Experts: Beware of Tax Refund Anticipation Loans
March 14, 2005 — -- 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.
Related Stories
ABC News Live