Abstract

The Cruelest Month

The author reports that tax preparation services are marketing tax refund loans with high interest rates and large fees to low-income Americans. The advertised cash is really a bank loan made against the expected return, carrying staggering annual interest rates that can range from nearly 90 percent to 1,800 percent, including fees. In the trade it's called a "refund anticipation loan," a RAL. More than half the people who get RALs have incomes low enough to qualify for the federal earned-income tax credit, one of the last shreds of the social safety net. Taxpayers spent an estimated $1.5 billion for RALs and related fees in 2002. H& R Block, America's best-known tax preparation service, got a nice piece of the action. It's a well-thought-out and--thus far--perfectly legal scam, in which the tax professional calculates the amount of the customer's refund and offers an instant refund, which turns out to be a loan provided by a collaborating bank. The customer gets a check for the amount of the refund, all right, but minus a healthy percentage deducted for interest along with an average $32 fee to the tax preparation service for arranging the loan and another $25 fee for the lending bank. National ACORN organizer Lisa Donner says customers coming in for tax preparation are given deceptive information to deter them from pursuing less expensive options than RALs, and many, like Hylton, are unaware that their up-front cash is a loan.