A Taxing Situation
Activists and Outraged Taxpayers Try to Get the Word Out About Refund Anticipation Loans
"We are a one-income family, and our taxes are pretty straightforward," Zantt says. "But the tax laws are so complicated now, and I didn't want to have any problems with the IRS."
As is the case with many families who live paycheck to paycheck, Zantt was anxious to receive her refund immediately and thought little of the loan fees she paid. "I was OK with the fee because we needed the money right away to pay off some bills," she says. But when Zantt received her check from H&R Block the next day, she was shocked to learn that the fees she had paid for her refund loan totaled $210--the equivalent of a 51.57 percent annual percentage rate on what is essentially a two-week loan.
"I didn't see [how much] the interest rate was until I received the check," Zantt recalls. "I understood they would deduct fees, but I didn't realize that the interest rate was so high. I just never thought of myself as being ripped off because I thought the difference was payment for their services. But it's like they're ripping you off because [out of] my $980 refund, I only got $770."
Zantt is not alone. According to a January 2004 report published by the National Consumer Law Center and the Consumer Federation of America, more than 12.7 million taxpayers took out RALs--roughly 10 percent of the 130 million tax returns filed in 2002. While fees vary depending on the complexity of the return and the amount of the RAL, on average borrowers pay $90 in administrative and setup fees in addition to tax-preparation fees. At a glance the fees may seem minimal and well worth the price for a quicker return. However, the study discovered that the various fees charged by commercial tax preparers in 2002--things like a $15 prepaid finance charge, $24.95 account fee (necessary for direct deposit of refunds to the lending bank), $27 peace-of-mind fee (guarantees help from an H&R Block specialist in case of an audit), $38 administration fee (discontinued in Maryland for 2004)--added up to a staggering $1.14 billion deducted from taxpayers' refund checks.
The study estimates that in 2004, RAL borrowers will pay annual percentage rates (APRs) of 70 percent for a $5,000 loan, up to 700 percent for a $200 loan. In other words, to receive a RAL for $2,100, consumers will pay an average of $250 in fees, which equates to an APR of 182 percent.
"[H&R Block] says the fee is only $15 or so, but they charge a fee for filing, and then a bank processing fee, et cetera," says Lisa Donner, director of the nonprofit Association of Community Organizations for Reform Now's (ACORN) Financial Justice Center in Brooklyn, N.Y., which makes it a point to condemn the rapid-refund loan process every year around tax time. "The problem is most people don't calculate the fees as an interest rate."
More alarming to consumer-advocacy groups is the transfer of wealth from the needy to private corporations. The National Consumer Law Center/Consumer Federation of American study concluded that recipients of the Earned Income Tax Credit, a tax refund for families who earn less than $34,000 per year, made up 36 percent of all those who received RALs in 2002--despite the fact that EITC recipients make up only about 15 percent of the taxpaying population. The study calculated that roughly $1.59 billion was paid to commercial tax preparers by those EITC families.
"The EITC is supposed to help people," says Len Burman, a senior fellow at the Urban Institute and co-chair of the Tax Policy Center in Washington. "So it is kind of disconcerting to see private sector coming in and taking the money they need for food, rent, and health care."
Tax preparers have come under increasing pressure from advocacy groups, consumer-protection agencies, and customers to reform RAL practices. In January, ACORN staged events at H&R Block offices in 55 cities to make low-income citizens aware of the high fees and interest rates that come with RALs. ACORN urged people who attended its events to take advantage of free tax-preparation offers from consumer groups rather than use commercial tax preparers. And in 2002, the New York City Department of Consumer Affairs filed suit against H&R Block over the manner in which the company markets its tax-prep products. Investigations conducted by the department from the mid-'90s through 2002 found that H&R Block consistently misled consumers and failed to provide accurate information about the RALs. The department also revealed that RALs were often the first and only product the company offered to its lower- income tax filers.
"H&R Block concentrates their offices in low-income areas and offers a different set of services than those in upper-income areas," ACORN's Donner says. "In New York City, the Department of Consumer Affairs found tremendous problems with people being pushed into RALs."
Zantt says she feels she was misled when she filed her taxes with H&R Block.
"They explain [the fees] to you, but it's all on the computer and it's all in small print," she says. "And they don't tell you verbally that that's what they're charging you. They don't tell you about the interest rate. They show you your refund and then calculate the fees and ask you if that's OK. And what are you supposed to say when you need the money?"
H&R Block refutes these charges, saying that RALs are just one service the company provides. Like any other service that offers convenient, expedited delivery, company spokespeople say, there are higher fees associated with RALs. The company says it informs consumers about both its free tax-filing options as well as its fee-based products.
"At H&R Block we can't make the final decision for the consumer, and neither can the advocacy groups," says Denise Sposato, H&R Block's U.S. tax public relations manager. "We go above and beyond the requirements of the law to make sure that they understand [the RAL is] a loan that needs to be paid back, and that if they can wait for the money, it will be cheaper and that they will pay a certain amount in fees to receive the money quicker than they would by waiting for a mailed check."
In addition, the company's 100 percent satisfaction guarantee permits disgruntled customers to return RAL checks that have not been cashed and have the transaction, including all charges and fees, reversed. H&R Block also informs low-income customers about other government programs they may qualify for, such as food stamps, free school lunches, or financial advice.
"We're the largest e-file and tax-preparer corporation in the country," Sposato says. "We do make efforts to educate our consumers so they can make the best choice for them. Last year, we got nearly $10 billion of the $36 billion distributed in [Earned Income Tax Credits] for our clients."
Though the National Consumer Law Center/Consumer Federation of America report commended H&R Block for its improved disclosure practices, opponents of RALs argue the issue is not only disclosure, but also the high fees charged to those who can least afford them.
"What this is about from our perspective is that it's just plain wrong," Donner says. "The rate they charge to loan people their own money is so high. If you're in a position that you must have the money sooner, then you especially shouldn't be charged more to get the money you need."
ACORN admits that it has targeted H&R Block for criticism because the company controls between 40 percent and 50 percent of the commercial tax-prep market. "If they changed their practices, that would help to change the market drastically," Donner says.
Consumer groups believe that federal and state laws are needed to better regulate the RAL industry.
The authors of the National Consumer Law Center/Consumer Federation of American study, Chi Chi Wu and Jean Ann Fox, are critical of the IRS's role in enabling RALs. The IRS is under a tight deadline from Congress to achieve an 80 percent electronic-filing mandate by 2007. To reach that goal, the report's authors say, the agency has turned to commercial tax preparers. The IRS allows the companies to issue RALs, the report says, "to bolster electronic filing." The IRS' policy is to allow its free e-file partners, such as H&R Block, to promote fee-based services while completing customers' tax returns. Though the IRS permits companies to push their products, the agency's Web site warns consumers against using RALs and other similar services.
"We don't endorse any product or service offered by tax-preparation sites," says IRS spokesman Jim Dupree. "If you use e-file and combine that with a direct deposit, you can get your refund in two weeks or less, and maybe another week to receive a check by mail. . . . Consumers don't need to buy these add-on products for preparing or e-filing their tax return for free. As long as they meet the company's e-file criteria, they [can] simply file their return for free. They're under no obligation to buy any additional services."
The fact that so many people are being drawn into using paid tax-prep services has caught the attention of some lawmakers in Congress. Two bills, both in committee since April 2003, have been introduced in the House and Senate with sections that specifically address RALs and seek to protect consumers from unreasonable tax-preparation fees.
"The provision dealing with tax-refund anticipation loans is to help people who are being taken advantage of by unscrupulous entities," says U.S. Rep. Ben Cardin (D-3rd District). "Too many Americans are paying exorbitant interest rates for these types of loans and are not even aware that they are doing so."
ACORN, however, says the legislation pending in Congress is weak. The group is demanding regulation of the commercial tax-preparation industry.
"Right now there's not a piece of legislation in Congress that directly addresses this and industry regulation," Donner says. "What does exist has mild language and is focused on free tax preparation. So it's up to states to regulate tax-preparation operations."
H&R Block officials say that updating and improving the government's e-file technology so that consumers can get their refunds faster would help eliminate the market demand for RALs.
This year, H&R Block in conjunction with Bank of America has introduced a pilot program in Washington, D.C., Fresno, Calif., and El Paso, Texas, in which tax refunds can be deposited into Visa debit-card accounts. The plan offers people without bank accounts the opportunity to receive a Visa card with a personal identification number within five to seven days of filing a tax return. The cards can be used at ATMs or stores where Visa is accepted. The cards are subject to a $24.95 one-time fee, and after that only standard debit-account fees, such as overdraft and withdrawal fees, apply. If successful, H&R Block believes the new program would be a better alternative to RALs for most customers, and the program could help the company's low-income clients establish a positive relationship with the banking community.
For Marianne Zantt, though, any hope of a positive relationship with a company like H&R Block is dashed. This year, she'll be filing her taxes with a free tax-prep service instead.
"I would have continued to go with them if I hadn't learned what the APR was on the loan," she says. "But now since I know about the free places, I'll go there from now on."
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