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Wednesday, February 2, 2011

Do instant tax refunds exploit low-income earners?

In a January, 2007 report by the Community Reinvestment Association of North Carolina, it states Refund Anticipation Loans i.e. 'instant refunds' cost between 36%-700% in interest. What's more, multiple national data collectors including online magazines and websites such as 'The Nation', and Children'sDefense.org among several others, claim the 'Instant Refunds' provided by some tax preparation companies are exploitive of poor persons residing in the United States.

To argue on behalf of the tax preparation services, it isn't illegal to provide refund anticipation loans. In the case of refund anticipation loan, the actual tax return is the collateral for the loan. Low income earners are essentially no less vulnerable to this type of service than are working class and some middle class earners. In all cases, those who feel they need money instantly pay a price for such loan and such a price does not discriminate among earners. What's more, several points can be made in favor of the tax preparation provider as follows:

• Tax clients are informed of the terms and conditions of the loan
• Fees Differ across Tax Preparation Companies
• An expedited service is being provided, which naturally costs more
• All recipients of instant refunds pay a fee
• States may regulate maximum tax preparation interest rates in the form of 'usury limits'

Having made note of the above points, there probably wouldn't be complaints about the refund anticipation loans without good reason(s). Specifically, statistical evidence indicates it is mostly poor households that end up paying more than middle class households for their tax preparation services.

How low-income tax filers lose money

In addition to being potentially ill-informed and/or mislead as to the financial implications of 'Instant Refunds', lower income earners who utilize the refund anticipation loan may be missing out on several cheaper and almost as fast tax preparation and filing methods.

• The IRS Vita Program is free: While the tax preparation process itself is not illegal, it may not go out of its way to inform low income tax filers of the Internal Revenue Service's Voluntary Income Tax Assistance program also known as VITA. The IRS claims that anyone unable to file their own tax returns with an income below $39,000 can receive free tax preparation assistance from the VITA program

• E-Filing is Cheaper: Additionally, filing online or e-filing taxes may take less than 14 days to deliver an electronic return to a tax filers checking account. For between $30.00 -$100.00, online tax preparation databases such as H&R Block's, and tax preparation software such as Turbo Tax can yield an effective tax filing process that costs the tax filer a fraction of the money one would pay for the Refund anticipation loan and in person tax preparation fees. These methods do take a little know how and self guidance in the tax preparation process, but are more affordable and federal fees may be waived for certain income levels making it even cheaper.

• The IRS Tax Care for the Elderly (TCE) program offers tax preparation free of charge to individuals who are 60+ years of age. Furthermore, one doesn't necessarily have to sweat to acquire such service as The American Association of Retired Persons (AARP) has many nationwide locations that operate under the IRS TCE program.

• Traditional Paper Filing is almost Free: If one is comfortable and experienced with filing taxes, the paper filing method may only cost the price of a stamp or two, and perhaps a few photo-copies is the traditional paper filing methods. With a little time and a phone call or two to the IRS, one may be able to file their own tax return especially if it isn't complicated.

It is evident from the content in this article and the research it sites, low income persons are statistically vulnerable to the 'instant tax refund' also known as refund anticipation loans. While the instant tax refund is not illegal per se, it is one of the more expensive tax preparation services available to low income and middle income earners. Such being the case, it can be considered potentially exploitative in terms of the proportionate of cost to income ratio. Individuals who utilize the instant tax refund service may be far less likely to do so had they known about the other less expensive options available to them.


1. http://www.ncimed.com/docs/2006_RALReport.pdf
2. http://www.lectlaw.com/files/ban02.htm
3. http://www.thenation.com/doc/20060501/yeung
4. http://www.irs.gov/individuals/article/0,id=107626,00.html
5. http://www.irs.gov/newsroom/article/0,id=108104,00.html
6. http://www.childrensdefense.org/site/PageServer?pagename=tbo_vita_ca