NJ Division of Consumer Affairs: Beware of Costly Tax Refund Loans

Such quickie refund loans are sometimes falsely advertised as “instant” or “same day” tax refunds.  The State Division of Consumer Affairs has taken enforcement action against tax preparers who engaged in this type of deceptive advertising.  Even if they are advertised honestly — as refund anticipation loans (RALs), refund anticipation checks (RACs), or special lines of credit — consumers should be aware that they may come with hidden fees and high interest rates.

A recent report by the National Consumer Law Center and Consumer Federation of America notes that RALs may be riskier and more expensive than before.  Following widespread criticism, federally regulated banks no longer offer RALs.  Today, the RALs that exist are offered by payday lenders and other non-bank businesses.

In addition, some tax preparers are offering a so-called “alternative” to RALs in the form of “buying” the consumer’s anticipated tax refund — essentially a loan in disguise.

Refund anticipation checks (RACs) are a new emerging product.   An RAC enables the consumer to pay for tax preparation fees out of his or her IRS refund, and provides the speed of an IRS direct deposit to consumers who don’t have bank accounts — but they also generally come at additional costs.  With RACs, the tax preparer works with a bank to open a temporary account for the consumer.  The bank arranges for the IRS to direct deposit the refund into the temporary account, then issues a check or prepaid card to the consumer, and closes the account.  Banks generally charge at least $30 for this service, and the tax preparer may charge add-on fees of up to several hundred dollars.  RACs may represent a high-cost loan of the tax preparation fee, with an APR equivalent to 260 percent.

“Quickie loans with hidden fees and high interest rates are often marketed to the working poor, and ultimately serve to deplete their assets, making it even harder to get by on a limited salary,” Eric T. Kanefsky, Acting Director of the Division of Consumer Affairs, said.  “A better option is to take advantage of free tax preparation services available from the IRS, or non-profit groups such as the AARP, for those with lower incomes.  These volunteer services should help you apply for the Earned Income Tax Credit or any other credits to which you may be entitled.  Some free services even help their clients open bank accounts in order to get faster refunds with no fee.”

Tax preparers who offer RALs or similar products are required to advertise them truthfully. They are prohibited from requiring a client to enter into a refund anticipation loan and must be transparent about the costs involved. Tax preparers must also provide itemized statements of service charges, including charges for tax return preparation, electronic filing, and providing or facilitating the RAL.

Consumers who consider obtaining an RAL or similar product, despite the costs, should find out how long it will take to get their refund if they file their returns with the IRS without signing up for an RAL. Those who choose to obtain an RAL should carefully read any loan documents, especially the fine print, before signing. Consumers who have signed up for an RAL without receiving full disclosure of the terms and conditions may file a complaint with the Division of Consumer Affairs at 800-242-5846.

This article appeared in print on page D14 of the March 6th, 2013 edition of Hamodia.