Taxpayer Beware: Government Watchdogs Warn Against Refund Anticipation Loans

With little over a month left to file taxes, some cash-strapped taxpayers feeling the crunch of an economy sliding toward recession turn to refund anticipation loans. Such short-term loans mean they can walk out of a tax preparer’s office with their refund check in hand.

State officials and watchdog groups — such as Illinois Attorney General Lisa Madigan and the Better Business Bureau — have been warning Illinoisans for years about the high interest rates and fees charged in refund anticipation loans. Now, a bill in the Illinois legislature could help balance the scales in taxpayers’ favor.

House Bill 1437 was originally intended to reform other short-term loans, but it appears a bill in the Senate was getting more traction on the issue. So, bill sponsor Rep. David Miller (D-Dolton) introduced an amendment to his own measure, gutting and renaming it “The Tax Refund Anticipation Loan Act.”

The bill requires state regulation of tax preparers, caps the interest rate on refund loans at 36 percent and requires tax professionals to post information about fees and interest rates on such loans.

Thirty-six percent may still seem like a lot, but it’s nothing compared to what is currently charged. A study released jointly by the Consumer Federation of America and the National Consumer Law Center said interest rates on such loans currently range from 50 percent to 500 percent. Other financial watchdog groups had similar figures.

“Our experience has been that [refund anticipation loan interest rates] are triple digits,” said Sharon Reuss, spokeswoman for the Center for Responsible Lending, a national research and policy group based in North Carolina.

Specific costs of a refund loan are uncertain until after an applicant’s taxes are prepared and they are approved for a short-term loan by the bank with which the tax preparer works.

All tax professionals contacted for this article declined to give specific rates, but promised discounts in fees charged for tax preparation to potential customers expressing interest in a refund anticipation loan.

Another concern addressed in the bill is the lack of regulation of tax preparers in Illinois. In a state that requires licensure for auctioneers, geologists and interior designers, a tax professional can operate without regulation of any kind.

The proposed regulatory responsibility would fall to the Illinois Department of Professional and Financial Regulation. Sue Hofer, communications director for the agency, said such a law would put Illinois at the forefront of tax professional regulation. Only California and Oregon have similar state statutes. Currently, the Internal Revenue Service is the only regulatory authority for tax professionals in Illinois.

“Right now, the companies are only regulated by the federal government,” she said.

However, participation in the IRS’s regulation program is voluntary. Enrolled tax preparers must pay $125 in dues and attend 72 hours of continuing education every three years in exchange for the designation.

A spokesman for the attorney general’s office noted income taxes function as an interest-free loan to the government, which the IRS pays back to taxpayers every year in refunds.

“The government’s had your money all year anyway. Why pay more money to someone else?” said Scott Mulford, deputy press secretary for the office. Mulford said most taxpayers can file electronically and sign up for direct deposit of their return, usually obtaining a refund within two weeks.

The IRS is also taking a closer look at refund anticipation loans, accepting comments from the public on the marketing of refund anticipation loans through April 9. The agency is considering curtailing the promotion of such loans, depending on the feedback it receives.

There are several Illinois Department of Human Services programs offering free tax preparation help for residents earning less than $15,000 a year ($40,000 per family). More information is available by calling (312) 409-1555. Also, the Center for Economic Progress has 36 free tax preparation sites throughout the state offering similar services. Call (312) 252-0280 for more information.