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It's Time To Eliminate Refund Loans

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The Tampa Tribune

Published: January 27, 2008

Author James Baldwin once summed up nicely my feeling about Refund Anticipation Loans, which are heavily marketed this time of year by tax preparation companies:

"Anyone who has ever struggled with poverty knows how extremely expensive it is to be poor."

For many years, I took care of my brother Mitchell before his death at age 32. He suffered from epilepsy and often couldn't work because of seizures. My care included watching his finances.

One of my many frustrations was trying to prevent Mitchell from spending unnecessarily on products or services that gave him faster access to his money - for a fee. These convenience fees cut into his budget. If he spent $20 in fees one month to use ATMs not owned by his bank or to cash a check, that meant $20 less in groceries. And since his income was so small, the loss of that $20 could have meant less to eat one week. I was there to help so my brother didn't go hungry, but others don't have that kind of assistance.

When living on the edge financially, one cannot afford convenience fees that go with instant money. That's why I dislike RALs.

A RAL is a short-term loan backed by a person's tax refund. Tax preparation companies count on desperate people trying to get their refund as quickly as possible, but there's a price for that speed.

What galls is there's little risk to the lender, yet the loans often carry high fees. The Consumer Federation of America and the National Consumer Law Center have found that RALs cost from about $30 to more than $125 in loan fees. Some tax preparers also charge an application or document preparation fee of about $40. The consumer groups say the effective annual interest rate for a RAL can range from about 40 percent to more than 500 percent.

This type of loan takes advantage of the very people - cash-strapped taxpayers - who can ill afford the costs.

Amid criticism, some companies have lowered RAL fees. For example, H&R Block says its typical RAL costs about 2 percent of the principal.

It's Not That Much Faster

Although the appeal of this loan is that you get your money fast, actually you only marginally speed up the delivery of the refund. The turnaround on the loans can be a day or two. However, taxpayers who file returns electronically and opt for direct deposit can receive refunds in 10 days or less.

What I would like to see is a ban on these loans. That may not happen, but the IRS and Treasury Department announced recently they are considering a rule that could restrict the marketing of RALs and similar products.

The Treasury Department and IRS said they are concerned some tax preparers may have clients improperly claim credits or deductions or both to inflate refunds to increase fees collected on RALs. The evidence is only anecdotal, but it's enough to warrant further investigation, said David Williams, IRS director for electronic tax administration and refundable credits.

Williams said the IRS is considering prohibiting tax preparers' involvement with RALs.

Under the proposal, "if you prepare the return, you can't obtain taxpayer consent to process the RAL," Williams said.

Your Opinion Counts

If you want to comment on the proposed rule, send written or electronic comments to the IRS by April 7. Mail to: Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington DC 20044. You can also submit comments at www.regulations.gov. You need to reference "REG-136596-07."

Williams said if the IRS does move to rein in RAL marketing, taxpayers probably won't see any changes until the 2009 tax season.

Keeping in mind what Baldwin said, I hope the IRS moves faster on this issue. The longer it takes to restrict RAL marketing, the more it costs the poor.

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