News and Finance

The author James Baldwin once summed up quite nicely my feeling about refund-anticipation loans, which are marketed heavily at this time of year by tax-preparation companies.

Baldwin said: “Anyone who has ever struggled with poverty knows how extremely expensive it is to be poor.”

When you’re living on the edge financially, you cannot afford the convenience fees that go along with instant money. That’s why I dislike refund-anticipation loans, or RALs.

A RAL is a short-term loan backed by a person’s tax refund. Tax-preparation companies count on desperate people trying to get their refund as quickly as they can. But there’s a high price for that speed.
What galls me is that there’s little, if any, risk to the lender — yet the loans often carry high fees. The Consumer Federation of America and the National Consumer Law Center have found that RALs cost from about $30 to more than $125 in loan fees. Some tax preparers also charge a separate application or document-preparation fee of about $40. The consumer groups say the effective annual interest rate for a RAL can range from about 40 percent to more than 500 percent.

This type of loan takes advantage of the very people — cash-strapped taxpayers — who can least afford the costs.

Amid criticism, some companies have lowered RAL fees. For example, H&R Block says its typical RAL costs about 2 percent of the principal.

Although the appeal of this loan is that you get your money fast, you in fact only marginally speed up the delivery of your refund cash. The turnaround on the loans can be a day or two. However, taxpayers who file returns electronically and opt for direct deposit can receive refunds in 10 days or less.

What I would like to see is a ban on these loans. That may not happen, but the Internal Revenue Service and the Treasury Department announced recently that they are considering a new rule that could greatly restrict the marketing of RALs and similar products.

In announcing a comment period for the proposed rule, the Treasury and IRS said they are concerned that some tax preparers may have clients improperly claim credits or deductions or both to inflate refunds in order to increase the fees collected on RALs.

The evidence of such misconduct is only anecdotal, but it’s enough to warrant investigation, said David Williams, IRS director for electronic tax administration and refundable credits.

“We’ve got to look at whether the RALs are causing a problem,” Williams said.

Williams said the IRS is considering prohibiting tax preparers’ involvement with RALs payday loans application. The agency doesn’t have the authority to ban the product, but it can forbid tax professionals from selling or marketing the loans directly.

Under the proposal, “If you prepare the return, you can’t obtain taxpayer consent to process the RAL,” Williams said.

He added that the agency also plans to do its own research to determine if tax laws are being broken by tax advisers or tax preparers trying to maximize refunds to boost RAL income.

Even when a flat fee is charged for RALs, some tax preparers could be inappropriately inflating the amount of a refund to boost their business in other ways, the IRS said. For example, some merchants who offer tax-preparation services may encourage customers to obtain RALs and spend the funds on the merchant’s other products or services.

Williams said if the IRS does move to rein in the marketing of RALs, taxpayers probably won’t see any changes until the 2009 tax season.

Keeping in mind what Baldwin said, I hope the IRS moves faster on this issue. The longer they take to restrict the marketing of this useless product, the more it costs those who can least afford it.