Tax Preparers Become Loan Sharks

taxes 2006The tax preparers have seen the light and realize there is more money to be made being loan sharks than by preparing your taxes. And they have taken it to a whole new level this year by not even requiring you to fill out a tax return…simply bring in your year end pay stub, they will do the calculations and send you on your way with a loan that any loan shark would be proud of.

The more common name the tax preparers roll off their tongues is “refund anticipation loans” ( RALs) but don’t be fooled by the innocent sounding name. Those that request RALs are typically charged fees for the refund anticipation loan, for electronic filing, for tax preparation and for a short-term bank account for those who don’t have a checking or savings account. These fees can reach as high as $500, depending on the size of the loan. So you’ll end up paying hundreds of dollars in fees for getting your money a few weeks early which can work out to an interest rate of over 1000%.

But the tax preparers take it a step further even beyond loan sharks. Not only do you pay up to triple digit interest rates on the loan, but you are paying these rates to borrow your own money. You read that correctly. Unlike a credit card loan (or a loan shark loan), you aren’t borrowing someone else’s money – the money is the extra money you paid to the government which is already yours and you are entitled to (we won’t even get into the fact that you have been loaning this money to the government interest free for the entire year).

And what do you get for paying these huge rates to borrow your own money? Not a whole lot. You get hold of your money a few weeks early at best. While many people believe that it will take months to get their tax return refund (as this was the case years ago and they still hold that image), the truth is that the IRS has greatly improved their refund turn around time and if you file online, you can expect to get your tax refund in as little as 10 days. Even if you file the old fashion way through snail mail, you should get your refund in less than a month.

Even worse, there are plenty of alternatives where you can get your refund for free for those willing to put in even a small amount of work. Probably the best financial move you can make is to go to your company’s personnel department and adjust your W-2 income tax withholding so that you don’t receive a refund. This will give you more money in each of your paychecks throughout the year and also means you won’t be giving the government an interest free loan of your money each year.

Even if you march in and change your W-2 income tax withholding today, it won’t help you with your tax return this year. Even so, you can still get your tax refund quickly by filing your tax return electronically through the IRS Free File Program. As long as your adjusted gross income is under $52,000, you can do this for free, so there isn’t any reason to do your taxes by hand.

If you want to speed up your tax refund as much as possible, consider having the refund direct deposited into your bank or savings account. With a new program this year, you can have the money directed into as many as three different accounts. Opting for the direct deposit should get you your refund in about 10 days after filing. Direct deposit also gives protection against lost or stolen refund checks that sometimes occur when refund checks are sent by regular mail.

If your adjusted gross income is over $52,000, you still can file for free with TaxAct which lets anyone use its standard version for free. With this program, you have a choice of filing over the Internet or downloading the TaxAct software onto your computer. The TaxAct offer is limited to federal tax returns. If you choose to go with TaxAct, be warned that you’ll have to endure constant promotions for their paid version called TaxAct Deluxe.

For those with low incomes, you can even have someone help you prepare your tax return in person to make sure you receive all the deductions and credits for which you’re entitled. IRS volunteers offer free tax preparation to those with low incomes across the country at specific sites in each state during tax season. To qualify for this free service, your adjusted gross income must be less than $39,000. You can locate the nearest Volunteer Income Tax Assistance office by calling the IRS at 1-800-829-1040.

While there may be a few financial emergencies that could justify paying loan shark interest rates for a refund anticipation loan, 99% of people have absolutely no good reason to go this route. You worked hard for the money that is being returned by the government, so make a little effort to make sure you keep all of it.

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4 Responses to Tax Preparers Become Loan Sharks

  1. Ian says:

    This has bothered me too. Ever year the sheer amount of commercials offering these “super easy” loans increase dramatically. It seems like financial stupidity is widespread. Watching these commercials is like watching the payday-advance “Check to Cash” commercials.

  2. Morfydd says:

    Um, I work for the big green tax prep firm, but don’t speak for them in any way.

    Just to clarify, a RAL is a loan on the refund, after file the return. An IMAL (Instant Money (um, somethingsomething) Loan) is based on paystubs. And it’s not something that the big green company did until this year. The other companies have been doing it for years and they were eating our lunch because of it.

    IMALs are icky. No doubt about it. But there’s no way to compete unless we offer them. My analogy is a gas station who doesn’t want to sell cigarettes. The two products should be unrelated, and the second has an arguable moral cost. But people will go somewhere else to buy gas if they can also get cigarettes.

    My company also tells me that our IMAL fees are decidedly lower than our competitors, so it’s not as icky as it could be. I have no basis for comparison, though, so they could just be blowing smoke.

  3. Morfydd says:

    I put this into a separate comment to try to set off a different point: Many low-income people *can’t* do their taxes themselves.

    (Ok, they can, but they tear their hair out trying, and then come to me.)

    The biggest benefit for the working poor is the Earned Income Tax Credit. This is money back above and beyond any payroll deductions, often thousands of dollars. And it’s a pain to calculate.

    I don’t know why the forms are set up the way they are, but calculating the EITC by hand is *hard*. I’ve worked two days thus far in the tax season, and had four people tell me, “When I tried to do the numbers, it said I owed,” and my calculations had them getting back a minimum of $1000.

    We charge by the form, and there are a lot of forms and worksheets for the EITC. That means they’d pay a substantial (for the poor) amount for me to file for them. Using the RAL means we just deduct the fees from their refund.

    There is a RAC that is *not* a loan, but that also deducts the fees. I encourage clients to take that instead, but they almost always want their money fast. (Hell, I encourage my clients to use the free file when their returns are simple. I’ve gone to the point of printing out the 1040EZ, handing it to them, and shooing them out of the booth.)

    My clients frequently have sub-optimal money management skills, and their refund is the largest amount of money they’ll see all year. And no matter how much I try to discourage them from a RAL, they want their money. Now.

    Anyway, my point was that you’re conflating two premiums being paid:

    –The premium for having someone who knows what they’re doing prepare your return. (I could rewire my house, but have chosen not to spend time learning about wiring & just pay an electrician.)

    –The premium for getting your money back fast.

    Tax prep firms automatically do the first, and do the second as a service. It may not be a useful service to the readers of this blog, but I certainly can’t talk my clients out of it.

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