Tax Refund Anticipation Loans (RALs) Harm Working Poor

SAN FRANCISCO, Feb. 1 /PRNewswire/ -- It's tax season, and tax preparation companies have started advertising their tax Refund Anticipation Loans (RALs) as "instant money." But tax filers should be warned -- this fast cash option burdens them with high interest rates and fees.

The Garcia family was supposed to receive $2,000 in Earned Income Tax Credit (EITC) from the federal government last tax season. Mr. Garcia is a teacher, and his salary is barely enough to support his wife and four children. The Garcias, who asked not to be fully identified, needed all of that extra money. But they were tricked into purchasing a RAL that when added to their preparation fees, cost them more than 10 percent of their EITC.

For years, Mr. Garcia took his taxes to a small tax preparation office in Los Angeles. Last year his wife did their taxes there, but couldn't afford the tax preparation fee. The tax preparer offered Mrs. Garcia her EITC money that day, and said he would simply subtract the preparation fee from it. He didn't tell her that he was really offering her a RAL that came with an even larger fee. She ended up spending $210 that day.

During tax season, tax preparers prey on EITC recipients by offering them RALs. These high-interest loans are brokered at mainstream tax preparation companies like Jackson Hewitt and H&R Block, rent-to-own outlets, trough check cashers and even at car lots.

For a refund of $2,150, a RAL consumer could pay a $100 loan fee, a $30 electronic filing fee, a $146 tax preparation fee and possibly even a $30 check cashing fee -- a total of $306, or approximately 14 percent of the refund.

RALs work against the purpose of the EITC, which is meant to help low-wage working families survive by increasing their incomes. But many consumers have been persuaded to purchase these loans. In 2002, 553,321 RALs were purchased in California, costing consumers as much as $122 million in loan and tax preparation fees.

There are alternatives for EITC recipients. If their total household income is less than $38,000, tax filers can have their taxes prepared for free at a Volunteer Income Tax Assistance (VITA) site, and then directly deposited into their bank accounts. The Internal Revenue Service (IRS) can electronically deposit tax refunds into tax filers' accounts in as little as 10 days for free.

Patricia Constantine of the San Antonio Community Development Corporation in Oakland runs a VITA site. Last year, she was able to help tax filers without bank accounts get their EITC money quickly. She gave them a $1 bill to open a bank account, so she could get their full refunds to them in 10 days. VITA sites like Constantine's are located throughout California, and could save tax filers from the high expense of tax preparation fees and RALs.

RALs are a rip off. These high-interest loans are repaid by a consumer's IRS tax refund and carry little risk for the lender. But RALs are very expensive and risky for the consumer. If the tax preparer makes a mistake and overestimates the refund amount, or if the IRS denies or delays the refund, the consumer will still have to pay back the RAL. If that person can't make the payment, the RAL lender can send the account to a debt collector and harm the consumer's credit score. Also, if the consumer returns the following year to have his or her taxes prepared and purchases another RAL, the money from the previous year's RAL will be deducted from that person's current refund.

Tax filers work hard to earn their refund money and do not need to pay costly fees to get their taxes prepared. The California Reinvestment Coalition (CRC) has been working to educate consumers on how to avoid RALs. For its second year in a row, CRC met with organizations and distributed information warning about the dangers of these high interest loans. This year CRC developed a brochure about RALs in Spanish and English entitled: "Your Tax Refund Money is Yours." For more information about CRC's campaign, or to request RALs brochures, contact Rhea Serna at 415-864-3980.

For a list of VITA sites in California, go to the Franchise Tax Board's web site at http://www.ftb.ca.gov/individuals/vita/sites.asp or call the IRS toll free at 1-800-829-1040.

The California Reinvestment Coalition is a non-profit membership organization of more than 200 nonprofit organizations and public agencies across the state of California. We work with community-based organizations to promote the economic revitalization of California's low-income communities and communities of color.