pm and our money was on our card by 6 am the next day, and we were allowed to pull off as much money from the ATM as we wanted. I am really shocked that so many people have had problems with it. We even get approved every year for the tax loan that they offer at the end of the year."
Price of RALs
How much will taxpayers pay if they get a quickie tax loan? The price of a RAL includes several components:
• A loan fee ranging from $34 to $130, which is usually broken down into a "Refund Account" fee and a "Bank Fee."
• Some tax preparers may charge one or more separate add-on fees, sometimes called "application," "administrative," "e-filing," "service bureau," "transmission," or "processing" fees. Add-on fees can range from $25 to several hundred dollars. Add-on fees are not charged by H&R; Block, Jackson Hewitt or Liberty Tax.
Due to changes over the last several years, the price of RALs has dropped significantly for loans in the $1,000 to $4,000 range. For example, the price for a typical RAL of $3,300 has decreased from over $100 in 2007 to about $65 in 2010 - a savings of 35 percent or more.
In general, the effective annual percentage rate (APR) for a RAL can range from about 50 percent (for a $10,000 RAL) to nearly 500 percent (for a $300 RAL). If a $40 add-on fee is charged and included in the calculation, the effective APRs range from about 85 percent to nearly 1,300 percent. An average RAL of $3,300 carries an APR of 72 percent.
Tax preparers and their bank partners also offer an "instant" same day RAL for an additional fee, from $25 to $39. Some of the APRs for an instant RAL of around $1,500 are 185 percent (Block) and 211 percent (Chase).
Finally, consumers who do not use one of the major commercial chains should ask if the preparer charges any add-on fees.
IRS to Regulate Tax Preparers
On January 4, 2010, the Internal Revenue Service (IRS) announced its plans to regulate the tax preparation industry. Currently, most tax preparers are not subject to any sort of licensing, competency or minimum educational requirements.
The IRS has proposed regulating tax preparers by requiring paid preparers to:
• register with the IRS and obtain a unique identification number;
• pass a competency test;
• take fifteen hours per year of continuing professional education; and
• comply with a code of ethics.
The proposals are the result of a six-month IRS review of the tax preparation industry, which it also published on the same day. The agency's plan to regulate tax preparers will phase in over the next few years, and not apply to this tax year.
As for RALs and RACs, the IRS announced that it would create a task force to look at these products. It also promised to reexamine the Debt Indicator, an electronic acknowledgement service provided by the IRS that tells tax preparers whether a taxpayer's refund will be paid or will be intercepted for government debts. The Debt Indicator has benefited the RAL industry by lowering potential loan losses.
Tips to Help Consumers Save Money and Privacy This Tax Season
• Wait for your tax refund from the IRS. Don't pay a bank to loan you your own refund. If you file your return electronically and have the IRS direct deposit your refund into your checking or savings account, you can get all the money you have coming to you in less than two weeks. By waiting a week or two for your refund, you can save $65 or more.
• Use free tax sites to prepare your tax return. Volunteer Income Tax Assistance (VITA) programs offers free tax preparation for low-income taxpayers. It'll save you the steep cost of tax preparation, keeping you from having to come up with money to pay for tax prep -- a leading reason why people take out refund anticipation loans. Plus, non-profit community groups won't pitch you a pricey loan.You can locate VITA sites by calling the IRS at 1-800-829-1040. Some of these sites are also listed on the website of the National Community Tax Coalition (http://taxcoalition.org/programs.cfm). Last year, programs were listed in over half the states. The IRS partners with commercial tax preparation and software companies to provide free online federal tax preparation services and e-filing to most consumers. Tax preparers are not permitted to sell refund anticipation loans through Free File. To locate an online free service, go to www.irs.gov and click on "Free File" on the right hand side of the page.
• Avoid check cashing fees. Get direct deposit of your refund into your own bank account. Tell the IRS to direct deposit your tax refund into your checking or savings account. Take your account number with you when you go to get your taxes prepared. If you don't have a bank account, you might want to open a savings account before you file your tax return in order to benefit from speedy direct deposit. If you don't have a bank account, you can select a debit card that can receive direct deposit from the IRS. Watch out for debit card fees and restrictions that can make them a bad deal. Also avoid high-cost cash advance features that come with some prepaid cards. Using direct deposit to get your refund also avoids the high cost of paying to cash a tax refund check. Check cashers typically charge 2 percent or more of the face value of a check. Cashing a $3,000 refund check can cost $60 or more. Funds direct deposited into a bank account are also protected by FDIC insurance.
• Be careful of your privacy -- watch what you sign! Tax preparers are permitted to share or even sell your private, confidential tax return information to marketers by simply getting you to sign on the dotted line. Read all the forms that your tax preparer gives you, and watch out for anything that gives permission for your preparer to share your tax information.
