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 to 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 refund loans.

"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 position skeptically.

"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 prime?
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 to you.

"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 their refunds.

"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 refund immediately."

Jay MacDonald is a contributing editor based in Mississippi.