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Instant Tax Refunds: Fast but Expensive

E-filing: Free and Fast

March 17, 2005
With less than a month to go before the April 15 tax filing deadline, Illinois Attorney General Lisa Madigan reminded consumers about the high cost of Refund Anticipation Loans (RALs) and urged those consumers who still need to file their tax returns to consider other refund options instead of obtaining a RAL.

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Madigan said what most consumers may not realize is that by filing their taxes electronically and opting for direct deposit into their bank accounts, their refunds will arrive very quickly - usually in just eight to 15 days. If consumers choose a RAL, they must first pay the tax preparer to help fill out their tax forms and then pay additional fees and costs to obtain their refund check just a few weeks earlier.

The message may be getting through. IRS officials say that, based on trends so far, they expect more than half of all tax returns this year to be filed over the Internet.

Calling it a "phenomenal penetration," IRS Commissioner Mark Everson says he expects the number of electronic filings to spike in the final days, as more taxpayers race against the deadline and become aware of how easy it is to file online.

Refund anticipation loans, also known as "instant tax refund loans," are loans consumers can obtain based upon their expected tax return. The RALs are provided by tax preparers and result in extremely high costs and fees, which include loan fees, electronic filing fees, document preparation fees and tax preparation fees. These fees are deducted from the consumers' tax refund checks before the checks are even issued.

"While many consumers may view a RAL as simply an advance on their expected tax return, what they are actually signing up for is a high-cost, short-term loan that will deprive them of a large chunk of the money they should be receiving as part of their tax returns," Madigan said. "These loans are especially costly to those who need the money the most, and should be avoided whenever possible."

According to a report released in January 2005 by the Consumer Federation of America (CFA) and the National Consumer Law Center (NCLC), consumers paid more than $1.4 billion in loan charges and fees in 2003 associated with RALs. These short-term loan terms reportedly had annual interest rates of 70 percent to more than 1,700 percent.

The average RAL recipient in 2003 paid an average of $250 in costs and fees on a RAL, when their refunds amounted to an average of $2,050. That amounts to more than 12 percent of their refunds going directly into the hands of their tax preparer and loan provider.

The same study showed that low-income families most often paid the high price for a fast return on their tax refunds.

In Illinois, the Truth in Lending Act governs the requirements for RAL providers, but does not require advance disclosure of fees and interest rates connected with RALs. Thus, consumers must know to ask about fees and interest rates before applying for a RAL to make an informed decision about their money.

Everson said most people filing online are motivated because they are due a refund, and e-filing helps them get their money faster. He said most e-filed refunds take less than three weeks. That, he adds, makes consumers less likely to take out refund anticipation loans.

Everson said other advantages include accuracy. On paper returns, it's easy to make a math mistake. Filing online performs math chores automatically. He points out that a mistake on a paper form requires correspondence to resolve the issue, delaying any refund check.

Online returns also IRS save money for taxpayers. Everson says an electronic return is $2 per return cheaper to process than paper. In addition, the increase in electronic filings has allowed the IRS to consolidate functions and reduce staff in some offices on the East Coast.

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