Your tax refund is yours to keep



Each year as W-2s begin arriving in mailboxes, commercials start promoting a range of services to ‘help’ consumers with tax preparation. These advertisements beckon consumers to take advantage of convenient and worry-free services.

Each year, high-cost tax-related services drain an estimated $11 billion from the pockets of 30 million households with moderate and low-incomes. Two of the most prevalent and high-cost financial ‘services’ are Refund Anticipation Loans (RALs) and Refund Anticipation Checks (RACs).

A RAL is a high-cost, short-term loan secured by the taxpayer’s expected refund. Interest rates on a typical RAL are about 150 percent. The fee for the RAL is in addition to the fee for tax preparation. Other add-on fees such as electronic filing, applications, and fees to cash the loan check, wind up with many taxpayers spending more than 10 percent of their refund, just to get their own money a few days sooner.

Disproportionate use
According to FINRA Investor Education Foundation, a national survey of self-reported RAL users showed that while 13 percent of African-Americans reporting using a RAL in the last five years, just six percent of Whites did.

Similarly, RACs – temporary bank accounts opened for the sole purpose of receiving tax refunds – are another costly loan. Once the refund is deposited, the lender issues the consumer a paper check or prepaid debit card and then closes the account. RAC fees vary, but as with RALs, consumers often elect to have the tax preparation costs deducted from their refund. RAC customers are also charged checking cashing and other add-on fees for this short-term loan.

Consumers most vulnerable to the lure of expensive RALs and RACs are either unbanked or under-banked, but are also eligible for the federal Earned Income Tax Credit. (Check the IRS online at

According to the Federal Deposit Insurance Corporation, African-Americans alone account for 36.9 percent of the unbanked – consumers without a personal account with either a bank or credit union. Further, Latino and African-American communities together represent more than 60 percent of the nation’s unbanked households.

Consumers with bank accounts who turn to non-bank fringe services for day-to-day money management are ‘under-banked’ households. Under-banked households pay more for basic transaction and credit financial services, and additionally are more vulnerable to loss or theft. These families also, according to FDIC, often struggle to build credit histories and achieve financial security.

Use free services

Rather than wasting a portion of tax refunds on RALs or RACs, consumers would be better served by accessing one of the free tax services available. Local IRS offices are available to assist or direct consumers to qualified preparers. Other nonprofit, social service agencies or those serving older residents can also offer referrals to qualified low and no-cost tax assistance.

Most importantly, anyone who hires someone to assist them with their returns should be aware that IRS holds the tax filer accountable for their selection of a preparer. Every qualified tax preparer must sign the return and also enter their assigned Preparer Tax Identification Number. Tax preparers are also required to give taxpayers a copy of their own returns.

Charlene Crowell is the Communications Manager for State Policy & Outreach with the Center for Responsible Lending.



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