“Each year at this time, some tax preparers offer money up front in exchange for a large share of the taxpayer’s expected refund. Lower-and middle-income New Jerseyans who need cash quickly are especially vulnerable to these sales pitches, at the risk of throwing away a considerable portion of their refund,” Attorney General Chiesa said. “Taxpayers should resist the temptation of getting only some of their money today. You can instead receive your full refund within a few weeks by filing electronically and opting for direct deposit into your bank account.”

Such quickie refund loans are sometimes falsely advertised as “instant” or “same day” tax refunds. The State Division of Consumer Affairs has taken enforcement action against tax preparers who engaged in this type of deceptive advertising. Even if they are advertised honestly – as refund anticipation loans (RALs), refund anticipation checks (RACs), or special lines of credit – consumers should be aware that they may come with hidden fees and high interest rates.

A recent report by the National Consumer Law Center (NCLC) and Consumer Federation of America (CFA) notes that RALs may be riskier and more expensive than before. Following widespread criticism, federally regulated banks no longer offer RALs. Today, the RALs that exist are offered by payday lenders and other non-bank businesses. In some cases the interest rates for these loans are reportedly comparable to an APR of more than 90 percent, in addition to various fees.

In addition, the NCLC and CFA note that some tax preparers are offering a so-called “alternative” to RALs in the form of “buying” the consumer’s anticipated tax refund – essentially a loan in disguise. Some refund “purchases” are reportedly comparable to a loan with an APR of 400 percent or more.

Refund anticipation checks (RACs) are a new emerging product.  An RAC enables the consumer to pay for tax preparation fees out of his or her IRS refund, and provides the speed of an IRS direct deposit to consumers who don’t have bank accounts – but they also generally come at additional costs. With RACs, the tax preparer works with a bank to open a temporary account for the consumer. The bank arranges for the IRS to direct deposit the refund into the temporary account, then issues a check or prepaid card to the consumer, and closes the account. Banks generally charge at least $30 for this service, and the tax preparer may charge add-on fees of up to several hundred dollars. RACs may represent a high-cost loan of the tax preparation fee, with an APR equivalent to 260 percent.

“Quickie loans with hidden fees and high interest rates are often marketed to the working poor, and ultimately serve to deplete their assets, making it even harder to get by on a limited salary,” Eric T. Kanefsky, Acting Director of the Division of Consumer Affairs, said. “A better option is to take advantage of free tax preparation services available from the IRS, or non-profit groups such as the AARP, for those with lower incomes. These volunteer services should help you apply for the Earned Income Tax Credit or any other credits to which you may be entitled. Some free services even help their clients open bank accounts in order to get faster refunds with no fee.”

Acting Director Kanefsky noted that the IRS offers volunteer programs called Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) which provide free tax preparation assistance for taxpayers who qualify. To find the VITA site nearest you, call 800-906-9887 or use the VITA Locator Tool. Most TCE sites are operated by the AARP Foundation’s Tax Aide Program. To find the nearest AARP Tax Aide site, call 888-227-7669 or use the AARP Site Locator Tool.

The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for low- to moderate-income working individuals and families. To qualify, the individual must have earned income from employment, self-employment or another source, and must meet certain other requirements.

Consumer Advice on RALs and Similar Tax Refund Products:

Tax preparers who offer RALs or similar products are required to advertise them truthfully. They are prohibited from requiring a client to enter into a refund anticipation loan and must be transparent about the costs involved. Tax preparers must also provide itemized statements of service charges, including charges for tax return preparation, electronic filing, and providing or facilitating the RAL.

Consumers who consider obtaining an RAL or similar product, despite the costs, should find out how long it will take to get their refund if they file their returns with the IRS without signing up for an RAL. Those who choose to obtain an RAL should carefully read any loan documents, especially the fine print, before signing. Any such documents should include:

• Annual percentage rate of the loan
• Schedule of all charges and fees
• Maturity date of the loan
• List of all charges for electronic filing
• Date or period within which the loan money will be received
• Who is responsible for paying the loan, if it exceeds the actual refund minus any interest and fees.

Consumers who have signed up for an RAL without receiving full disclosure of the terms and conditions may file a complaint with the Division of Consumer Affairs at 800-242-5846 (within New Jersey) or 973-504-6200, or at www.njconsumeraffairs.gov.

Consumers can download the Consumer Brief factsheet, “Refund Anticipation Loans: What Consumers Should Know About ‘Fast’ or ‘Instant’ Refunds,” available from the State Division of Consumer Affairs at www.state.nj.us/lps/ca/brief/ral.pdf.

NATIONAL CONSUMER PROTECTION WEEK (NCPW) is a coordinated campaign that encourages consumers nationwide to take full advantage of their consumer rights and make better-informed decisions. NCPW 2013 runs from March 3 through 9 and additional information is available at www.NCPW.gov.

Consumers who believe they have been cheated or scammed by a business, or suspect any other form of marketplace abuse, can file a complaint with the New Jersey Division of Consumer Affairs by visiting its website or by calling 1-800-242-5846 (toll free within New Jersey) or 973-504-6200.

Follow the Division of Consumer Affairs on Facebook, and check our online calendar of upcoming Consumer Outreach events.

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