Tax Refunds Can Be Worth Their Wait in Gold
The author James Baldwin once summed up quite nicely my feeling about Refund Anticipation Loans, which are heavily marketed 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."
For many years I took care of my brother, Mitchell, before his death at age 32. He suffered from epilepsy and often couldn't work because of severe seizures. My care included watching over his finances.
One of my many frustrations was trying to prevent Mitchell from spending unnecessarily on products or services that gave him faster access to his money -- for a fee. These convenience fees cut into his budget. If he spent $20 in fees one month to use ATMs not owned by his bank or to cash a check, that meant $20 less in groceries. And because his income was so small, the loss of that $20 could have meant less to eat one week. Because I was there to help, my brother didn't go hungry. But others don't have that kind of assistance.
When you're living on the edge financially, you cannot afford 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 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 ill afford the costs.
After 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 is that you get your money fast, you in fact 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.
I would like to see a ban on these loans. That may not happen, but the IRS and 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 further investigation, said David Williams, IRS director for electronic tax administration and refundable credits.