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Consumers Taking Out Fewer Instant Tax Loans

But low-income taxpayers still lose hundreds of millions in unnecessary costs

By Mark Huffman
ConsumerAffairs.com

April 1, 2008

The finding comes from the annual report on the RAL by the National Consumer Law Center (NCLC) and Consumer Federation of America (CFA).

The report reveals that RALs drained the refunds of nearly 9 million American taxpayers in 2006, the last year on which the Internal Revenue Service provided data.

The good news is that this figure has declined from a high of 12.4 million in 2004, but it still represents $900 million in loan fees, plus over $90 million in other fees. In addition, another 10.8 million taxpayers spent $324 million on other types of financial products to receive their refunds.

In other good news, both industry giant H&R Block and major RAL lender JP Morgan Chase have lowered their prices significantly. However, other players such as Jackson Hewitt and Republic Bank & Trust still make RALs with triple digit Annual Percentage Rates (APRs).

Also, consumer advocates warned that even with lower prices, RALs pose a risk to taxpayers if the IRS denies or holds up their refunds.

“Taxpayers shouldn’t forget that these are loans,” advised NCLC Staff Attorney Chi Chi Wu. “They carry the risk of loans, including unmanageable debt if your refund doesn’t arrive as expected.”

RALs are bank loans secured by the taxpayer’s expected refund -- loans that last about 7-14 days until the actual IRS refund repays the loan. That’s the first indicator of just how unnecessary most RALs are: Most taxpayers could have their refund in two weeks or less even without the costly loan.

“For a free quick refund, file electronically and have your refund direct deposited to your own bank account,” says Jean Ann Fox, Director of Financial Services for CFA, “You’ll generally receive an efiled, direct deposit refund within 8 to 15 days.”

Using the most recent data available from the IRS, NCLC and CFA calculate that approximately 9 million taxpayers received RALs in the 2006 tax-filing season (for tax year 2005).

For that year alone, about 1 in 14 tax returns involved a RAL. Although high, that 9 million figure is much lower than the high of 12.4 million RALs reported for 2004. Part of the 2006 decline, however, is probably due to better reporting.

In 2006, the IRS required tax preparers for the first time to separately report RALs versus non-loan refund anticipation check (RACs) products. Thus, prior data may have included RACs that were erroneously reported by tax preparers as RALs.

The biggest target for RALs are the low-wage workers who claim the EITC. Nearly two-thirds (63%) of all RAL borrowers in 2006 were EITC recipients, despite the fact that EITC recipients only make up 17% of taxpayers.

About 5.7 million working poor families spent over $570 million in RAL fees in order to get their tax refund monies less than two weeks sooner than they otherwise could. Administrative or application fees added another $57 million to the drain.

The IRS data for the first time helps determine the amount taxpayers paid for RACs. In 2006, nearly 10.8 million taxpayers received a RAC, at a cost of about $324 million. Taxpayers who have a bank account could have avoided the expense of a RAC (generally about $30) by having their refunds direct deposited into their account, which is just as fast. In addition, Block customers who received the Emerald Card last year could have had their refunds direct deposited onto those cards, and avoid a RAL or RAC.

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