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Refund anticipation loans live on in new disguises

New tax refund advances take the place of banned RALs

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Taxpayers might keep more of their own tax refund money in their pockets this year because banks no longer make the costly loans often advertised by tax preparation companies as rapid refunds. But consumers watch out: other quickie loan products might be even worse.

In the past, refund anticipation loans (RALs) enticed millions of consumers to get very high-interest loans for up to the estimated amount of their refunds. Through RALs, they got money in one or two days rather than waiting at least one to three weeks for their Internal Revenue Service refund. (See "11 options for filing tax returns for free.")

But federal regulators cracked down on refund anticipation loans after investigations found that many tax preparers, who were acting as agents for banks offering the products, were not complying with federal lending regulations and state laws. Federally regulated banks were forced out of the RAL business, and in 2012, only one still made the loans. This year, none do.

Refund anticipation loans morph, proliferate

Cash-strapped consumers, though, still want refunds fast, experts say -- especially this year.

"People plan on that tax money," says Morgan Flynn, director of sales and marketing for the Association of Registered Tax Return Preparers, founded by the president of M&M Income Tax Service, a South Carolina tax preparer that offered refund anticipation loans last year. Since the IRS delayed the start of tax season by over a week in 2013, due to last-minute tax code changes by Congress, consumers desperate to get money for rent or medical bills will be in even more of a bind, he says. Also, consumers claiming certain education tax credits will have to wait about two weeks longer (around mid-February) to file. And, unlike last year when the IRS predicted that many taxpayers would receive their refunds within 10 days, the agency this year states that most taxpayers will get their money within 21 days.

So, tax preparers will be on the lookout for ways to speed up the refund process for their clients, and to make up the income they're losing from not being able to offer bank refund anticipation loans, says Tom Feltner, director of financial services for the Consumer Federation of America.

But consumers should think twice before biting on offers for any of the products that are replacing refund anticipation loans, Feltner says: "Consumers need to realize they are paying a fee to get their own money."

Here is a roundup of 2013's RAL-like substitutes.

Tax preparers still offer quick cash
This year, tax preparers are still partnering with financial institutions to offer three main products: refund anticipation checks (RACs), which have been around for years, as well as personal loans not tied to a tax refund and non-bank refund anticipation loans. Here's how they work:

  • RACS and similar products -- Consumer advocates say a refund anticipation check is basically a costly short-term loan of the tax preparation fee. Some consumers use them to defer paying their tax preparation fees, which average $143 for a nonitemized 1040A federal and state tax return, or $246 for an itemized return, according to a survey by the National Society of Accountants. Most tax preparers require consumers to pay for that service when the return is filed. But with a refund anticipation check, the preparer agrees to wait and take that fee out of the refund, essentially floating a loan for the cost of that fee to the taxpayer.

    To do so, a temporary bank account is opened for the consumer. After the tax refund is deposited into that bank account -- usually 10 to 21 days later -- the tax preparation fee and other fees are taken out, and the taxpayer gets the remainder by check -- or, in variations on the RAC, by direct deposit or prepaid card. The lender usually charges a fee of $30 to $35, and the preparer might charge an additional fee of $25 or more, according to Chi Chi Wu, staff attorney for the National Consumer Law Center.

    The three biggest tax preparation chains all are offering refund anticipation checks this year. H&R Block offers a RAC for a fee of $34.95 for direct deposit, or that amount plus an additional $20 for a paper check. Liberty Tax Service has electronic refund deposits or electronic refund checks  -- check-like products -- for a $29.95 bank fee plus a $9 "transmittal fee." And Jackson Hewitt advertises on its website that taxpayers can "get up to $9,999 fast" through an Assisted Refund, which functions like a refund anticipation check and costs as much as $49.95. After fees are subtracted, the consumer can get the remainder of the refund via direct deposit, check or on a Jackson Hewitt smart card Prepaid Visa Card, which carries a monthly fee of $5.95 and a $2.50 fee for ATM cash withdrawals.
  • Personal lines of credit -- Several big preparers are offering personal loans that they are careful to say are not tied to a tax refund. "It's based off of a person's credit, not the size of their tax refund or their status with the IRS," says Flynn, noting that the amounts are much lower than the $3,000 or more many consumers were able to get with RACs.

    For example, in some states Jackson Hewitt is offering the new "SmartLine" personal line of credit of $200 to $1,000, which the consumer repays in monthly installments. It has a $6.95 monthly maintenance fee, an interest rate of 35 percent, a late fee up to $35 and an "access fee"  of 3 percent or $10, whichever is greater, to transfer funds. Until Jan. 24, H&R Block offered a line of credit called an "Emerald Advance," with funds put on the H&R Block Emerald Prepaid MasterCard. It had an annual fee of $45, a $5 late payment fee and an APR of 36 percent.

    Flynn says M&M Income Tax Service considered offering similar loans, but decided against it because it's too much of a gamble for the lender and likely won't last as a RAL replacement: "They know a good percentage of these are going to default," he says, noting that's why the loan amounts are lower.
  • Nonbank RALs -- Lenders other than banks can still make refund anticipation loans, and these loans, especially if they come from payday lenders, could be "riskier and more expensive" for taxpayers than the traditional refund anticipation loans, Wu says. However, consumer groups say these lenders likely will not have the capital to make these loans on a widespread scale the way banks could. For example, in order to make 100,000 loans of $1,500 each, a lender would need $150 million. This year, Liberty Tax Service is partnering with a nonbank lender that will make refund anticipation loans for a $39 fee plus finance charges based on the loan amount, which can be up to $3,000. 

A RAL by any other name
In a related twist, AIT Financial Group, a company whose "goal is to provide you with options to replace the refund anticipation loans that are no longer available," is now offering to "buy" part of taxpayers' refunds for a hefty fee.

A really dirty tax preparer will say, 'Yes, we have a RAL,' to get you in there. You file your tax return and then they will call you and say, 'Sorry, you're not approved for the RAL. Thank you for filing with us.'

-- Morgan Flynn
Association of Registered Tax Return Preparers

Here is how the product, called "Simple Cash Option," works, according to Nathan Adams, senior vice president for AIT Financial. The taxpayer goes to a tax preparer, who completes their tax return. The consumer then goes online and, with the transaction recorded by a webcam, "offers to make a sale" to AIT of a portion of their refund. The company either accepts or rejects the offer, but Adams won't say how they decide or what percent they accept. The customer has two days to back out without incurring fees. Within 48 hours of the return being accepted by the IRS, the company issues the taxpayer a check.

The company won't reveal its fees, saying they change from day to day based on factors such as how much money they have "on the street" at the moment. However, on its website, the company gives several hypothetical examples: a taxpayer who wants $600 might sell $700 of their refund, which amounts to a fee of $100. Or, a taxpayer who wants $1,200 might sell as much as $1,600 of their refund, so the fee would be $400. The cost is "lower than a loan they'd get from a payday loan company," says Adams, who states that the product is "not a loan." 

Consumer groups say taxpayers should be very wary of these types of products. "This is RAL lending in the form of a 'tax refund assignment' or purchase of a tax refund," Wu says. "This is a disguised loan and a nonbank RAL."

Watch out for 'shady' tax preparers
In 2012, the U.S. Department of Justice and other officials sued certain tax preparers for a variety of unsavory practices, including offering refund anticipation loans to get consumers in the door as a bait-and-switch scheme. The department sued a chain called Instant Tax Service, alleging they advertised refund anticipation loans, then turned down more than 90 percent of applicants.

"A really dirty tax preparer will say, 'Yes, we have a RAL,' to get you in there," Flynn says. "You file your tax return and then they will call you and say, 'Sorry, you're not approved for the RAL. Thank you for filing with us.'"

In a case that's still ongoing, the Department of Justice in 2012 tried to shut down the national chain Instant Tax Service and five of its franchisees, for allegedly inflating the size of customers' tax refunds through fraud, such as making up dependents, then skimming huge, sometimes undisclosed, fees off the refund.

Also in 2012, Illinois Attorney General Lisa Madigan sued national tax preparation chain Mo' Money Taxes for similar activities. The company allegedly advertised "instant cash" to low-income consumers, then siphoned as much as $700 from each refund before handing over the rest to the taxpayer. In December, the department also sued a Mo' Money licensee in Tennessee for fraud, including getting taxpayers' refunds for thousands of dollars when they should have owed money.

Hairstylists licensed, but not tax preparers
The IRS in 2011 began requiring tax preparers to register and, except for CPAs, attorneys and enrolled agents, pass a competency test. But a federal judge in January temporarily derailed the program, saying the IRS does not have the authority to regulate tax preparers. The IRS plans to appeal. "You need a license to cut hair in most states," Wu says. "But in this court decision, the court was saying you don't need one to prepare someone's taxes for hire."

In order to avoid questionable preparers and onerous fees, consumer advocates recommend that low- and middle-income taxpayers consider getting free tax preparation help through a volunteer program such as Volunteer Income Tax Assistance. Through the program, consumers who have bank accounts can e-file their taxes and request direct deposit for their refunds, and in most cases get them in 21 days or fewer. Consumers who don't have accounts can e-file and have their refund put on a prepaid card, including a prepaid or payroll card they already have, Wu says.

The Consumer Federation of America's Feltner says consumers should steer clear of risky loans and look at their tax refund as a way to add to savings or pay down debt. He says: "Try to use it to build your finances, not to get further in debt."

See related: 4 last-ditch, high-cost loans to avoid

Published: February 7, 2013


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