It seemed like a small price to pay to Keisha Scott, especially since the tax refund she expected in return was to be so much larger.
For a mere $230, the 31-year-old Denver resident signed up for an advance on her 2008 tax refund, known as a “refund anticipation loan,” provided to her by the tax preparer she hired.
Like thousands of other Coloradans are expected to do this tax season, Scott decided it was easier and more convenient to have someone else handle the details of her tax return and refund instead of doing it herself.
“It wasn’t because I needed the cash,” she said. “It’s just nice to have the extra money, and when you bust your butt the whole year, you want it now.”
But critics say the loans are analogous to loan sharking, with interest rates topping as much as 140 percent — more than 30 times the rate of an average mortgage or 10 times that of an auto loan — if factored out over a year.
Worse, critics say, is that people could simply wait a week and get the entire amount themselves. But the allure is quick cash for what appears to be little money down.
Though she could have gotten the entire refund herself, Scott, a cook at Lutheran Medical Center, said she didn’t want to be bothered.
And like many users of refund anticipation loans — RALs in tax parlance — Scott’s refund was bolstered by the government’s earned income tax credit, a special tax break for low-income workers. The credit gave her much more than she would otherwise have received, she said, declining to disclose the exact amount.
The business of providing taxpayer refund advances is popular in low-income communities because it provides individuals with money now, oftentimes people who have neither a bank account nor access to one. Getting a check from the U.S. Treasury Department is more trouble than it’s worth.
Businesses say it’s a service
Yet for a fee, they can acquire their refund in as little as 24 hours, or even one hour if they’re really in need.
“I work hard,” Scott said, reasoning why she opted for the RAL. “Why not get it back fast?”
Tax businesses that offer the loans — H&R Block, Jackson Hewitt and Liberty Tax are among the industry leaders — say they’re providing low-income residents with a valuable and necessary service.
“Many of the people we deal with don’t have bank accounts; they take the loan and that helps them cope with the prep fees too,” said Dave Meyers, a certified tax preparer at Liberty Tax on East Colfax Avenue in Denver. “We don’t force them into anything.”
Low- and moderate-income families spent about $900 million on RALs in 2007, according to the National Consumer Law Center and Consumer Federation of America.
About 8.7 million Americans paid to get their refunds sooner that year, the organizations said. Simply because they didn’t want to wait the two weeks for a check or direct deposit.
“In tough economic times, quick money may be tempting,” NCLC attorney Chi Chi Wu said. “But American taxpayers need every dollar of their refunds, and just waiting a week or two will put more money in their pockets.”
Low-income market targeted
They’re popular in Colorado too. For tax year 2005, the most recent data available, 89,935 Coloradans used an RAL to get their refund, according to the Brookings Institution. And of those, 59 percent relied on the earned income tax credit to bolster the amount.
“Clearly, lower-income taxpayers are the primary market for these expensive products,” said Rich Jones, director of policy and research at The Bell Policy Center in Denver.
Some critics, such as ACORN, say it’s not the loans that are an issue but the tactics used to get people to agree to them. Test calls have shown some preparers were too eager in getting folks to agree to a loan, according to Colorado ACORN director Ben Hanna.
“Overwhelmingly we were told what it cost and that we’d get our refund the same day,” Hanna said. “There’s something wrong with that. Consumers need to know all their options up front.”
Costs at Liberty Tax, for example, can range from about $200 for a simple tax return for a single individual and another $30.95 in a bank fee. Then there’s a finance charge based on the size of the refund.
The biggest worry, however, is if the loan amount is higher than the actual refund, which can sometimes happen, though it’s rare.
“Some refund amounts are calculated incorrectly because companies hastily use a year-end pay stub, not a W-2,” said Dan Maddux, executive director of the American Payroll Association. “This is a mistake that could cost the taxpayer even more money.”
David Migoya: 303-954-1506 or dmigoya@denverpost.com
