Tax Refund Loans Can Be Costly

About 62,000 New York taxpayers discovered what NOT to do when looking for a quick refund on their taxes—take out a loan equal to the amount of the expected refund and then get blindsided by sky-high costs.

For more information on tax fraud or to report it, contact the Internal Revenue Service at www.irs.gov or (800) 829-0433.

New Yorkers learned the hard way when they went to H&R Block, the country's largest tax-preparation firm, for a fast tax refund. To tide them over until their refunds arrived, the firm sold them a refund anticipation loan, or RAL.

RALs (rhymes with PALs) sound friendly. But these short-term loans aren't the blessing they at first seem, as the New Yorkers discovered after adding up the fees and interest charges.

RALs aren't new, nor are they illegal. But they are one of a number of questionable and pernicious tax schemes pitched aggressively to consumers, especially during tax season.

RALs can bite hard. Whether sold by H&R Block or another tax preparer, RALs carry huge—critics say outrageous—interest rates and fees.

"They run between 67 percent and 774 percent APR (annual percentage rate)," says Washington lawyer Christopher Peterson. Lenders "don't tell you that a lower APR assumes the loan is for the entire year rather than the two weeks it typically takes to get your refund."

How much might someone pay? Amounts vary, but the New York City Department of Consumer Affairs (DCA) says a person who gets a RAL of $500 for 11 days—the anticipated time to get a refund on a return filed electronically—pays $197. That includes $30 in interest charges at 522 percent APR (182 percent APR if repaid a year later), a tax preparation fee plus a "peace of mind guarantee" for $129 and a filing fee of $38 (even though electronic filing is free).

In the New York City cases, the DCA filed charges against H&R Block in March 2002 for violating a city law requiring lenders to disclose alternative ways to get tax refunds quickly, such as filing returns online.

Read the New York City Department of Consumer Affairs' press release about its settlement with H&R Block. (Note: The page loads as a PDF file.)

The suit was settled in December when the firm agreed to pay the 62,000 New Yorkers $4.2 million in restitution. (The money will be paid mostly in the form of vouchers that can be used for services at H&R Block or redeemed.) The company, while not admitting guilt, said in a statement it would offer taxpayer education programs as part of the settlement.