Consumers Council says avoid tax refund loans

(Editor's note: Watch the blog for an upcoming series of columns on income tax filing by local tax preparer Debra Speakes.)

Phoenix, Arizona Feb. 3 - The Arizona Consumers Council joins the Consumer Federation of America and the National Consumer Law Center in urging Arizonans to avoid quickie tax refund loans.

These loans, which usually cost $35 to $130, last just 7-14 days, until the IRS gives the customer his refund. Some smaller tax preparation firms charge even more, tacking on additional fees that can reach the hundreds of dollars. These high fees don't buy much: according to the IRS, those who e-file and choose to get their refund by direct deposit should have their money within three weeks.

Equally costly are refund anticipation checks. With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund check. After the refund is deposited, the bank issues the consumer a check and closes the temporary account. Also, if a taxpayer's RAL application is rejected, she is automatically given a RAC at a cost of $30 or so, even though the taxpayer may not have asked for it.

RALs and RACs Drain Hundreds of Millions from Taxpayers

According to the National Consumer Law Center, RALs drained something like $738 million from the refunds of about 8.4 million American taxpayers in 2008, plus over $68 million in other fees. In 2008, about 12 million taxpayers received a RAC, at a cost of about $336 million.

While that's a lot, it's less than in the past. Tax preparers have dropped their fees on these loans substantially in recent years. And, federal regulators are stepping in. The Office of the Comptroller of the Currency ordered Santa Barbara Bank & Trust, which is one of the three biggest RAL lenders, to get out of the RAL business. SBBT provided the bulk of Jackson Hewitt's RALs, leaving that company without a RAL source for over half of its stores.

And, more regulation may be on the way: in early January, the IRS announced that that it will regulate the tax preparation industry.

Use these alternatives to avoid fees

Leslie Kyman Cooper, executive director of the Arizona Consumers Council urges consumers to take these steps to avoid costly and unnecessary tax refund loans:

Wait for your refund. Waiting a just a few days can mean $50, $60 or even more in your own pocket.

Have your taxes done for free. Low income taxpayers can take advantage of VITA (Volunteer Income Tax Assistance) or AARP programs. Use this website to find a location near you for free tax preparation.

Free File. Use the IRS's Free File program, where the IRS has partnered with commercial tax preparation and online software companies to provide free federal tax preparation services and e-filing for most consumers. Tax preparers are not allowed to sell refund anticipation loans through Free File.

Don't pay check cashing fees. Have your refund direct deposited. Open a bank account if you don't have one. Or, select a debit card and have the IRS deposit your refund to it. But be a careful consumer: read the fine print and don't pay outrageous fees.

Watch what you sign. Tax preparers can share or sell your confidential information if they get your signature on a form that allows them to do so. Read disclosures carefully, and don't let your secrets be sold.

About Arizona Consumers Council

The Arizona Consumers Council has been protecting, education and advocating on behalf of Arizona consumers for over forty years. Find more information on this issue and others at our website.