Eric Gillin

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Rapid Tax Refunds Get Expensive Real Fast

Eric Gillin

This year more than 11 million taxpayers will take out refund anticipation loans, or RALs, and receive tax refunds in as little as three days, a 16% increase over the 9.5 million in 1994, according to a study from the Consumer Federation of America and the National Consumer Law Center.

But to do so, taxpayers will pay annual interest rates between 67% and 774% and more than $800 million in fees, the CFA and NCLC say.

"They should be called 'consumer impulsive loans,'" says Steve Rhode, president of Myvesta.org, a financial crisis center. Indeed, many leap before they look at what RALs cost.

How It Works

Tax preparers partner with lenders to provide RALs. First, preparers, such as H&R Block and Jackson Hewitt, charge fees to prepare returns and electronically file them. Then lenders, such as Household Bank and Bank One, receive loan fees for the RAL itself. Finally, check-cashing fees are tacked on, increasing the total average bill to $267, according to the CFA and NCLC.

On a 2,000 tax refund, $267 is 13.4% of what amounts to a three-week loan. That's an annual percentage rate of more than 230% -- a figure that might make credit card companies blush.

To add to the downside, fees for RALs have been rising in the past two years. In 1999, H&R Block and Household charged between $19.95 and $59.95 for a RAL. This year fees range between $29.95 for a typical RAL and $89.95 for refunds over $2,000. Under H&R Block's "Instant Money" option, taxpayers can pay another $10 to receive a same-day refund, avoiding the three-day wait of a standard RAL.

While consumer groups say these loans gouge consumers, H&R Block argues it's offering a service that customers want. "Our clients demanded it," says Denise Sposato, a spokesperson with H&R Block, the nation's largest RAL processor. "We're not in the loan business. We wouldn't offer it if they didn't want them."

RALs Rising

The recession is a major factor behind the increase in RALs. People are counting on the refunds to help pay bills. "The economic downturn has caused a lot of people to need money today, and because they need the money today, they're willing to spend a great deal to get it," says Jim Southward, president of the California Society of Enrolled Agents.

Ironically, the people who use RALs most are the same ones who can't afford them. Close to 40% of those who take out RALs are also recipients of the earned income tax credit, or EITC, the largest federal antipoverty program, which provided $30 billion to 18.4 million people last year. "They're the ones who don't have the deep pockets to wait five weeks. The creditors are calling," Southward says.

People who use RALs tend to live paycheck to paycheck. As a result, they put too much importance on their refunds. "People use the IRS as a savings club," Rhode says. "They'll withhold too much, get $8,000 or $10,000 at the end of the year, but they can't pay their bills every month."

Consumer groups say that people who must pay for tax preparation services with their refunds are particularly vulnerable. Unaware of alternatives and intimidated by intricate forms, such people can feel overwhelmed and make bad decisions. "Tax forms are complicated, and if you look at the EITC, it's a lot more complicated," says Shelley Curran, spokesperson with the Consumer's Union. "[Plus,] people don't really understand that because of e-filing and direct deposits, they can still get their refund very quickly."

While RALs are clearly specified as loans by their very name, marketing can obscure this fact by hyping the benefits of fast cash. In April 2001, H&R Block received 2,230 citations from the New York City Department of Consumer Affairs for misrepresenting its products and luring customers into accepting loans they did not fully understand. "Consumers don't understand the fine print," says Rhode.

But H&R Block says that customers are told in writing the RAL is a loan and that ultimately, consumers are willing to pay to receive their refunds early. "We make them aware they have other options to get their refunds quickly. In fact, on the loan document, it clearly states the alternatives in bold," Sposato says. "The final decision rests with the individual."

But demand for RALs likely will wane as the IRS updates its computer system. By 2003, the IRS says, taxpayers who file by phone will receive refunds in two to three days. By 2005, this will include everyone who e-files a 1040. "It's anticipated the use of the RAL will largely disappear in the next three years," Sposato says.