The author James Baldwin once summed up quite nicely my feeling about refund anticipation loans, which are heavily marketed this time of year by tax preparation companies.
Baldwin said: "Anyone who has ever struggled with poverty knows how extremely expensive it is to be poor."
For many years, I took care of my brother, Mitchell, before his death at age 32. He suffered from epilepsy and often couldn't work because of severe seizures. My care included watching over his finances.
One of my many frustrations was trying to prevent Mitchell from spending unnecessarily on products or services that gave him faster access to his money -- for a fee. These convenience fees cut into his budget. If he spent $20 in fees one month to use ATMs not owned by his bank or to cash a check, that meant $20 less in groceries. His income was so small, the loss of that $20 could have meant less to eat one week. Because I was there to help, my brother didn't go hungry. But others don't have that kind of assistance.
When you're living on the edge financially, you cannot afford the convenience fees that go along with instant money. That's why I dislike refund anticipation loans, or RALs.
An RAL is a short-term loan backed by a person's tax refund. Tax preparation companies count on desperate people trying to get their refund as quickly as they can. But there's a price for that speed.
What galls me is that there's little, if any, risk to the lender, yet the loans often carry high fees. The Consumer Federation of America and the National Consumer Law Center have found that RALs cost from about $30 to more than $125 in loan fees. Some tax preparers also charge a separate application or document preparation fee of about $40. The consumer groups say the effective annual interest rate for an RAL can range from about 40 percent to more than
This type of loan takes advantage of the very people, cash-strapped taxpayers, who can ill afford the costs.
Amid criticism, some companies have lowered RAL fees. For example, H&R Block says its typical RAL costs about 2 percent of the principal.
Although the appeal of this loan is that you get your money fast, you in fact only marginally speed up the delivery of your refund cash.
The turnaround on the loans can be a day or two. However, taxpayers who file returns electronically and opt for direct deposit can receive refunds in 10 days or fewer.
What I would like to see is a ban on these loans. That may not happen, but the IRS and Treasury Department announced recently they are considering a rule that could greatly restrict the marketing of RALs and similar products.
In announcing a comment period for the proposed rule, the Treasury and IRS said they are concerned that some tax preparers may have clients improperly claim credits or deductions, or both, to inflate refunds in order to increase the fees collected on RALs.
The evidence of such misconduct is only anecdotal, but it's enough to warrant further investigation, said David Williams, IRS director for electronic tax administration and refundable credits.
"We've got to look at whether the RALs are causing a problem," Williams said.
Williams said the IRS is considering prohibiting tax preparers' involvement with RALs. The agency doesn't have the authority to ban the product, but it can forbid tax professionals from selling or marketing the loans directly.
Under the proposal, "if you prepare the return, you can't obtain taxpayer consent to process the RAL," Williams said.
He added that the agency plans to do its own research to determine if tax laws are being broken by tax advisers or tax preparers trying to maximize refunds to boost RAL income.
Even when a flat fee is charged for RALs, some tax preparers could be inappropriately inflating the amount of a refund to boost their business in other ways, the IRS said. For example, some merchants who offer tax preparation services may encourage customers to obtain RALs and spend the money on the merchant's other products or services.
If you want to comment on the proposed rule, suggest something different, or expose an unscrupulous tax preparer who has taken advantage of you through an RAL, send your written or electronic comments to the IRS by April 7.
You can mail your comments to: Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044, or submit them at www.regulations.gov. In each case, reference REG-136596-07.
Williams said if the IRS does move to rein in the marketing of RALs, taxpayers probably won't see any changes until the 2009 tax season.
Keeping in mind what Baldwin said, I hope the IRS moves faster on this issue. The longer they take to restrict the marketing of this useless product, the more it costs the poor.
Write to Michelle Singletary, c/o The Washington Post, 1150 15th St. N.W., Washington, DC 20071, or e-mail her at firstname.lastname@example.org.
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