NEWARK – As part of National Consumer Protection Week, Attorney General Jeffrey S. Chiesa and the New Jersey Division of Consumer Affairs today reminded New Jerseyans to be smart when filing their tax returns – and beware of various “quickie tax refund loans” that may cut deeply into their federal refunds.
“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,” 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.”
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 1-800-906-9887 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 1-888-227-7669 or use the AARP Site Locator Tool.
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