2011-02-18 / Columnists

Notes On Consumer Affairs

Think Twice Before Taking Refund Anticipation Loan
Commentary By Assemblywoman Audrey Pheffer


AUDREY PHEFFER AUDREY PHEFFER Given this tough economic climate, many New Yorkers are having trouble making ends meet, making it especially tempting to want your tax refund instantly. But think twice before falling prey to refund anticipation loans, commonly called RALs, which provide your money up front, for a very steep fee. Fortunately, new Internal Revenue Service (IRS) rules have made it easier to secure tax refunds quickly without falling prey to a highinterest RAL.

RALs are short-term loans made by banks through tax preparers and secured against the taxpayer’s expected tax refund. The annual percentage rate tax preparers charge for RALs can range anywhere from 70- 600 percent. Taxpayers can also face additional charges if their refunds don’t arrive when expected.1

Legislation I introduced addressing concerns relating to RALs, became law as of January 1, 2009. The Consumer Bill of Rights Regarding Tax Preparers was modeled after the City of New York’s successful law regulating paid tax preparers.

While the majority of tax preparers are trained, experienced and conscientious professionals that provide consumers with the information necessary to make informed decisions, it has become apparent that some consumers are not being well served. This new state law helps better educate the consumer on tax preparation practices, including Refund Anticipation Loans (RALs). RALs are often misrepresented as an “instant refund” to consumers rather than the high-interest rate loans they actually are.

The IRS has taken action to protect taxpayers by refusing to provide tax preparers with certain information used to determine RAL amounts. These new rules will curb this particular form of high-interest predatory lending. However, while the new regulations will make RALs harder to come by, the loans that are provided will still be accompanied by astronomical fees.

Data from the Consumer Federation of America and the National Consum-er Law Center indicate that in 2008, tax preparers took in $738 million in RAL fees from the refunds of 8.4 million taxpayers; that’s an average of about $85 per tax return. These numbers have probably grown since 2008 because of the recession, as more working families have been forced to live paycheck-to-paycheck. Taxpayers who receive the Earned Income Tax Credit, a special tax adjustment for low-income earners, are particularly targeted; nearly twothirds of RAL borrowers receive this tax credit.

Both New York State and the federal government have taken additional steps to decrease the prevalence of RALs. In New York, state law prohibits tax preparers from advertising RALs as “refunds,” and must state in an obvious place that an RAL is a loan and that a fee or interest will be charged.

This year, the IRS introduced a pilot program – MyAccountCard – to provide 600,000 low-income earners with a no-interest, no-fee debit card preloaded with their tax refund, eliminating the need for an RAL.3

In addition, provisions of the 2010-2011 New York State budget prohibits tax preparers and software providers from charging a separate fee for e-filing a New York State tax return.

Typically, tax preparers have charged an additional fee of $20 to electronically file a New York tax return. This practice encouraged cost-conscious taxpayers using a preparer to request that their returns be printed and mailed to the Department.

Under the new law, there will no longer be a monetary benefit to filing a paper State return, which should help shift taxpaper behavior voluntarily to the more efficient and lower cost option of electronically filing.

Unfortunately, these economic times have forced working families to seek more urgent means of securing cash. However, turning to an RAL can be a dangerous approach to the problem.

The appeal of instant cash masks the long-term effects of high interest rates, fees and potential damage to your credit score – all of which take money out of your pocket. Today, the government processes tax returns much more quickly than even a few years ago. The key is to be patient and not pay needlessly to get money that is rightfully yours. What to do to speed up turnaround time on your tax refund:

Check your mailbox. You may have been selected as one of the 600,000 Americans to qualify for the Treasury Department’s MyAccountCard pilot program, mentioned above.

File your taxes online using e-file. By filing online, taxpayers’ returns will be processed within 7-10 business days. Taxpayers can also check their refund status using the IRS’s “Where’s my refund” tool at www.irs.gov/individuals/article/0,,id=9659 6,00.html. If you do not own a computer, local libraries often provide free Internet access to community residents.

Indicate Direct Deposit on your tax return form. Taxpayers indicating Direct Deposit when filing will have their return deposited into their accounts within 10 days of filing. It usually takes the IRS between four and six weeks to mail your return in a paper check.

If you don’t have a bank account, open one today. Many banks now provide free checking accounts. Even if the bank charges an account maintenance fee, this fee usually ends up costing much less than the fees associated with direct check cashing and RALs.

For more information, visit the Internal Revenue Service at www.IRS. gov or the New York State Department of Taxation and Finance at www.tax. state.ny.us.

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