Elizabeth Robinson of Newport, Tenn., a 40-year-old single mother with one grown daughter and two at home, worked as a housekeeper last year. When she filed her taxes last month, she used a nationally known commercial tax preparer and qualified for the Earned Income Tax Credit available to families with incomes under about $35,000.
Faced with an unusually high electric bill of more than $80, Robinson opted for a refund anticipation loan, or RAL, which offers a tax refund within a few days and is secured based on a taxpayer's expected refund, including the EITC, which reduces the amount of tax a filer owes and may be returned with the refund. And that, she said, turned out to be a mistake.
At first, she was told it would cost $172 up front to have her taxes filed and mailed in with the RAL, but after she threatened to leave, the company knocked it down to $144 plus a preparer's fee and bank fee, she said. Her refund, which would have been $794, ended up being $609.
"I was vulnerable, and I was at their mercy," Robinson said, adding that she had used RALs in the past but never paid that much. "I wouldn't have done that if I didn't have to get my electric bill paid … but the jacking up of the fees, they're taking advantage and it's not right."
Robinson is not alone. Experts say those most likely to use RALs are those who can least afford them, and they either do not know about free tax-assistance programs or don't have bank accounts that would allow a quick direct-deposited refund from e-filing with the Internal Revenue Service.
According to a new report by the Children's Defense Fund, two out of three people qualifying for the EITC use commercial tax preparers for their returns. It also found they paid $690 million in loan charges in 2003, which rises to $2.3 billion if the cost of commercial tax preparation is included. IRS figures show that 79 percent of RAL recipients in 2003 had adjusted gross incomes of $35,000 or less, according to the CDF report.
"It's a multimillion-dollar industry, and they target low-income filers because those are the people who live paycheck to paycheck," said Rachel Cooper, research coordinator for the Children's Defense Fund-New York.
"So they obviously know they're the ones most vulnerable for taking these. Middle-income families don't really need a RAL because they can wait [for a refund]," Cooper said. "For low-income families, they think, 'Oh, I can get my money immediately.' A lot of people don't really realize what they're getting, or more so that they could get their money from the IRS now just by e-filing."
Cooper said it can be hard to get the full picture about RALs by looking at commercial tax preparers' literature. "A large percentage of people don't realize that they're taking a loan, and with that they don't realize the consequences of taking a loan," she said.
Alan Berube, a fellow in urban policy at the Brookings Institution who has studied RALs, said data from 2003 shows that between 35 percent and 40 percent of filers who qualified for the EITC used the high-priced loans. "The use of refund anticipation loans is mainly among low-income filers," he said. "High-income filers don't use this product at all, really."