In an age of instant gratification, think carefully about taking a high-priced tax refund anticipation loan (RAL), state and city consumer advocates warn.
With electronic filing and direct deposit, most taxpayers can get their money refunded in as little as eight to 10 days, tax officials say. And that, says Brad Maione, a spokesman for the New York State Department of Taxation and Finance, means the “average taxpayer may not really need a RAL.”
However, RAL providers say the product is vital for people who need cash fast.
“We don’t encourage our customers to take them,” said John Hewitt, CEO of Liberty Tax Service. “However, many people who live paycheck to paycheck and have no credit certainly need them.”
Still, Maione warns that the taxpayer ends up losing most of the refund owing to a high interest rate or by using a similar product, the refund anticipation check (RAC).
People taking these products tend to have low incomes, are young and are often single parents. They generally receive a tax refund of between some $1,500 and $3,500, says a US Treasury Department report.
But people using RACs and RALs pay plenty for the convenience.
They can pay rates as high as 264 percent on the loan, according to John L. Stancil, an associate professor of accounting at Florida Southern College in Lakeland.
So why would someone take a RAL while in the process of receiving a big refund check, a refund that amounts to a zero percent loan the taxpayer extended to the government?
Possibly the reason is an immediate cash need.
These loans can be deposited in an account in one or two days, as opposed to an electronic turnaround of eight or nine. Another reason is often low-income people don’t have the cash to pay tax preparation fees and they use RALs to foot the bill, according to the Treasury Department report.
But there’s another reason for the popularity of these loans, a city official contends. RALs and RACs are sold, not bought, says New York City Consumers Affairs Commissioner Jonathan Mintz.
“Tax preparers often have to lie about these high-interest loans to sell them,” Mintz wrote in a press release.
Liberty Tax Service’s Hewitt replied, “We do everything to talk people out of using these. But some people need them.”
Nevertheless, Mintz contends that tax preparers are using “fraudulent techniques” to induce people to use these “predatory” products.
“We know that because we are finding such a high degree of violations,” Mintz told The Post.
A spokeswoman for H&R Block, mentioned in the Treasury Department report, said that Block no longer offers these products because its bank terminated its RAL agreement as a result of regulatory action by the Office of the Comptroller of the Currency (OCC).
However, Block officials defended RAL and RAC products. “As a result of the OCC’s decision,” said Alan Bennett, H&R Block’s president and CEO, announcing the termination in December, “millions of taxpayers will be deprived of credit, or they will be forced to use higher-priced alternatives.”
Block said it is working on coming up with new products for these customers.
