Fast tax refunds can carry high price (Stoo-pid People Alert)

Chicago Sun-Times ^ | March 30, 2004 | Tammy Chase

[Condor51]

Offered the chance to get her income-tax refund in just two days, Mary Carter went for it.

The Englewood woman knew she was being charged $160 by H&R Block in tax-preparation fees. But Carter, who wanted to use her $760.05 refund to pay off credit-card bills, didn't realize until later that getting her tax refund right away had cost her about $100 more in fees -- money that was deducted from the refund.

Taxpayers here and across the nation appear to be embracing offers from tax preparers like H&R Block and Jackson Hewitt of "tax refunds fast." But critics say many people don't realize when they sign up to get their tax refunds in just a day or two that they are agreeing to take out short-term "refund anticipation loans" -- for which they are charged interest rates of 70 percent or more.

In 2002, the last year for which figures are available, consumers nationwide paid a total of $1.14 billion in refund anticipation loan fees, in addition to $406 million in electronic filing fees on those same tax returns, according to the Consumer Federation of America.

The average amount of those tax refunds: $2,043. The average total loan fees to get those refunds immediately: $90.

About 12.7 million refund anticipation loans were taken out during the 2002 tax season, and, boosted by ads offering tax refunds fast, they appear to be growing in popularity, according to the Consumer Federation, a Washington-based advocacy group.

Tax firms such as H&R Block and Jackson Hewitt borrow money from banks to make short-term loans for the amount of a taxpayer's refund, then are repaid plus their fees when the tax-preparer gets the taxpayer's check from the IRS. The firms say they are just giving people what they want and acting entirely within the law.

Critics, though, say they are taking advantage of the poor, who might not be savvy enough about financial matters to realize they are paying annual interest rates of 70 percent or more -- in some cases, 700 percent -- so they can get their tax refunds within a day or two, rather than wait the two weeks or so it typically takes if they ''e-file,'' or longer if they file by mail.

[Condor51]

Every year sob stories like this get printed and YET idiots keep looking for their 'free money' fast with zero consequences, like INTEREST for the loan they are taking out.

And it's always the evil tax return companies fault for 'taking advantage' of the poor simpleton (as implied here) minorities - GAG!

[TommyDale]

"The average amount of those tax refunds: $2,043. The average total loan fees to get those refunds immediately: $90."

The way I calculate the APR is that if they pay this 4.4% amount for gaining two weeks in refund time, the annualized amount over a full year that "interest" charge would be over 114.53%. This rip-off should be illegal.

[Extremely Extreme Extremist]

I paid only $7.95 to have both my state and federal taxes done electronically (which I did myself) and got the refunds in 5 business days.

[Glenn]

What's a refund?

[mtbopfuyn]

If Mary hadn't bought those new Prada shoes, she wouldn't have had a credit card bill. She deserves what she gets for not reading the fine print.

[<1/1,000,000th%]

People are making a lot of interest free loans to the Feds.

[familyofman]

These early refunds and check cashing establishments are some of the worst leeches in society. The community development bank I help start targeted these practices. We offered tax preparation services for $50 dollars and "quick refunds" at an actual APR of 8.0% on the loan - the electronic filing refunds were almost always received within 2 weeks. In addition to the tax services we provided basic financial education for both the parents and children at all the local elementary and middle schools in the area (including 12 charter schools).
Education is the key to stopping rip-offs, not legislation.

[kevkrom]

I paid only $7.95 to have both my state and federal taxes done electronically (which I did myself) and got the refunds in 5 business days.

Exactly. I only filed federal taxes electonronically, mailed in the state, but in less than two weeks I had both refunds directly deposited into my bank account.

[xrp]

This rip-off should be illegal.

No matter how hard you try, you cannot make stupidity illegal.

[cuz_it_aint_their_money]

I paid only $7.95 to have both my state and federal taxes done electronically (which I did myself) and got the refunds in 5 business days.

Let's see:
Local taxes: Filled out their paper form and mailed in - Cost: one 39 cent stamp (and about 15 minutes of my time.)
State taxes: Filed online - Cost, zip-zilch-nada (and about 1 hour twiddling my thumbs waiting for the website to play catch-up)
Federal taxes: Cost - Taxcut Software $9.95, two 39 cent stamps (and about 2 hours.)

Total costs: $11.12 and about 3.25 hours.

End result: reclaiming my own money (I refuse to call it a refund) from the Feds $750.00

[Alberta's Child]

Education is the key to stopping rip-offs, not legislation.

That's an excellent point. A fool and his money will soon be parted.

One of the biggest problem this country faces is one that nobody wants to talk about -- How is that portion of our population that is dumber than bags of rocks supposed to survive in a society that becomes increasingly complex by the day?

[familyofman]

"How is that portion of our population that is dumber than bags of rocks supposed to survive in a society that becomes increasingly complex by the day?"

No easy answers as far as I can see. Especially when a lot of the people that fit the 'dumber than a bag of rocks' label come from a long line of 'rocks'. This is even more pronounced when you limit the topic to finances. There seems to be a growing, and seemingly happy, underclass in the US that will always be the targets of predators. Predators don't go after the strong in the herd - they pick off the weak and disabled.

[IYAS9YAS]

It's funny. They want the money in two days. I e-filed and got my (paltry) federal refund in less than 2 weeks. Of course, I also beat the crowd in that I had mine in and done by Feb 1. I owed the state a whopping three bucks. I love playing my deductions right.

[TXBSAFH]

It is an interest free loan some people give Uncle Sam out of their pay checks every pay day.

[TiCobra]

The people who use the Refund Anticipation Loans know ahead of time that there is an extra charge for these Rapid Refunds. The amount and the APR is clearly marked as an extra fee.

There are several reasons that people use the Refund Anticipation Loans. The first reason is that they generally do not have a bank account for the IRS to directly deposit the money into. This means that it will take a couple of weeks longer to get their refund.

Also, they typically do not have the money to pay for the tax preparation fee. They therefore have to have it deducted from the refund.

I think that education is the key. Schools should spend more time on money management instead of some of the time wasters they spend their time on.

However, there are many things that people stupidly waste their money on, like check cashing businesses, renting expensive furniture and big screen tvs, etc. You can't outlaw stupidity.

[dakine]

"What's a refund?"

I agree...something is wrong with a system where I write a check come April 15th...

[Modernman]

The average amount of those tax refunds: $2,043. The average total loan fees to get those refunds immediately: $90.

Interesting. My employer does a very good job of deducting the right amount from my salary. I only get a small amount back every year since they are so accurate. A lot of people get excited when they get back a large tax refund from the government. They shouldn't be. You're better off getting the money up-front than giving the government an interest-free loan.

[Modernman]

No matter how hard you try, you cannot make stupidity illegal.

A very good argument can be made that these types of services violate usury laws. They're illegal in some states.

[yankeedame]

And it's always the evil tax return companies fault for 'taking advantage' of the poor simpleton (as implied here) minorities - GAG!

Too true, and yet isn't it strange you never see these kinds of stories about dumb clucks who play the lotto, or the state governments that take advantage of them?

[Centurion2000]

The way I calculate the APR is that if they pay this 4.4% amount for gaining two weeks in refund time, the annualized amount over a full year that "interest" charge would be over 114.53%. This rip-off should be illegal

Don't want to get ripped off ? Don't take out the refund anticipation loan.