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Tax Day Means Big Bucks for Predatory Lenders

Poor people just can't get a break. Even when the government actually offers them a benefit, the private sector manages to find a way to take a big cut. That's what's happened since Bill Clinton pushed through a major expansion of the Earned Income Tax Credit (EITC), a measure that boosts the income of working poor families with a refundable tax credit. It's now one of the biggest anti-poverty programs in the nation. At the same time, however, the EITC has spawned a lucrative cottage industry of scummy tax preparers who prey on unsophisticated workers with promises of "immediate" refunds that are, in fact, very expensive predatory loans that in 2006 drained nearly a billion dollars out of the refunds owed to people who really needed the money.

Tax preparers like H&R Block and Jackson Hewitt offer what are known as Refund Anticipation Loans, in which they give clients their "refunds" on the spot. The "refunds" are actually loans based on the future refund, which is then directed to the tax preparer or lender. The interest rates on many RALs are exorbitant—anywhere from 36 to 1,200 percent once all the fees are factored in. What's really evil about these loans is that many people eligible for the EITC don't realize that they can get all of their tax refunds, for free, from the IRS within a week or two of filing their returns, a fact that the tax preparers are certainly not sharing.

Earlier this year, consumer groups sent out mystery shoppers to many of the commercial tax preparation firms offering RALs and found that most of them didn't tell consumers that the money they were receiving was a loan, or that they'd get more money if they waited a week for the IRS. The groups also reviewed IRS records and discovered that RALs were such easy money that tax preparers can now be found in such dicey locales as payday lending shops, liquor stores, beauty salons, pawn shops and used car dealerships—one reason why RALs have been connected in many states to major criminal tax fraud scandals. Nearly two-thirds of RAL borrowers are EITC recipients, even though such folks only make of 17 percent of all tax payers. That's one reason why the IRS is currently considering whether to limit RALs. Unfortunately, any move will come too late for people filing this year.

Posted by Stephanie Mencimer on 04/15/08 at 8:05 AM | Comments (2) | Email | Print

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