Ramos: Beware of So-Called Instant Tax Refunds

Low-income taxpayers may face 700 percent interest rates on refund anticipation loans
January 13, 2006

January is the time of year when Americans start filing their taxes and millions of Americans expect refund checks. Many want their money quickly to pay bills and daily expenses. To get a fast turnaround, many low-income Americans will turn to refund anticipation loans called RALs to receive all or part of their refund a few weeks earlier than expected.

But RALs are not tax refunds. They are high-cost, short-term loans against taxpayers’ anticipated refunds and tax services charge exorbitant interest rates for them. Interest charges can range from about 70 percent for a loan of $5,000 to over 700 percent for a loan of $200. In addition, if one’s anticipated refund is less than expected, the consumer still has to pay the total RAL amount.

Tax preparation companies that promote these loans prey on the poor and convince unaware consumers to unnecessarily borrow against their own money. Over half of refund anticipation loans are taken out by an estimated 7 million low-wage families who receive Earned Income Tax Credits.

According to the Consumer Federation of America, RAL fees, tax preparation fees and check cashing cost consumers a total $1.75 billion. These fees markedly reduce the refund amount that working families count on, transferring this money instead to multi-million dollar corporations. That is why I support legislation that will protect taxpayers and prevent them from falling victim to these loans (A.1366).

The measure requires that RALs must be clearly advertised as loans not refunds. The tax preparer must also explain that an RAL is an option not a requirement and that it is a loan. In addition, the preparer has to provide the amount of the refund without the RAL and when one can expect it.

Be patient and you will get your full refund. In addition, wage earners who want their refund quickly should be aware that New York State has increased its pace of processing tax returns. What used to take two months now takes about five days.

If you file electronically or e-file, you can receive your refund in half the time and not pay interest rates or other fees. For information on electronic filing, visit the Internal Revenue Service Web site at www.irs.gov or the State Department of Taxation and Finance at www.tax.state.ny.us.