Tax prep agencies lure the poor into high-cost loans
Cleveland Free Times - March 7, 2006
A Little Off the Top
The Cleveland Free Times
By Charu Gupta
For as long as she can remember, Tameko Brown has been in financial straits.
The 32-year-old biochemistry stockroom manager makes about $30,000 a year.
She had her first child at age 18, and is now the single mother of four.
This qualifies her for the Earned Income Tax Credit, the anti-poverty program for families making less than $37,000.
Brown’s EITC return typically falls in the ballpark of $1,500 — an amount the feds would send in about three weeks.
But for years, no one at H&R Block told her that.
Instead, they offered her advances on her refund. And Brown always accepted.
“It meant ‘Wow! I can go home with some money today?’ I was excited,” she recalls.
At first, Brown didn’t realize that fees and interest would consume about $300 of her refund.
She caught on to all the extra charges her second year, but still took the deal, thinking it was preferable to waiting on the IRS.
Basically, Brown was paying to borrow her own money.
But as one- or two-week loans, these so-called rapid refunds are hardly beneficial.
Watchdog agencies like the National Consumer Law Center call the practice a scam.
Tax prep agencies prey on low-income families’ need for fast cash, and effectively transfer money the government intends for the working poor to multi-million-dollar corporations.
Out of the more than $30 billion available through earned income tax credits each year, the NCLC estimates that, in 2004, American taxpayers gave up nearly $1.6 billion through tax prep and loan fees in exchange for “refund anticipation loans,” or RALs.
In Ohio alone, which gets more EITC dollars than all but seven other states, more than 60 percent of EITC-eligible taxpayers who went to paid preparers also took out RALs — costing them nearly $40 million in loan fees, according to Policy Matters Ohio.
Late last year, H&R Block agreed to a $62.5 million settlement in four class-action lawsuits, spanning 23 states, including Ohio.
The complaints alleged that the company’s “instant refunds” were in fact loans that sometimes featured interest rates as high as 750 percent — amounts never disclosed to clients.
Outside the H&R Block office in the Lee Harvard Shopping Center on the East Side, a large poster touts an “Instant Money Refund Loan.”
In much smaller print at the bottom, it says that the loan comes with an interest rate. And those who don’t qualify for instant money can instead apply for an RAL.
The fine print is all about disclosure — a reasonable step required by many states, but hardly one that’s going to eliminate the problem of low-income taxpayers signing up for RALs anyway, says Chi Chi Wu, a lawyer with the National Consumer Law Center.
The commercial tax preparation industry consistently lobbies lawmakers to prohibit the IRS from offering free filing services, Wu says.
So the real problem of RALs lies with politicians in Washington.
Though tax prep companies market RALs, they’re not in the business of making the loan.
That falls to federal banks, which aren’t subject to state regulatory laws and can charge any interest rates they want.
The partnership between tax prep agencies and federal banks is a profitable one.
“It would take Congress or regulatory agencies to do something about this,” Wu says. And as a result, the IRS is one of the only federal agencies not allowed to develop free software for citizens.
The closest the IRS comes is the misleadingly named “Free File.”
Negotiated by the commercial tax preparation industry, Free File appears on the IRS’s Web site but then links to software available for purchase and commercial tax prep firms, like H&R Block and TurboTax.
Some taxpayers can qualify for free filing services, but they might also be tempted with an RAL.
In October, Sen. John Ensign (R-Nevada) inserted comments into the Congressional Record in favor of Free File and the commercial tax preparation industry.
Ensign argued for an amendment that would keep the IRS from creating its own filing software or e-filing programs “at taxpayers’ expense,” as this would “needlessly duplicate the resources and investments of the private sector.”
Last year alone, Ensign received $21,000 from commercial banks, and the finance industry was among his top 10 contributors.
Wu says Ensign’s comments were intended to warn the IRS not to consider free online filing at the federal level, unlike the many local and state governments that already provide the service.
In February, the California attorney general filed another lawsuit alleging that tax prep behemoth H&R Block had violated 15 state and federal laws while marketing and providing its instant refunds to low income families.
Repeat phone calls to H&R Block’s media relations department were not returned.
The IRS provides support to free volunteer income tax assistance (VITA) sites, and has been doing so for the last 20 years.
Volunteers are trained in tax law, then certified by the IRS.
But with a small budget, this program can hardly compete with the million-dollar marketing campaigns of big guns like H&R Block.
That’s why it took Tameka Brown more than seven years to find one in Cleveland. Earlier this year, Brown was listening to AM radio and the words “free” and “filing” caught her ear.
Brown now shakes her head as she looks back on all those years she paid to get her own money a few days early. “When you look at it, that’s bill money you just gave away,” she says.