Refund anticipation loans live on in new disguises
New tax refund advances take the place of banned RALs
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.
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
- 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
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
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'
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
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