If it's tax season, it's also open season on taking advantage of people who can't wait for their tax refunds.
I'm sure you've seen the ads by now. "Fast Refund & No Hassles." "Get your Refund Fast in 1 to 3 Days." Here's one I found on the Internet: "Walk in with your taxes. Walk out with a check." This last tax preparer, an H&R; Block franchise, then outlines what it would take to get your money fast:
- Tax prep fees starting at $43, which could go up based on the complexity of your tax return.
- An electronic filing fee of $40.
- A fee for the refund loan -- $29.95 to $89.95.
What these firms are advertising are "refund anticipation loans," which are short-term loans backed by a taxpayer's refund.
To understand why someone would pay $100 or more to speed up a tax refund, you have to know what it's like to be financially desperate.
My deceased brother was disabled and often needed money. When tax time came around, I practically had to wrestle Mitchell to the ground to prevent him from forking over what I knew was an unreasonable amount of money to get a rapid tax refund.
Nonetheless, I understood Mitchell's desperation. When you don't have much money, the chance to get your hands on some fast is tempting.
A recent study released by the Brookings Institution's Center on Urban and Metropolitan Policy concluded that tax preparation fees and refund loans are eroding the benefits of the federal Earned Income Tax Credit, which is intended to help working families with low wages.
According to the study, 2 million families in 27 urban and rural areas around the country got more than $3.4 billion in refunds based on the Earned Income Tax Credit in 2000. However, in 1999 low-income filers in those areas spent an estimated $212 million of their refund money for tax-preparation fees and high-cost refund loans. In several areas, including Atlanta, Baltimore, Indianapolis, New Orleans and rural Georgia, more than half of all filers who got the tax credit claimed their refunds through a high-cost loan, the study said.
For years, consumer advocacy groups have been trying to get filers to stay clear of these rapid refund loans.
If converted into an interest charge, loan fees can result in annual percentage rates ranging from 67 percent to an astounding 774 percent, according to a report by the Consumer Federation of America and the National Consumer Law Center.
But breaking the loan fees down to an annualized percentage rate often won't stop people like my brother. Like others in his predicament, Mitchell viewed the fees as the price he had to pay to get the cash he needed right away.
If you know someone thinking about getting a refund anticipation loan, help them find an alternative. Here's what you can tell them:
l The IRS has a new program that will allow millions of taxpayers to have their federal returns prepared and filed electronically for free. Go to www.irs.gov and click on the link for "Free File." The IRS has formed a partnership with a number of companies to provide the free service. Some are even offering free electronic filing for state returns. But each company sets its own eligibility requirements. Generally, eligibility for free electronic filing is based on factors such as your age, state residency, military status or adjusted gross income (the less you make the more likely you qualify for the service). But one caution. The IRS link will take you to company sites in which they pitch other services --including refund anticipation loans -- for a fee. Avoid those services if you qualify for free electronic filing.
l One alternative to speed up your refund is to allow the IRS to deposit your refund directly into your bank account. Taxpayers who file electronically and choose an electronic deposit of their refund can expect the money about 10 days after filing.
l Low- or moderate-income taxpayers without computer access may be eligible for similar help from Volunteer Income Tax Assistance or Tax Counseling for the Elderly preparers at area libraries, churches and community halls. The IRS has more information and the nearest locations at its toll-free number, (800) 829-1040.
Eventually, I got my brother to realize that if he paid to get his refund early, he was continuing a pattern of choosing a short-term solution at the expense of a long-term gain.
That $100, I told him, could be the beginnings of an emergency cash fund. It could, for example, pay to repair the eyeglasses he frequently broke because he was always falling from the seizures brought on by his epilepsy.
Since we know the businesses offering refund anticipation loans aren't looking out for the best interests of the poor or financially less fortunate, many of us have to become our brother's keeper. If you know better, let others know too.