In a hurry to get your refund? Beware

“It was the biggest rip-off in the world,” Jones says. “They’re taking advantage of low-income folks, because they need the refunds the most.” Jones hasn’t used a RAL since 2003 and is proud of that. “I’m not paying anyone for my money,” she tells me.

Now she’s helping others do the same. Jones volunteers with the Center for Economic Progress, a non-profit group in Chicago that offers free tax preparation for low-income families and individuals.

A few words from H&R Block
I asked H&R Block, the nation’s best-known tax preparer, to talk to me about RALs.

In a written statement the company said, “We believe the best option for our clients is to file electronically with the IRS and to receive an IRS direct deposit rather than taking out a RAL.”

But the company said many of its customers can’t do that because they don’t have bank accounts. Without a RAL, the company says, they would have to wait a month to get their IRS refund check in the mail.

“We aren’t callous to the fact that tens of millions of families consider their tax refund to be an important financial asset that sometimes involves immediate needs.”

Should the IRS restrict RALS?
In order to get a RAL, the tax preparer must share the client’s tax return with the bank providing the loan. This cannot be done without the taxpayer’s written consent. But that permission is usually buried in a stack of documents customers are told to sign when they pick up the return.

“Are you going to be paying attention to the privacy form or are you just going to sign?” asks NCLC’s Wu. “And that’s what we’re really concerned about; sharing information with boilerplate consent.”

Last month, the IRS announced it was considering whether to write rules that would restrict the sharing of tax return information to market RALs. Consumer groups support the ban.

“We don’t think your tax return should be used for any purpose other than filing your income taxes,” says CFA’s Fox.

She also worries that RALs have a negative impact on the filing process and could possibly contribute to tax fraud.

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“The fact that they’re going to make more money by selling you a loan may be an incentive to inflate the size of the refund they claim for you, or encourage people to claim factors that would help them qualify for certain tax credits,” Fox says.

The IRS is taking comments on the issue until April. In a news release, the IRS noted that it is “concerned” RALs and similar products may provide preparers “with a financial incentive to take improper tax return positions in order to inflate refund claims inappropriately.”

(You can comment on IRS Reg. 136596-07 at this Web site.)

My two cents
Clearly, it’s best to avoid RALs, but if you need to use one to get your refund in a hurry, at least shop around. Prices vary greatly from company to company. Compare the fees. Compare the APR. That is the only way to know which loan is the least expensive.

Just remember, when you use a RAL, you are paying money to borrow your own money. You can get every penny of your refund back in eight to 15 days if you file electronically and have the refund direct-deposited into your bank account.

One more thing: If you find yourself paying for a RAL or waiting by the mailbox for your refund check year after year, it would be smart to change the amount of tax withheld from your paycheck. Why let Uncle Sam borrow your money all year long, interest free!

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