"Anticipating"
Your IRS Refund Can Cost You Plenty by James H. Dimmitt
While accountants are reaching for
aspirin, millions of Americans are reaching for some fast cash this
tax season. Unfortunately, those who reach for fast cash in
the form of a "refund anticipation loan" are getting hit
with interest rates and fees that are out of this world.
The tempting ads are plastered in
newspapers and on television for "fast cash refunds",
"express refunds", or "instant refunds."
The ads offer to get your refund in a day or two, or in some cases
even instantly.
What is a "refund anticipation
loan"? It's a loan that borrows against your anticipated
tax refund from the IRS. Refund anticipation loans, or RAL's as they
are known in the tax industry, carry annual percentage rates (APR's)
of about 60% to over 700%, a fact that many consumers either don't
realize or simply overlook.
RAL's are marketed to people who need
money the most such as low and moderate income workers. A
report by the National Consumer Law Center notes that "about
40% of the 12 million refund loan customers in 2000, were families
who received the Earned Income Tax Credit, the largest federal
poverty assistance program." And since the RAL's often
use the term "refund" in their ads, many of those who take
the bait don't realize that they're receiving a loan and not their
actual refund from the IRS.
The fees associated with RAL's are
expensive. For example, let's say the IRS owes you a refund of
$2,000. In order to get a RAL you pay the following: RAL loan fee =
$75, Electronic filing fee = $40, tax preparer's fee = $100.
Total fees associated with your RAL = $215 which is more than 10
percent of your estimated refund. The APR on your refund loan
equals a whopping 142 percent!
Many low and moderate income workers
are without bank accounts and wind up paying an additional fee to
set up a one-time-use account so that their IRS refund can be direct
deposited.
Before giving in to the temptations
of refund anticipation loans, ask yourself if you really need your
money that quickly. If you can wait just a bit longer for your
refund you'll line your own pockets with extra cash rather than
forking it over to a RAL lender.
A great way to save money at tax time
is to go to a Volunteer Income Tax Assistance (VITA) site.
VITA sites provide free tax preparation to low and moderate income
taxpayers and are sponsored by the IRS. They can be found in
libraries, community centers and other locations during the tax
season. To find a VITA site call the IRS general help line at
1-800-TAX-1040 or visit www.tax-coalition.org.
