Making the poor pay more
"There are people who don't get their full
tax refund and if you are in that small percentage,
now you're in a lot of trouble because you've borrowed
$2,000, $3,000, $4,000 and you can't pay it back,"
says Wu. "These are people who are living paycheck
The CFA-NCLC study estimates that refund
loans drained about $700 million from the EITC program
in 2004. Based on national averages, an EITC borrower
could expect to pay $900 in fees for refund loan, electronic
filing, check cashing and tax preparation fees to obtain
a $2,150 refund.
"This is the only federal poverty
program where the cost of distribution is imposed on
the recipients," says Jean Ann Fox, CFA director
of consumer protection. "It's very cheap for the
government to distribute the EITC because they have
put the applicants in the position of having to pay
a commercial entity to help them apply for it."
It has even been suggested that the IRS
itself has been a passive advocate of refund loans.
Under a mandate from Congress, the IRS
must expand electronic filing to 80 percent of filed
returns by 2007. To further this process, the IRS is
continuing its partnership with commercial preparers
to provide free
electronic tax preparation and filing.
Since some of the companies in the program,
known as the Free File Alliance, market refund loans,
consumer groups urged the IRS to offer direct e-filing
through its Web site or at least prohibit its commercial
partners from offering refund loans. It did neither.
In announcing the e-filing partnership,
the IRS deferred to private industry's "expertise
and experience" in electronic tax services. As
for the loans, IRS Director of Electronic Tax Administration
Terry Lutes said the agency has never endorsed or encouraged
"They have a long history and existed
before e-filing," said Lutes. "But the point
we want to emphasize is that companies that do offer
them cannot advertise them as refunds; they are loans.
We emphasize that e-filing gets you the money fast.
Refund loans may beat it, but by just a few days."
Refund loan opponents view the government
"There is no evidence that Congress
has any concern about the entire area of predatory financial
services that strips wealth from their constituents
that can least afford to lose any money to the sharks,"
says Fox. "The IRS has a huge incentive to cast
a blind eye to what is going on in the refund loan market."
And consumer advocates worry that involvement
in the free file program could make some taxpayers sitting
ducks for sales pitches. Following the free file launch
three years ago, Fox specifically expressed concern
that "taxpayers who use these so-called 'free services'
will be a captive audience for commercial tax preparers
to sell outrageously expensive refund anticipation loans."
A loan past its
Some say the refund loan is living on borrowed
time as consumers find other
ways to gain quick access to their tax money. They
see the industry vanishing as technology and e-filing
cut the time it takes for the IRS to get your refund
"The IRS is claiming they will be
able to turn around refunds in two or three days in
a few years if you file electronically," says Wu.
In the meantime, activists in major cities
combat refund loans on several fronts by working to
shore up free tax filing services such as Volunteer
Income Tax Assistance (VITA) and Tax Counseling for
the Elderly. They also encourage lower-income taxpayers
to file for the EITC and open bank accounts to speed
"These are ways to meet the needs
of consumers who are eligible for the EITC without them
having to spend hundreds of dollars to get their taxes
prepared and file for a loan in order to have the out-of-pocket
money to get their taxes done," says Fox.
"We need to break the cycle somewhere
until the IRS figures out a way to get everybody their
is a contributing editor based in Mississippi.
Updated: March 15, 2006