News Star
Lorraine Swanson
March 30, 2006 

They’re called tax Refund Anticipation Loans or RALs, but in reality, they’re high-interest, high-risk loans that prey upon consumers, especially low- to moderate-income wage earners who qualify under the federal Earned Income Tax Credit (EITC) program.

Lured by commercial-tax preparers’ advertisements that promise “express money” or “instant refunds,” these consumers are often unaware that the same-day “tax refunds” they receive are actually high-interest loans with rates ranging from 40 to 700 percent.

Combined with tax preparers’ fees which can cost hundreds of dollars, families and individuals often end up losing a significant portion of their federal tax credits, and so do their communities.

“For companies like H&R Block and Jackson-Hewlitt, RALs are their most profitable product line,” said Steve Neumann, assistant director of Financial and Community Education for the Center of Economic Progress in Chicago, which provides free tax preparation services to consumers qualifying under the EITC program, and Illinois’ Earned Income Credit.

“I’ve heard stories of people losing up to $400 on tax preparation services and RAL interest rates. It’s money siphoned out of the pockets of those least able to afford it.”

The federal EITC is a refundable tax credit that reduces or eliminates the taxes that low-income working people pay, such as payroll taxes. It also frequently operates as a wage subsidy for low-income workers. Enacted in 1975, the EITC is one of the most effective anti-poverty tools in the United States.

According to a study by The Woodstock Institute, a Chicago-based policy and advocacy non-profit group that promotes community reinvestment and economic development in low-income and minority communities, lower-income consumers from Rogers Park, Edgewater and Uptown lost more than $1 million of their federal tax credits to predatory RAL interest rates last year.

“That’s $1 million that people didn’t get to save, pay down credit card debt, or recycle in the neighborhood economy,” said Ed Jacob, manager of the North Side Credit Union in Uptown.

“The EITC program is intended to benefit lower income, working families, but the tax preparation is complex and people need assistance preparing their taxes. RALs allow people to get their money a couple of days earlier, but the fees are expensive.”

Many residents on the Far North Side who qualify for the EITC receive about $1,800 in federal tax credits. The average loan rate for an RAL is $75, with an additional $175 spent on commercial tax preparation fees. The terms of most RALs are seven to 10 days.

Since most commercial tax preparation services file electronically, IRS refunds are obtained shortly after the term of the RAL expires. The major tax preparation franchises and mom-and-pop operations will also check to see if the individual filing for an EITC has a tax lien. By the time consumers actually do receive their tax credit refunds, about $250 has been siphoned out by the commercial tax preparer.

A majority of lower income consumers who fall victim to RALs and other loan scams rely on currency exchanges and predatory lenders to pay bills or take out high-interest loans to put down on a car, home, or pay medical bills.

The North Side Credit Union, a community development credit union that serves people who do not use mainstream financial institutions, offers financial education classes and low-interest loans as an alternative to payday lenders.

“With electronic filing and a bank account, most people today will receive their tax refunds from the IRS within three weeks,” Jacob said. “It frustrates me that people opt to get their money a week or two early.”

Last month, State Senator Jacqui Collins (16) introduced SB2844 to the Illinois General Assembly that would cap RAL interest rates at 26 percent, and make it illegal to issue an RAL to those qualifying for an EITC.

“RALs are juice loans,” Jacob said. “Every dollar that goes out on an RAL is a dollar that leaves the community. Communities become disinvested when money doesn’t stay or recycle in the neighborhood economy, which makes for healthy communities.”

The study mentioned in this article is available below:

File Icon Reinvestment Alert 29: Refund Anticipation Loan Usage Rates Negatively Impact the Asset Building Potential of the Earned Income Tax Credit

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