"Fast Refund" Loans Victimize Cash-Strapped Taxpayers

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January 19, 2004
H&R Block, the nation's biggest provider of tax anticipation loans, is the target of consumer protests as another tax season gets underway. The loans, popular among low-income taxpayers, typically carry extremely high interest rates and provide cash-starved consumers with only a marginal increase in the speed with which they get their refunds.

"We are warning our members to stay away ... and making sure they know they can get their refunds fast without a loan and often without paying for tax preparation at all," said Maud Hurd, president of ACORN, the Association of Community Organizations for Reform Now, which staged protests outside H&R Block offices around the country last week.

“Why should any company be able to skim off hundreds of millions of dollars in tax refunds meant for and earned by working families?” Hurd asked. “Why should we be charged interest rates in the hundreds or even thousands of percent range to be loaned the money we are owed?"

Victims of the fast-refund pitch are often taxpayers who qualify for the Earned Income Tax Credit, which averages around $1,600. Interest charges on the loans are often $500 or more -- typically a third of the refund. Consumers get their money only a week or so earlier than if they had not taken out the loan.

The loans are based on estimated income tax refunds. Preparers figure clients' taxes, calculate the amount of the refund, and offer to lend clients the refund amount — minus an array of fees — up front. The client pays the loan back when the refund check arrives.

A 2002 study by the Brookings Institute found that 39 percent of families who qualified for earned income tax credits in 1999 took out tax refund loans.

H&R Block holds the dominant share of the refund anticipation loan market. More than 40 percent of H&R Block's electronically prepared returns were packaged with a refund loan, Hurd said.

The company has been the target of class action lawsuits in Illinois and Texas. In 2001, New York City's Consumer Affairs office filed its sixth case against the company for misrepresenting rapid refunds.

Industrywide, the cost of borrowing the average $1,980 refund equals to an annual percentage rate of 222.5 percent, according to the National Consumer Law Center. For the convenience of getting the refund immediately vs. waiting 10 to 14 days through a no-cost IRS e-filing, refund loans siphoned off $1.8 billion, mostly from low-income wage earners, in 2001.

Between the refund loan fee, electronic filing fee and handling fees, the National Consumer Law Center calculated that in 2001 tax preparers drained $1.2 billion from money intended for Earned Income Tax Credit recipients.

Opponents celebrated one victory last fall when Intuit agreed to drop refund loan offers through its TurboTax software.

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