U.S. PIRG Consumer Blog: It's tax time, not refund anticipation loan time

For many years, we've worked with the National Consumer Law Center and the Consumer Federation of America in efforts to expose and restrict the outrageous practice by most tax preparers: convincing low-income customers to borrow Refund Anticipation Loans (RALs) against their refund at rates of 500% APR or more. Now, according to the New York Times, Tax Loans Are Losing Some Allure. The story, reporting on the latest (January 2007) CFA/NCLC report, notes that if you file electronically, the government itself will process your refund in about a week, at no charge. It goes on to point out that even the preparers are coming out with better products:

At the same time, the largest tax preparer, H&R Block, has cut fees for the loans as much as a third and issued a debit card that consumers without bank accounts can use that gives them the opportunity to bypass the loans altogether. [...] "It's a decent product," said Chi Chi Wu, a staff lawyer at the National Consumer Law Center in Boston. Coming from a consumer advocate who has spent years chastising the tax preparation industry for its practices, that is hardly faint praise. The product wins kudos because it is not just for the refund anticipation loans. It allows people who do not have bank accounts to get some of the advantages provided to those who do. "We have been supportive of that," Ms. Wu said.

One of the most disgraceful aspects of the whole Refund Anticipation Loan business is that the companies haven't merely been skimming money from desperate, less financially-literate lower income taxpayers who need the money. Their business model has ridden parasitically on the backs of each and every taxpayer: it depends on large refunds to lower-income Americans who qualify for the Earned Income Tax Credit (EITC). So, according to a 2006 NCLC and CFA report, over $900 million of the $1.6 billion in RAL fees paid in 2004 was siphoned out of this important poverty program that all taxpayers pay for. As Chi Chi Wu said at the time:

This is a form of corporate profiteering. It's a shame that big banks and commercial preparers pocket a chunk of anti-poverty benefits meant to help hardworking Americans.

We're working with CFA and NCLC to urge Congress to cut off the other corporate welfare program that the preparers rely on: the so-called Free File law that not only allows preparers to advertise on the IRS website but also prohibits upper-income taxpayers from directly filing their taxes to the IRS online for free; instead, they must pay a fee to a preparer. Although the program has been slightly improved, only lower-income taxpayers can "file" for free, but they must still run the gauntlet of RAL and other add-on fees.