February 27, 2004

Consumers Warned to Avoid Exorbitant Loans Disguised as ‘Instant’ Tax Refunds

‘Refund Anticipation Loans’ Drain Billions of Dollars From Low-Income Families

Attorney General Bill Lockyer today warned California taxpayers not to fall pry to high-priced “refund anticipation loans (RAL),” which tax preparers pitch as “instant” or “rapid” refunds, but which drain billions of dollars from consumers who can least afford to pay the exorbitant costs.

“Make no mistake,” said Lockyer. “These short-term loans may carry annual interest rates of more than 700 percent, and also may require consumers to pay fees for tax preparation, electronic filing and check cashing to enjoy the so-called benefits. What’s worse, these products are aggressively marketed to low-and moderate-income families most vulnerable to sales pitches that promise quick access to cash. Hard-working Californians should be aware much less expensive options are available.

Storefront tax preparers that offers cash advances based on consumers’ anticipated refunds have proliferated in the state’s shopping malls and department stores, and on street corners. Additionally, they have begun to form “partnerships” with other businesses, like rent-to-own operations and car dealerships.

Depending on the tax refund amount and fees charged, RALs can force consumers to pay the equivalent of annual interest rates ranging from 70 percent to 1,837 percent, according to a January 2004 report by the National Consumer Law Center (NLC) and the Consumer Federation of America (CFA). The cost of obtaining an RAL for a $200 refund, the study found, equals an annual interest rate of more than 700 percent. In 2002, consumers paid a total of $114 billion in RAL fees and electronic filing fees, according to the report.

Taxpayers who have bank accounts can avoid paying these sky-high fees and still receive their tax refund in 10-14 days through direct deposit. Even taxpayers who get their refunds through the mail can expect to receive their checks from the IRS in a few weeks. However, that’s not what some RAL marketers tell consumers.

“I had representatives of my office call around to see what tax preparers were telling potential clients,” Lockyer said. “They found that some refund-loan peddlers were telling people it would take two or even three months to get their refunds from the IRS. That’s hogwash. And it’s an underhanded way to get people to buy something they don’t need. These outfits also insist they cannot provide estimates over the phone on the cost of obtaining an RAL. They tell taxpayers they have to come into the office, and that makes it extremely difficult to comparison shop.”

Lockyer noted that if a preparer miscalculates a con-sumer’s taxes, and no refund is due, the consumer still must pay back all the borrowed money. Additionally, late repayment of an RAL can subject consumers to heavy interest and late fees.

Despite their high costs, the use of RALs appears to be growing. The NCLC/CFA report cited Internal Revenue Service (IRS) data that show consumers took out 12.7 million such loans in 2002, compared to 10.8 million in 2000.

The economic burden of tax refund loans falls particularly hard on families who can least afford the cost. The NCLC/CFA report estimated 7 million families who signed up for RALs in 2002-roughly 55 percent of the total- received the federal Earned Income Tax Credit (EITC). The EITC provides financial assistance to the working poor. The study found that EITC recipients in 2002 spent a total of $779 million in RAL fees and electronic filing fees. When tax preparation fees and check cashing fees are added in, EITC recipients in 2002 paid $1.75 billion in RAL-related costs, the report found.

Low- and moderate-income families, however, do not have to use these expensive services. “Free tax assistance from trained volunteers is widely available throughout California,” said Lockyer. “I encourage all consumers to find out if free tax preparation assistance is available to them. And I especially urge families who may be eligible for the EITC to check out free tax assistance programs in their communities before they pay to have their returns. Consumers can obtain information about VITA volunteers in their neighborhoods, and find out if they qualify for free assistance, by calling 800-829-1040.

Taxpayers eligible for the EITC also have the option of filing out their own tax forms by following a free and easy step-by-step program at wws.icanefile.org. This website (I can Electronically File) provides all the required tax forms, as well as a video guide and instructions, in English and Spanish. Computers with Internet access often are available at local libraries, and also may be available at local legal aid or legal services offices. After completing the program on this website, consumers may either print out their tax returns and submit them to the IRS by mail or, if they have an e-mail address, submit the tax returns electronically to the IRS.

Lockyer also urged low-income taxpayers to open bank accounts as a cheaper, better way to get their refunds quickly. Taxpayers must have bank accounts to receive their IRS refund through direct deposit. The Federal Reserve estimates 22 percent of families who earn less than $22,500 do not have bank accounts.

Consumers who believe they have been victimized by a tax return preparer can file a complaint with the Attorney General’s Office at http://www.ag.ca.gov/consumers/mailform.htm or by writing to the Public Inquiry Unit of the Attorney General’s Office at P.O. Box 944255, Sacramento, CA 94244-2550.

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