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Tax loans speed up and shrink your refund

©Associated Press
February 16, 2003

NEW YORK -- The signs on the front windows of H&R Block offices beckon taxpayers with the slogan "Instant Money -- Refund Anticipation Loan." Other tax preparers offer "rapid refunds" or "immediate refunds."

But fast isn't always best, and signing up for these quick refund services can end up costing taxpayers a lot of money, experts say.

" 'Money today' sounds attractive," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America in Washington, D.C. "I don't think folks realize they're actually signing up for loans. And I don't think they have a clear idea of how much they're paying for this . . . sometimes 100 percent APR (annual percentage rate) or more."

Claude Arceneaux, a bartender on Bourbon Street in New Orleans, learned that the hard way.

Last year at tax time, he was temporarily out of work and didn't have a lot of savings, so he was attracted to a tax preparer's offer of a fast refund.

"I was supposed to get $473 back," Arceneaux said. "I only got $320-something. They took $150 for preparing a standard 1040 tax form and fees for the loan.

"It really hurt, because it happened at a time I really needed the money."

Arceneaux said he called the Internal Revenue Service to complain but was told the loan process was legal.

This year, he said, he has discovered VITA, the Volunteer Income Tax Assistance service where IRS-trained volunteers give free assistance to tax filers. A similar program, the Taxpayer Assistance Center, aids elderly taxpayers.

Filers often consider instant refund offers because they don't want to wait the six weeks it can take to get a mailed refund from the IRS. Or they don't have a bank account, so they can't take advantage of the IRS' direct deposit option for those who file electronically. E-filed returns can get direct deposit refunds within 10 days to two weeks.

Denise Sposato, a spokeswoman for H&R Block, said the company's documents clearly explain how refund anticipation loans work and the nonloan alternatives that are available.

One alternative that the Kansas City, Mo., company offers is a refund anticipation check service. For $24.95, taxpayers can get a temporary bank account into which the IRS can deposit a refund check.

The cost of H&R Block's refund anticipation loan depends on the amount, Sposato said. For example, a customer pays a $24.95 fee plus a $45 finance charge for a loan of $1,001 to $1,500 -- an APR of 77.4 percent to 116 percent, she said.

The CFA's Fox said low-income families are attracted to the offers because they often don't have the cash to pay for tax preparation but feel they need professional help with complicated forms.

"The loan is attractive because it covers the (preparation) fees, and there's the promise of money in your pocket right away," she said.

A pitfall that families often overlook, Fox added, is that if the IRS turns down any of their claimed deductions or credits, "They're still going to have to pay back that loan."

Neill Goslin, a community organizer who coordinates the VITA program in the central city area of New Orleans, said many poor families don't understand that the instant refunds really are loans.

"They get asked, 'Do you want your money today or tomorrow?' " he said. "They don't read the fine print. Knowing they'll have the money tomorrow is enough for them."

Goslin said the deal is especially tempting for low-income families who qualify for the earned income tax credit, a federal program designed to get money into the hands of the nation's poor but that is based on a complicated calculation using income and the number of children in the family. This year, the maximum EITC for a family with two or more dependents is $4,140.

A recent study by the Brookings Institution found that tax preparers often charged about $100 to fill out the tax forms for low-income residents and an additional $100 for a refund anticipation loan.

"If a family is getting a lot back, $200 probably doesn't seem like a big deal," Goslin said. "We'd like to see them get it all."

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