Considering a Refund Anticipation Loan?
Consider this: The fees and charges of the RAL actually add up to an annual interest rate of more than 37 percent.
As the clock winds down to the April 17 deadline for filing State and federal income tax returns, the California Board of Accountancy (CBA) is warning consumers about Refund Anticipation Loans (RAL).
An RAL allows taxpayers to borrow against an anticipated tax refund. These loans are offered by tax preparers, online tax preparation services, and sometimes certified public accountants (CPAs) in conjunction with preparing tax returns. Frequently, these loans are described as “instant tax refunds,” which may give the impression the loans come from the California State Franchise Tax Board (FTB) or the Internal Revenue Service (IRS). In reality, these are short-term loans, often with hidden costs attached. Because consumers are not used to calculating short-term interest, these loans may sound appealing at first glance.
On January 3, 2007, the California Office of the Attorney General (AG) announced that tax preparation firm Jackson Hewitt Inc. agreed to pay $5 million to settle a suit alleging violation of State and federal laws in marketing high-cost RALs. In a news release announcing the settlement, then-Attorney General Bill Lockyer said, “Jackson Hewitt made a lot of money by pushing customers to take out expensive loans rather then encouraging them to wait a couple of weeks to get their refunds from the IRS for free. In the process, they deceived consumers and took money from low-income families who could least afford it.”
According to the AG’s Office, some Jackson Hewitt customers had loan fees and charges that added up to a more than 200 percent annual interest rate. Jackson Hewitt is the nation’s second largest tax preparation firm. The AG’s office also sued tax-preparation firm H&R Block in a similar case. That case is pending in San Francisco Superior Court, the news release said.
CPAs offering RALs are required by California Board of Accountancy regulations to make specified written disclosures to consumers, including the dollar amount the CPA will receive for facilitating the loan. If you use a CPA to prepare your tax returns, and you are considering an RAL, you may want to inquire about other alternatives.
Meanwhile, the IRS reports that 54 percent of taxpayers, including nearly nine million Californians, are filing their taxes electronically. The Internal Revenue Service offers free electronic filing, called FreeFile, for taxpayers with an adjusted gross income of $52,000 or less (for a single person). The IRS also has a list of companies that offer low-cost electronic filing. Details on free and low-cost services are online at irs.gov.
One of America’s largest personal income tax preparation firms will grant clients a $5,000 RAL within two days of filing their taxes—for an additional $110 in fees and charges. According to the firm, if the clients do not take advantage of the RAL, they have to wait an average of three weeks to receive their refund. However, consumers who accept the loan offer may be spending more money than they’ll receive on the refund. This is because the RAL is considered a three-week loan: The fees and charges of the RAL actually add up to an annual interest rate of more than 37 percent.
California’s Franchise Tax Board has a similar electronic filing system. It is free to taxpayers meeting certain qualifications. (For example, a single person must have an adjusted gross income under $150,743.) The FTB program is called CalFile. You can get information on CalFile and other options for electronic filing online at www.ftb.ca.gov.
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