You’ve gathered all your paperwork and made an appointment with Happy Times Tax Preparers. You chose them because they promised to give you an instant loan based on your tax refund. After the paperwork is done your told that you have a tax refund of $3,500.00. The happy Times tax preparer offers you a Refund Anticipation Loan ( RAL ). “Great!”, you say, “Where do I sign?” Before you do, read on.
According to an annual report issued by the National Consumer Law Center, and the Consumer Federation of America, using data collected from the IRS for the tax year 2016, RALs collected $833 million dollars in loan fees and an additional $68 million in other fees. In a companion report the NCLC and the CFA said that RALs provide tax preparers with an incentive to inflate refunds and commit tax fraud. “Not only do RALs siphon off hundreds of millions from the hard-earned tax refunds of American taxpayers, they also undermine the integrity of our tax system,” said Chi Chi Wu, NCLC Staff Attorney.
Let’s take a closer look at RALs. An RAL is a bank loan secured by the taxpayer’s expected refund. Now, these loans only last about two weeks which is when the IRS refund pays the loan off. The fact that the loan only last two weeks or so is a good indication of how needless this type of loan is. If the taxpayer could be a little patient, in two weeks they would have their money without the cost of a loan.
A typical RAL loan fee ranges from a low of $34 to a high of $130, usually covered as an “Account Fee” or a “Bank Fee”. Then there’s the host of other, so called, “Add-on Fees”, that the freelance tax preparer might factor in. Fees with names like “application,” “administrative,” “e-filing,” “service bureau,” “transmission,” and “processing” fees. Add-on fees start at about $25 and move up from there into several hundred dollars. These types of fees are not charged by the big chains like H&R Block, Liberty tax or Jackson Hewitt.
Let’s talk interest rates. According to the NCLC and the CFA, the annual interest rate (APR) for an RAL could range from 50% to an astonishing %500. Tack on a $40 Add-on fee that may be included in the interest rate calculation and you’re looking at an interest rate of 85% to 1,300%. While independent tax preparer’s RAL interest rates are high , companies like JPMorgan Chase or H&R Block usually offer lower rates somewhere in the neighborhood of 36%. There can still be what is called, a “Refund Account” fee which is defined as the cost of a temporary account that has to be set up so the taxpayer’s refund can repay the loan. If that fee is included in the APR calculations the interest rate could more than double.
Organizations like the NCLC and the CFA believe that the financial incentives for RALs promote the existence of fringe tax preparers. Their joint report cites dozens of examples of criminal tax fraud cases involving RALs.