If you want your tax refund right away this year, be prepared to pay. For years, consumer advocacy groups have warned against so-called "instant" or "same-day" refunds. The reason: these refunds are actually bank loans, and they often bring exorbitant fees. In some cases, that means a mind-boggling 1,300 percent when calculated like a credit-card annual percentage rate.
With tax season under way, advocates are once again warning consumers against them and state officials are pressing for better disclosure on the part of tax preparers.
In mid-February, the Alabama state senate voted 25 to 0 to create the Alabama Board of Individual Tax Preparers, which would require commercial tax companies to disclose costs on the arrangements underlying instant refunds as well have their preparers pass a test.
Before that, New Jersey cited 38 companies for false advertising in connection with "same-day refund" postings purporting to offer instant IRS refunds – which are actually high-interest loans.
Michigan lawmakers are also readying a bill that would force disclosure of interest rates and fees.
The controversy surrounding what tax preparers call "refund anticipation loans" is not new. In 2006, California Attorney General Edmund G. "Jerry" Brown sued major tax preparers to stop marketing the loans as refunds. In January, he announced a $4.85 million settlement with tax giant H&R Block. Another major tax preparer, Jackson Hewitt, settled in 2007. Other, smaller suits have been settled in recent years.
Despite the eye-popping rates, nearly 1 in 15 taxpayers opted for an early refund in 2007 – a total of $900 million spent to get paid an average of 10 days early, according to Americans for Fairness in Lending, a nonprofit advocacy group in Boston. The majority of those were lower-income families who received the Earned-Income Tax Credit, the group says.
Refund anticipation loans (RALs) are a significant piece of the overall tax-preparation pie. In federal tax filings, industry giant H&R Block reported revenues of $190.2 million last year through RAL arrangements with its partner, the bank HSBC. That is more than 4 percent of the company's total revenues.
Big industry players walk the line between meeting what they say is a strong demand for RALs and ensuring that customers are aware of the costs.
"We agree that the best thing is for taxpayers to e-file and get their refunds direct-deposited by the IRS," says Nancy Mays, spokesperson for H&R Block based in Kansas City, Mo. "We are on the same page with the advocates.... Our tax professionals are trained to tell clients that e-filing is the least expensive and entails a reasonable waiting time."
Even so, about 20 percent of H&R Block customers choose RALs. They "say they have an urgent money need hanging over their head – overdue rent, a broken car. That's what people tell us," Ms. Mays says. Many don't have bank accounts.
She touts the fact that such "unbanked" customers can transfer the money onto the company's Emerald Card – that's a prepaid MasterCard – and save about 40 percent of an RAL's cost elsewhere.
This effort doesn't have consumer advocates extolling the company and its RALs this tax season. If anything, they are more critical in this year's dramatically worsened economic climate.
"In the current political climate, people are not particularly sympathetic to banks and purveyors of these loans," says Jim Campen, executive director of Americans for Fairness in Lending. "Over the years, they've become more aware of the exploitative nature of these loans, and that will be all the more evident in this economy," he says.
A few years from now, the point may be moot. The Internal Revenue Service is developing a filing system called the Customer Account Data Engine, which the IRS says will dramatically shorten refund wait times.