When Shawanna Boyd turned 18, her friends told her that as a working single mom, she'd have to file her taxes every April. Everyone she knew went to H&R Block, so when Boyd got her W-2 in the mail that year, she drove to the franchise nearest to her home in Elmont, Long Island, and paid a tax preparer to do the paperwork.
Except for the four years she spent in the Army as a weapons mechanic, Boyd, now a 27-year-old medical assistant who earns $10 an hour, has gone to H&R Block to get her taxes filed. Most years, Boyd has also needed help from H&R Block to claim an Earned Income Tax Credit  for working families who make less than $35,000 a year, which has helped her buy new shoes, snacks and school supplies for her son.
And most years, as the tax preparer finishes up, Boyd is asked how she'd like to get her refund. Usually, Boyd chooses to get her money through something called a "refund anticipation loan ," which allows her to get a check within forty-eight hours instead of waiting the four to six weeks she was frequently told it would take otherwise.
Though Boyd had some idea that getting her money back fast meant taking out a loan, she didn't realize until recently that she was paying about $130 extra in fees and interest so that she could pick up her refund check just ten days earlier than if she had filed her taxes electronically.
"I didn't know it was costing more than it was supposed to," Boyd says. "All of my friends go to H&R Block, so I thought it was normal. But then other friends told me it was only costing them $50 to get their taxes done. I was like, That's kinda crazy. I shouldn't be paying more than $100 more. I could have used that money to pay bills, the car insurance, buy food, a whole number of different things."
Consumer advocates say that Boyd's experience is emblematic of the problem with refund anticipation loans, high-interest financial products whose terms are not always spelled out clearly and are invariably most attractive to the working poor.
"Refund anticipation loans are directed toward the poorest of the poor, so what ends up happening is that people who can least afford to give up, say, $114 for a loan on their own money for ten days are targeted for these products," says John Roddy, a Boston attorney who has filed a class action lawsuit in Ohio against H&R Block over the loans. "This is the kind of product that makes absolutely no economic sense for the recipient, but it makes huge economic sense for the provider."
It's undisputed that refund anticipation loans tend to be taken out by low-income individuals. According to the Internal Revenue Service, 78 percent of the people who filed for a refund anticipation loan in 2004 had an income of $35,000 or less. The IRS also reports that 56 percent of those who took out the loans qualified for the Earned Income Tax Credit, which means that about $700 million was depleted from the federal anti-poverty program in 2004.
A November 2005 survey conducted by the Consumer Federation of America  also found that the loans tend to be taken out by minorities with less formal education. According to the organization's research, more than 50 percent had a high school education or less, and one out of seven, or about 15 percent, are African-American.
Sometimes billed as "instant money" or "rapid refunds," refund anticipation loans are offered by tax preparers like H&R Block and Jackson Hewitt that partner with financial institutions like HSBC or BankOne, so that the taxpayer can get an advance on his or her refund. Consumers are typically charged an administrative fee by the bank to set up a "dummy account" so that it can collect the refund directly from the government, as well as what can translate into triple-digit annual interest rates. For Boyd, costs for the loans generally totaled between $100 to $150 for a refund check of about $2,000.
The loans became popular in the 1980s with the introduction of income-tax e-filing, and they have become a lucrative part of the tax-preparation business. In 2004, the last year that statistics were available from the IRS, about 12 million American taxpayers forked over  $1.24 billion in fees related to refund anticipation loans. H&R Block made about $183 million on the loans in 2005, according to papers  it filed with the Securities and Exchange Commission; Jackson Hewitt, meanwhile, reaped about $61 million in profits from the loans in 2004, according to company documents .
A spokesperson for H&R Block says that refund anticipation loans can be a valuable service to some of its customers. "The biggest benefit is speed," says company spokesperson Linda McDougall. "Some customers want their money right away, and they don't want to wait two weeks. And because some clients don't have checking accounts, so they don't have an account for an automatic deposit from the government, this is another option."
A 2005 report by Georgetown University , which was partially funded by Jackson Hewitt, also found that for the taxpayers it surveyed, refund assistance loans were primarily taken out by low-income individuals for whom "there are plausible circumstances in which the net present value of a refund anticipation loan would be positive and, therefore, utility increasing." (A spokesperson for Jackson Hewitt did not return phone calls.)
Though the debate over whether refund anticipation loans are outright exploitative continues, consumer advocates have challenged tax-preparation firms over advertising and disclosure of the loans; according to a National Consumer Law Center  report, 70 percent of the borrowers the organization surveyed didn't know that they had, in fact, taken out a loan. (In contrast, the 2005 Georgetown University report found that the borrowers it surveyed were informed about the terms of the loan, made a conscious decision to take the loan and were generally satisfied with it).
But in the past fifteen years, H&R Block, which handles the most refund anticipation loans in the country, has faced more than twenty lawsuits related to advertising and disclosure of the loans. For the most part, H&R Block has prevailed in court, though recently, a number of class action suits representing millions of taxpayers are nearing settlement for multimillion-dollar sums, and a suit filed in an Illinois district court is set to go to trial in May. These suits--some of which have a long, tortured procedural history--coupled with advocacy by groups such as the Children's Defense Fund  and ACORN  have led to some changes in how H&R Block does business. In recent years, the company has, for example, instituted a five-step process  to help its clients understand the terms of the refund anticipation loan, and it has dropped some of its administrative fees, among other reforms.
Still, lawsuits continue. In February the California Attorney General's Office filed a suit  against H&R Block over its advertising and disclosure practices for the loans. A spokesperson for the Attorney General adds that the office has also been investigating other tax-preparation companies, including Jackson Hewitt, for similar violations.
Lawmakers have also tried to curb the use of these loans. Three federal bills were introduced last year: One measure called for a ban on the loans for those who can claim an Earned Income Tax Credit, and two others recommended better national oversight of the loan providers. Political observers say, however, that given the focus on more pressing issues such as Iraq and immigration, these bills are unlikely to move anytime soon.
Some states have also attempted to regulate the loans. In 2005 Connecticut became the first state to adopt an interest rate cap of 60 percent on refund anticipation loans (a bank has since sued the state, arguing that the law is a violation of the National Bank Act). Eight additional states, as well as New York City and the Village of Hempstead in Long Island, also currently require improved disclosure of the loans. And some regulatory bills, such as the one introduced  earlier this year in New York by Assemblyman Ruben Diaz, are pending.
Consumer advocates say that it can be difficult to discourage people from taking out a refund anticipation loan. "Tax season is the one time of year that some people get a big check," notes Chi Chi Wu of the National Consumer Law Center. "Human nature is to want that money as soon as possible, and the tax-preparation industry encourages that. We say, Go to a free tax-service center and wait a week so you can get a couple hundred dollars more. But some people just don't want to do it. It's like telling people to eat healthy."
Besides, tax-preparation firms have already begun crafting new loan products to peddle to low-income customers. In January, Jackson Hewitt introduced a Money Now Loan  to enable clients to get a refund assistance loan based on their last paycheck--even before they receive their W-2 in the mail.
"Don't wait for your W-2," one Jackson Hewitt ad beckons. "Get up to $1,900 with a Money Now Loan in minutes. Then come back with your W-2 to file your return."