Refund anticipation loans (RALs) are high cost loans secured by and repaid directly from the proceeds of a consumer's tax refund from the Internal Revenue Service (IRS). About 12 million taxpayers took out RALs in 2004, costing them over $1 billion dollars in loan fees. Pay stub RALs differ from a traditional RAL because they are offered earlier, before a taxpayer receives her W-2. Since a taxpayer cannot file a tax return without a W-2, pay stub RALs are made before the tax season officially starts, from January 2 to mid-January, and are based on the consumer's most recent pay stub. Holiday RALs are made even earlier, during November and December. Both types of loans are offered by tax preparers, and are expected to be repaid from the proceeds of the consumer's tax refund....Pay stub RAL fees can be as high as $102, translating into triple digit APRs. In addition, at least one tax preparation company, Jackson Hewitt, charges a $50 "deposit" for services when making the loan. Furthermore, Hewitt customers must pay for another RAL or a refund anticipation check to repay the pay stub RAL.

The consumer groups go on to warn that Jackson Hewitt, for one, is requiring these pay stub RAL customers to come back for more financial punishment:

Another problem with pay stub and holiday RALs is the fact that one tax preparation company, Jackson Hewitt, is apparently forcing pay stub RAL borrowers to return to the same tax preparer and same office for tax preparation. This prevents borrowers from seeking a less costly alternative for tax preparation, such as filing the return themselves through the IRS Free File program or obtaining free tax preparation services from a VITA site. Pay stub RAL borrowers cannot even comparison shop for a less expensive commercial tax preparer.

Finally, the consumer groups warn that the new breed of predatory loans from the tax preparers seems to be clearly designed to grab one of the most important benefits that Congress has ever provided working-class Americans, the Earned Income Tax Credit (EITC), even as the IRS seeks to get those benefits to consumers faster:

A significant threat posed by pay stub and holiday RALs is the fact that they enable the RAL industry to keep draining tax refunds and Earned Income Tax Credit (EITC) benefits. The IRS has been working on efforts to speed the delivery of refunds, which should help to reduce the use of traditional RALs that put cash in taxpayers' pockets within a day or two of filing the tax return. Instead of phasing out controversial tax refund loans, the RAL industry appears to be responding to the potential of faster IRS refunds by introducing a loan product that can get the "jump" on tax filing season, allowing tax preparers and high rate lenders to continue exploiting the tax refunds of cash-strapped low-wage workers.

I can only note that I am sure that there are cynics among you who may say -- "Well, people should be smart enough to avoid this product or they'll lose." Well, you as a taxpayer are losing, too, so you should back efforts to rein in predatory lending. The money that the tax preparers are pocketing isn't only coming from the working class Americans they gouge, it comes from every taxpayer, including you, since that EITC tax credit that's being sucked dry is one of our largest and most important tax policy programs. It's coming from you, and it is supposed to go to the less well-off, not to predatory lenders.

Finally, we really don't like it when predatory lenders prey on anyone, but in this case there are numerous alternatives. VITA is one of the many free tax preparation programs for low income, or military, or elderly taxpayers. Find out more from the IRS itself.