Tax-Refund Loans Win Clients, Critics

STRAPPED for cash and expecting a sizable federal tax refund, many people are choosing to pay their tax preparer extra to get their money early.

For an additional $29, electronic tax filers can get an advance on their refund, cutting the usual three-to-four-week wait to as little as two days.

Known in the industry as "refund anticipation loans," the three-year-old service offered by chains such as H&R Block and Jackson Hewitt has been gaining customers and detractors.

Over a third of H&R Block's 17 million customers requested "Rapid Refund" last year, according to Judy Keisling, an assistant vice president at the Kansas-based company. But consumer advocates and independent tax preparers call the exorbitant fees for the loans a "disservice." They hit the low to low-middle income groups - those least able to afford it, these critics argue.

Quick refunds can be misleading, says Stephen Wallace, assistant secretary of the Massachusetts Executive Office of Consumer Affairs. "It appears on the face of it a modest fee to get a quick advance or loan on a refund," he says. "If people take time to crunch numbers, they are paying an exorbitant interest rate."

For example, for the privilege of getting a refund of $600 dollars 17 days early, the tax filer pays an annualized interest rate of 104 percent. For $300, the minimum refund eligible, the annual interest rate soars to 208 percent. (The top annual interest rate on many credit cards is about 18 percent.)

"It's a real rip-off," says Elizabeth Clarke, owner of Clearbrook Tax Service in Newton, Mass., who declines to offer the service. "I just don't think I would be responsible.

"I'm here to save them [my clients] money, to get all the deductions they legally deserve. To turn around and have them pay a huge interest rate for getting their money a couple of days earlier - it just goes against my philosophy."

Peter Sepp of the National Taxpayers Union in Washington is less sympathetic to users of tax-refund loan services. A trickle of complaints has come in from people upset at the high fee, he says. But if they had properly planned their withholding levels at the beginning of the year they wouldn't be expecting a large refund, he says.

"You would either owe a very little sum or get a very little part of it back," Mr. Sepp says. "All you're doing by getting a huge refund is allowing the IRS to use your money."

Before refund anticipation loans were offered nationally, taxpayers in North Carolina, Tennessee, Alabama, and Mississippi could go to loan discounters, Ms. Keisling says. For fees as high as $300, they would sell their refund for instant cash.

H&R Block makes no money from Rapid Refunds, Keisling says. The entire fee goes to the bank. Working in partnership with tax services, the bank opens an account in the taxpayer's name and makes a loan against the anticipated refund. The refund itself is automatically deposited into the account by the Internal Revenue Service about three weeks later.

For banks, the loans are low risk and high return. For many filers, overpaying federal tax is the only way they save money, even at the expense of lost interest. Keisling says many people plan their finances so the lump sum around April can be used for vacations or as a down payment on a car or house.