Tax Refund Anticipation Loans Rip-Off Low-Income Families

It's tax time again. For some, it's a time of dread, for others, especially those expecting refunds, it's a good time. The extra cash will help their families survive the ever-increasing cost of living in California. They've anticipated their refund all year and have good intentions for how they will spend it. They should not have to lose any of this money to corporate greed.

But every year, families are lured into the offices of major tax preparers who spend millions on fancy TV commercials and billboards that market expensive and risky tax Refund Anticipation Loans (RALs) disguised as "fast cash" or "instant refunds."

"RALs are completely unnecessary," said Rhea Serna, California Reinvestment Coalition policy advocate. "Just waiting a couple of days for a tax refund can save someone hundreds of dollars! This is money that can be used for bills, groceries or other needed household expenses."

Tax filers should be warned that RALs are not instant refunds; they are predatory short-term loan products. If tax filers paying to get their taxes prepared receive a refund immediately (or even within a week), they are probably receiving a RAL rather than their actual refund. These loans come with an average interest rate of 178 percent, but can be as high as 700 percent depending on the size of the loan. And they mostly hurt low-income tax filers.

Both H&R Block and Jackson Hewitt, the two largest tax preparers in the country, were legally challenged last year by former California Attorney General Bill Lockyer for targeting the working poor in their marketing and selling of predatory loan products. Both these companies began their RAL marketing campaigns in November focusing on working families who can claim the Earned Income Tax Credit (EITC). The EITC is not just a tax refund for the working poor, it's an anti-poverty benefit intended to boost the overall income of many struggling families, who are so poor the federal government has decided to give them extra money during a time of welfare cutbacks.

If a families' total household income is less than $36,348, they are eligible to receive an EITC benefit of up to $4,500. Tax companies see this extra money as a way to profit. They convince EITC families to come into their offices to have their taxes prepared and get their extra money faster. According to IRS data more than 56 percent of all RAL borrowers are EITC recipients. In fact, one out of every three EITC recipients gets a RAL.

For an average EITC refund of $2,150, Jackson Hewitt may charge more than $100 in loan fees, a preparation fee as high as $150 and a $65 check cashing fee, which is more than $300 in fees just to get a tax refund that could be prepared for free. And if the tax preparer makes a mistake and the refund is denied, smaller than expected or "frozen" for auditing purposes, the RAL must still be repaid. If not, then the loan will be sent to a debt collector and could damage the borrower's credit.

These fees and risks could be avoided. People earning less than $39,000 are eligible to get their taxes prepared for FREE at a Volunteer Income Tax Assistance (VITA) site. For those earning below $50,000 the IRS has a free file program on the internet (www.irs.gov). If the filer has a bank account, a tax refund can be directly deposited within as little as 7 to 10 days. Many VITA sites help filers open bank accounts and also provide valuable information about food stamps, health benefits and financial counseling.

To find a VITA site, Bay Area residents can call either 2-1-1 or 1-800-358-8832. For sites located throughout California, call the IRS' toll- free hotline at 1-800-829-1040 or go to the Franchise Tax Board's web site at http://www.ftb.ca.gov/individuals/vita/index.html.

For more information about RALs, please contact Rhea Serna at (415) 864-3980 or rserna@calreinvest.org.

The California Reinvestment Coalition (www.calreinvest.org,) advocates for the right of low-income communities and communities of color to have fair and equal access to banking and other financial services. CRC has a membership of more than 245 nonprofit organizations and public agencies across the State.

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