Liberty Tax Service — the nation's third largest tax preparer — has been barred from deceptive advertising that "blurs the line" between tax refunds that are free and high-cost loans. The order stems from a suit filed by the state of California.

"Liberty Tax Service lured cash-strapped Californians into paying for high-cost loans, when they could obtain tax refunds free from the IRS just weeks later," said California Attorney General Edmund G. Brown Jr., who won the ruling in a lawsuit. "This ruling bars Liberty from deceptive advertising that blurs the line between IRS tax refunds and pricey loans."

Liberty's print and television ads misled customers by promising "Most Refunds in 24 Hours." In reality, Liberty was selling refund anticipation loans, not a tax refund.

Customers had to pay an upfront fee of about $30 plus interest, at a rate that could be as high as 395 percent annually. By contrast, tax refunds are available at no charge from the IRS and generally arrive anywhere from 8 days to 4 weeks after returns are filed.

In February 2007, Brown filed suit in San Francisco Superior Court against Liberty Tax Service as part of an effort to stop deceptive marketing associated with Refund Anticipation Loans. Brown reached settlements with Jackson Hewitt in 2007 and with H&R Block in 2009 over similar claims.

The ruling holds Liberty responsible for its deceptive marketing, which also included print ads that failed to include disclaimers mandated by law and television ads that included those disclaimers, but so briefly and in such faint type that the Court said they were "plainly designed to be overlooked by consumers."

According to the IRS, refund anticipation loans target low-income taxpayers, especially those who receive the Earned Income Tax Credit. Approximately 70 percent of Liberty Tax Service's refund anticipation loan customers in 2006 and 2007 received this credit.

The ruling:

• Bars Liberty Tax Service from using false or misleading advertising to sell tax refund loans;

• Requires the company to review and monitor the ads run by its California franchisees;

• Requires the company to discipline franchisees that fail to receive approval of their ads from Liberty and report those franchisees to the Attorney General; and

• Requires the company to pay $1.16 million in civil penalties, $135,886 in restitution, and the Attorney General's costs.

Two violations of the advertising provisions of the injunction by a single franchisee will result in a $15,000 fine; a third violation requires the termination of the franchisee. The injunction also imposes limitations on Liberty's ability to collect, on behalf of itself or others, money supposedly due from its customers for previous years' tax refund loans.

The judgment requires Liberty Tax Service to inform these alleged debtors of supposed debts before the consumers takes any step that would commit them to having any amount of the alleged debt deducted or withheld even temporarily from their refund. This is a significant modification of Liberty Tax Service's past collection practices.

Consumer advocates and policymakers, including the U.S. Taxpayer Advocate, have sharply criticized such practices for years.