Giannoulias: Beware of refund anticipation loans
Free tax assistance available statewide

February 10, 2009

With income tax season upon us, State Treasurer Alexi Giannoulias warned Illinois residents today about the high cost of refund anticipation loans and other “instant” filing offers and urged them to use free assistance and direct deposit alternatives.

Refund anticipation loans (RALs) are actually expensive, short-term loans based on a filer’s expected tax refund. They accelerate an income tax refund by less than a week but cost a taxpayer owed $3,000 anywhere from $62 to $110 plus fees, according to the Consumer Federation of America and National Consumer Law Center.

“Refund anticipation loans essentially force you to pay to borrow your own money,” said Giannoulias. “It’s hard enough to earn a living in this economy without squandering your money on a refund anticipation loan. This is your money, you deserve all of it.”

Research shows that rapid refunds are targeted to people with literacy and language barriers who have high school or grade school educations. They also market to people who least can afford them; the majority of RAL users earn less than $35,000 a year and qualify for the Earned Income Tax Credit.

Noting that Jan. 31 was the deadline for employers to mail W-2 forms, Giannoulias cited two organizations that offer low-income residents free tax help and a state site that all residents can use to have their refund direct deposited for free.

• The Center for Economic Progress has free tax filing sites in a dozen Chicago neighborhoods, seven Chicago suburbs and several central and downstate communities. They are open to families with incomes of $45,000 or less or individuals with incomes of $20,000 or less. For more information, call (312) 252-0280 or visit www.economicprogress.org.

• Ladder Up offers a free Tax Assistance Program (known as TAP) at 18 Chicago sites and six Chicago suburbs. They are open to families with incomes of $45,000 or less or individuals with incomes of $20,000 or less. For more information, call (312) 409-1555 or visit www.goladderup.org.

• As part of the IRS-sponsored Tax Counseling for the Elderly (TCE) Program, the AARP Foundation also offers free tax-preparation and e-filing for eligible filers. AARP Tax-Aide is a free tax-assistance service for low- and middle-income taxpayers, with special attention to those 60 and over. Learn more at www.aarp.org/money/taxaide.

• Taxpayers who do not qualify for free tax services can get their Illinois tax refund directly deposited into their bank account in about a week if they file their tax returns electronically at www.tax.illinois.gov. The IRS has free filing for people who make less than $54,000.

“Tax time is ‘the time’ for families to get ahead. Products such as Refund Anticipation Loans (RALs) shrink that opportunity by leaching money that families desperately need, especially in these difficult times,” said David Marzahl, Executive Director of the Center for Economic Progress. “We’re proud to stand side by side with Treasurer Giannoulias in our work to protect tax time for low-income families.”

When a borrower receives a RAL, the tax preparer lends the amount of the tax refund that is expected, minus interest and fees. Then, when the government sends the actual refund check, usually in seven to 14 days, it is direct deposited into the bank that made the loan.

RALs can easily force a borrower into debt by overestimating a family’s refund. For instance, the government can deduct delinquent tax, child support or student loan payments from the refund. That means the borrower can end up owing the tax preparer the difference between the loan and refund -- plus interest.

“In these economic times, every dollar counts, and we urge Illinois residents to seek the free tax services available to them,” said Robert Burke, Founder of Ladder Up.

In general, the annual percentage interest rate (APR) for a RAL ranges from 50 percent to nearly 500 percent, the Consumer Federation of America reports. If a $40 add-on fee is charged and included in the calculation, the APRs shoot up to between 85 percent and 1,300 percent, the center reports.

The RAL industry drained the refunds of 8.67 million American taxpayers in 2007, costing them $833 million in loan fees plus over $68 million in other fees, the center reports. In addition, another 11.2 million taxpayers spent $336 million on related financial products to receive their refunds.

“RALs are expensive and risky, they take advantage of the people who can least afford them and drive them further into debt,” Giannoulias said. “With a little patience, a checking account at a reputable financial institution and direct deposit, every Illinois resident can get their entire tax refund.”

The cost of RALs varies by institution. The following costs for a $3,000 return were published in January by the Consumer Federation of America and National Consumer Law Center.