States crack down on high-interest tax loans.
If you want your tax refund right away this year, be prepared to pay. For years, consumer advocacy groups have warned against so-called "instant" or "same-day" refunds. The reason: these refunds are actually bank loans, and they often bring exorbitant fees. In some cases, that means a mind-boggling 1,300 percent when calculated like a credit-card annual percentage rate.
With tax season under way, advocates are once again warning consumers against them and state officials are pressing for better disclosure on the part of tax preparers.
In mid-February, the Alabama state senate voted 25 to 0 to create the Alabama Board of Individual Tax Preparers, which would require commercial tax companies to disclose costs on the arrangements underlying instant refunds as well have their preparers pass a test.
Before that, New Jersey cited 38 companies for false advertising in connection with "same-day refund" postings purporting to offer instant IRS refunds – which are actually high-interest loans.
Michigan lawmakers are also readying a bill that would force disclosure of interest rates and fees.
The controversy surrounding what tax preparers call "refund anticipation loans" is not new. In 2006, California Attorney General Edmund G. "Jerry" Brown sued major tax preparers to stop marketing the loans as refunds. In January, he announced a $4.85 million settlement with tax giant H&R Block. Another major tax preparer, Jackson Hewitt, settled in 2007. Other, smaller suits have been settled in recent years.
Despite the eye-popping rates, nearly 1 in 15 taxpayers opted for an early refund in 2007 – a total of $900 million spent to get paid an average of 10 days early, according to Americans for Fairness in Lending, a nonprofit advocacy group in Boston. The majority of those were lower-income families who received the Earned-Income Tax Credit, the group says.