Ever wanted to borrow your own money and pay someone else an exorbitant fee to do so? If so, you’re in luck. With the end of the holiday season comes the beginning of another gift-giving season: tax season. You give the gift of your hard-earned money to tax preparation services and you get to file your taxes before the April 15th deadline. Some people are giving more than others, though, and may not realize they are the victims of a clever scheme.
You may have seen the commercials on television or received their junk mail from the postal service. “Super fast refund!” they promise. Or you may be lured in by this: “Need money now? We’ll get your refund in days!” They’re called Refund Anticipation Loans (RAL) and they are a ripping off thousands of Missourians every year. More than 8 million Americans pay hundreds of millions of dollars for these “loans” each and every year. Tax preparers rake in about $1.57 billion in fees from earned-income tax credits for working families every year according to the National Consumer Law Center.
How refund anticipation loans work
It is tax time and you have all your paperwork in order. You may not know the first thing about filing taxes, are concerned about filing the wrong paperwork, or you just don’t want the stress. Whatever the reason, you head over to the local tax preparation service. Depending on your filing status, deductions, and a number of other factors, you will pay between $40 and a few hundred dollars to file your tax return with one of these services.
During these hard economic times, you may behind on the mortgage and need some quick cash. If you’re a low-income individual, money is hard to come by, and it’s gone as soon as it’s made. Tax time is a very important time for millions of people. For many working poor, it’s a time to catch up on bills and buy new appliances or a used car.
You decide to go for the RAL. The tax preparation service has a special relationship with a bank (or in some cases, is also a bank) who will loan you the amount of your refund minus fees and cut you a check in 48-72 hours. In the end, you will pay your tax preparation fees, a processing fee, and between 40%-700% APR for a RAL. Want it loaded on a convenient debit card? Add a fee (and more fees every time you use the debit card.) If your “loan” is approved, the bank and/or tax prep service keeps your actual refund and your business is concluded.
Your friendly neighborhood tax preparer may also try to sell you “insurance” on your tax return for the low, low price of $30-$50. Is it part of the scam? The “insurance” protects the tax filer against errors made in filing your taxes. Example: the tax preparer entered the number 4 instead of the number 5. It does not protect you against omitting information from your tax return or providing the tax preparer with false information. In other words, you are paying to cover their rears.
They draw you in with promises of quick returns and really stick it to you with the many fees and the insurance. Perhaps the most devious part of this process is that they make you feel like it’s free because you pay nothing up front. All these fees and interest rates come directly out of your refund check to the tune of several hundred dollars.
File your taxes for free, electronically
What many people do not yet know is that they can electronically file (e-file) their taxes online for absolutely free using the same name-brand point-and-click software “professional” tax preparers use and receive a check in the mail as soon as 10 days from the date of filing. If you have your refund direct-deposited into your bank account, this refund could hit your pocketbook in a matter of a few days. Same service, no cost; you get your entire refund, no hassle.
Visit the IRS website to learn more about free electronic filing. Everyone, regardless of income or filing status, can use the free e-file service. It is so easy to do you’ll wonder why you haven’t done it before. Don’t forget to spread the word. Put control back into your hands–and keep the change.