Christmas was approaching, money was tight, and the mom wasn't sure how she'd buy gifts for her two kids. So she went to a national income tax preparation company in Holyoke that was offering a deal to cash-strapped taxpayers: if she brought in her pay stubs, they'd estimate her tax refund for the year, then lend her part of it.
The mother appeared due a healthy refund from the government. A single parent earning $25,000 a year, she qualified for the earned-income tax credit and other credits that would put about $5,000 back in her pocket.
The company lent her $1,000, charging her a $125 fee for the service. The deal also required her to return to the company the following spring to have her tax return prepared for another $250. Still crunched for money, the mother then accepted another loan from the company, which got her the remaining amount of her refund until the government check arrived, for an additional $125.
Her final bill: $500—an awful lot of money for anyone to pay, especially a low-income family. Worse, it was an unnecessary cost, say advocates who object to what they call predatory behavior by tax-prep services that target low-income working people.
At issue are refund anticipation loans, or RALs, in which tax prep companies (big names like H&R Block, Jackson Hewitt and Liberty, and smaller, storefront operations) offer clients immediate loans based on their expected government refunds. In a survey of several companies, the non-profit National Consumer Law Center found RAL fees ranged from about $60 to $140; that's on top of the couple of hundred dollars the client pays to have her return prepared. Because of the short-term nature of these loans, their APRs are staggering: from 50 percent to 500 percent, according to NCLC.
"These loans get refund money into the hands of the taxpayer immediately, but at a very high cost," said Dave Plaut, asset development coordinator at Community Action of the Franklin, Hampshire and North Quabbin Regions. "The problem is, they're taking money from the people who are least able to afford it."
According to NCLC staff attorney Chi Chi Wu, 9 million taxpayers—one in 14—got RALs in 2006; 85 percent of them had incomes of $35,000 or less. Taking these loans is risky. If there's a problem that delays their tax refunds, Wu said, "…they're still on the hook for that loan, and they're going to have to pay it back. And most people don't have two or three thousand dollars lying around."
There are better options, such as Volunteer Income Tax Assistance, or VITA, programs, which are supported by the IRS. The programs are funded and run by anti-poverty agencies, which hold clinics where low-income taxpayers can have their returns prepared for free by IRS-certified volunteers. The returns are filed electronically, meaning state refunds can arrive in a few days, and federal refunds in a week to 10 days.
Tim Clegg runs a VITA program at the Valley Opportunity Council of Holyoke and Chicopee, where he met the single mom whose story is recounted above. This year, his program expects to process about 1,000 returns. "These are folks that would have paid $150 or $200 for a simple return," Clegg said. "That ends up leaving a substantial amount of money in the community, rather than passing it on to a corporate franchise that might not really have their hearts in the community. What enables these national corporations to sell these services … is the financial stress that working poor families are under."
To counter that, VOC plans to offer more financial services to clients throughout the year—like budgeting help, or advice to make sure they're not having too much withheld from their weekly paychecks—to avoid the crises that make them vulnerable.
For information on local VITA programs, contact Valley Opportunity Council (533-0214); Community Action of the Franklin, Hampshire and North Quabbin Regions (376-1175); Springfield Partners for Community Action (263-6500); or Springfield ACORN (737-0169).
