Fast Tax Refunds Can Carry High Price

March 30, 2004

BY TAMMY CHASE

Chicago Sun-Times

Offered the chance to get her income-tax refund in just two days, Mary Carter went for it.

The Englewood woman knew she was being charged $160 by H&R Block in tax-preparation fees. But Carter, who wanted to use her $760.05 refund to pay off credit-card bills, didn't realize until later that getting her tax refund right away had cost her about $100 more in fees -- money that was deducted from the refund.

Taxpayers here and across the nation appear to be embracing offers from tax preparers like H&R Block and Jackson Hewitt of "tax refunds fast." But critics say many people don't realize when they sign up to get their tax refunds in just a day or two that they are agreeing to take out short-term "refund anticipation loans" -- for which they are charged interest rates of 70 percent or more.

In 2002, the last year for which figures are available, consumers nationwide paid a total of $1.14 billion in refund anticipation loan fees, in addition to $406 million in electronic filing fees on those same tax returns, according to the Consumer Federation of America.

The average amount of those tax refunds: $2,043. The average total loan fees to get those refunds immediately: $90.

About 12.7 million refund anticipation loans were taken out during the 2002 tax season, and, boosted by ads offering tax refunds fast, they appear to be growing in popularity, according to the Consumer Federation, a Washington-based advocacy group.

Tax firms such as H&R Block and Jackson Hewitt borrow money from banks to make short-term loans for the amount of a taxpayer's refund, then are repaid plus their fees when the tax-preparer gets the taxpayer's check from the IRS. The firms say they are just giving people what they want and acting entirely within the law.

Critics, though, say they are taking advantage of the poor, who might not be savvy enough about financial matters to realize they are paying annual interest rates of 70 percent or more -- in some cases, 700 percent -- so they can get their tax refunds within a day or two, rather than wait the two weeks or so it typically takes if they ''e-file,'' or longer if they file by mail.

"Despite a barrage of ads trumpeting refund anticipation loans, these loans are a very costly way for people to get their own money," said Melissa Merz, spokeswoman for Illinois Attorney General Lisa Madigan.

Fast returns

In Congress, there has been talk of capping interest rates and of requiring tax firms and their banks to more clearly spell out what these refund anticipation loans cost. No such laws have been passed.

"This is something that has to be examined closely," said Nadeam Elshami, spokesman for U.S. Rep. Jan Schakowsky (D-Evanston). "The No. 1 priority is making sure consumers, especially low-income taxpayers, are not taken advantage of."

Tax-refund loans offer one clear advantage over filing with the Internal Revenue Service directly: speed.

That was the attraction for Johnny Poe, a retiree who lives on the West Side. Poe said he went to H&R Block in the mid-1990s and was offered a chance to get his refund faster, and he did so for years. He said he didn't know what it cost him -- and still doesn't, though documents he was given for one year's loan show that he would be charged an annual percentage rate that could top 125 percent.

"It was confusing," said Poe, who now goes to directly to the Internal Revenue Service for tax help.

Neither H&R Block nor Jackson Hewitt makes public how much money they make on tax-refund loans.

H&R Block says it doesn't hide the costs from consumers. It says it lays out all filing options, from mail to electronic filing to getting refund loans. And a spokeswoman for the Kansas City, Mo., company said that some of the fees it charges for refund anticipation loans are paid to the bank that actually makes the loan -- Household Bank, sometimes called Beneficial Bank.

''We don't set those [bank] fees,'' said H&R Block spokeswoman Denise Sposato. "We make this available to our clients because consumers want them."

Household says its fees are competitive when compared with what it would cost to take out a cash advance on a credit card. It compares a $75 finance charge on a refund anticipation loan of $2,200, which computes to an annual rate of 117 percent, to the finance charge on a comparable credit-card cash advance, which it calculates would be $74, for an annual percentage rate of 112 percent. In its literature, Household presents the loan fee as "an alternative to delayed credit-card, rent or mortgage payments and . . . bounced checks."

Popular with low-income filers

Where critics such as the Consumer Federation and the community activist group ACORN find fault is with what they see as the targeting of poor people for the high-interest loans. More than half of those who took refund loans in 2002 were taxpayers with incomes low enough to qualify for the federal government's Earned Income Tax Credit, according to Consumer Federation data, though recipients of the tax credit for low-income households account for just 15 percent of all taxpayers.

"You think wealthy people do this?" David Roberts, an associate professor of accountancy at DePaul University, said of the refund loans. "A refund [means], in effect, you've overpaid in the year. People let the government hold their money at no interest. Now, they want to pay a high interest rate to get their own money?"

"It's pretty clear they are targeting certain areas," said Madeline Talbott, director of ACORN's Chicago office. "I don't think we'd be complaining if they charged a reasonable rate of interest . . . [say] 10 percent."

Still, some consumers say that, even at a high price, they need the tax-refund loans. Torrence Turner, who is 38, unemployed and the father of three, said he paid $275.95 this year to get his $2,385 refund -- with $99.95 of that going to pay for the refund anticipation loan.

"I like getting my money back quicker," the Chicago man said, "though it would be better if I could get it cheaper. But I had bills to catch up on."