For some Americans, tax refunds are a yearly treat, an opportunity to build savings, or even splurge on a vacation. For others, living paycheck to paycheck amid lingering recession, the refunds become a lifeline, leaving them vulnerable to tax preparation firms who prey on their desperation, promising quick refunds in exchange for large fees and high interest rates. While some of the worst products, like Refund Anticipation Loans, have been largely phased out, there are still plenty of companies offering quick fix programs whose fees might not be as high RAL's, but still take advantage of low income taxpayer's financial weakness.
Pre-IRS restrictions, prepartion services offerred RALs to taxpayers in low-income neighborhoods, promising fast tax refunds -- up to two weeks faster than the IRS. Those with bank accounts received their refunds in a day or two, minus hefty fees and interest charges, and in return signs the pending refund over to the bank. Within 15 days, the IRS wires the refund straight to the lender. Those without bank accounts could still use RALs, through a debit or payroll card. Before the RAL crackdown, nearly 63 percent of EITC filers took a refund anticipation loan, at costs that range from $65 to more than $115.
As Mother Jones noted in their 2012 article on the tax preparation industry, there would likely be no RALs without the EITC. The founder of Instant Tax Services told the magazine that the EITC is "a beautiful, beautiful thing that Richard Nixon gave the country." When they offerred the RAL, customers earning between $16,000 and $30,000 starting in December, and filed 4/5ths of yearly returns by February, creating a windfall in extra fees. This was intentional. According to Mother Jones, "the company's manual suggested franchisees set up shop in neighborhoods where the household income is $30,000 or less. . . Each franchisee attends a week of training sessions where unbelievable emphasis was put on poor minorities."
Despite the end of most RALs, there are unfortunately still options for unscrupulous accountants to take advantage of the most vulnerable tax payers, including EITC recipients. Consumer advocates remain concerned that these new services will pick up where the RALs took off. They claim not to be as harsh, but as Tom Feltner, the director of financial services for the Consumer Federation of America told USA Today, "We're always concerned when consumers don't receive the entire balance of their tax refund."
Among the new services are Liberty Tax Service's Instant Cash Advance, available to those with a minimum $1,500 federal tax refund, and Jackson Hewitt's "Assisted Refund" which still carriers a fee, though customers can avoid out-of-pocket costs when they fill out the tax return. Even H&R Block, whose former employee invented the concept, but was initially hesitant to offer it, now has Refund Anticipation Checks, which allow the user to deduct the tax-prep fees from the refund, along with a $24.95 fee for a refund-anticipation check to have the federal income tax refund deposited onto H&R Block's debit card, the "Emerald Card."
Experts like Feltner and Chi Chi Wu, a staff lawyer at the National Consumer Law Center quoted in the New York Times, counsel clients to avoid the quick refund schemes that charge a fee. As Wu notes, taxpayers with bank accounts can still file electronically and receive their refund in two weeks or less. With a little extra planning, filers can receive the money when they need it most, without lining the pockets of shady accountants. Even the unbanked can file electronically, and receive the refund quickly on a payroll or other similar card.
EITC recipients and other low income Americans, should be able to use the credits as intended, to help low-income Americans extend their paychecks, to truly make work pay. Along with the credit, should come counseling or at least more encouragement to file early, avoiding the temptation to use quick fix services, and allow filers to keep all their hard-earned money.