CONSUMER ALERT: “RAPID” TAX REFUND PRODUCTS MAY BE TOO COSTLY
LITTLE ROCK – Consumers who expect to receive a federal income tax refund typically already have an idea about how they will use the refund, often long before the money actually arrives. Some may pay off bills. Others may set it aside for a vacation. Few, if any, have carved out plans to give a large portion of the refund right back to a tax preparer or financial institution.
However, millions of American taxpayers do exactly that each year when they obtain “rapid” refund products such as refund anticipation checks (RACs). Those products are nothing more than short-term loans secured by an expected tax refund. The high fees associated with those loans are usually subtracted directly from refund proceeds. Thus, consumers are essentially borrowing and paying interest on their own money.
Attorney General Dustin McDaniel issued this consumer alert today to warn consumers about the disadvantages of refund-anticipation products.
“Everyone wants the money that’s due to them as quickly as possible, but often consumers can avoid the high fees associated with products if they are patient enough to wait just a few days,” McDaniel said. “Taxpayers who file electronically with the IRS and get their refunds through a direct deposit usually receive their refunds in a week or two, and with that they can avoid borrowing the money that is rightfully theirs.”
Approximately 18 million taxpayers received RACs in 2011, according to the National Consumer Law Center. The nonprofit group estimated that Americans paid a total of $748 million in fees in order to get "rapid" refunds.
For those taxpayers who choose not to pay fees associated with refund-anticipation products, they can expect to see their refunds within eight to 15 days if filed electronically and directly deposited into a bank account. The IRS offers a prepaid debit card option for those consumers without bank accounts.
Those who obtain RACs usually pay about $30 for the service. Add-on costs may reach $100 or more, not to mention tax preparation fees.
Companies that offer RACs or similar products are required to comply with the Arkansas Refund Anticipation Loan Act. The Act, enacted in 2009, requires tax preparers to make some specific disclosures if they offer refund-anticipation product services.
Those tax preparers must prominently display a schedule of fees for the products. They must provide consumers with a printed notice that lists any and all conditions related to the RAC or other products. Also, the preparer is prohibited by law from charging any fees in addition to those assessed by a lender unless the fees are charged to all tax-preparation customers.
To avoid the high costs associated with refund-anticipation products, consumers should utilize the IRS Free File program. Everyone is eligible to file for free, but taxpayers who earned less than $57,000 in adjusted gross income can file for free using brand-name tax software. The Free File program is available starting Jan. 17, and the IRS begins accepting returns on Jan. 31.
Other organizations offer tax preparation assistance to senior citizens or those who may be otherwise unable to afford tax help. For more information about those organizations or programs, visit www.irs.gov or go to the Attorney General’s Consumer Protection Division website, www.GotYourBackArkansas.org.
The Attorney General’s Consumer Protection Division hotline is (800) 482-8982.