Thursday, November 27, 2014
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Rapid refunds can be a ripoff for the poor

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The Earned Income Tax Credit is designed to help the working poor with children, and can result in a tax refund for those families of up to several thousand dollars. (Image courtesy of the Internal Revenue Service)
Some commercial tax preparers have faced a barrage of lawsuits over "Rapid Refund" programs. Rapid refunds are short-term loans based on an expected tax refund. In Minnesota, those loans on average carry annual interest rates of more than 200 percent. Several nonprofits say some tax preparers have taken advantage of the poor with those loans. Instead of going to court, one tax group is taking a different approach. It's setting up its own rapid refund program for low-wage workers.

St. Paul, Minn. — The Children's Defense Fund in Minnesota says it's noticed a disturbing trend. Low-wage workers are paying sky-high interest rates to get their tax refunds faster. They say some tax preparers are taking advantage of low-wage workers who now get the Earned Income Tax Credit, a credit that can mean thousands of dollars in a tax refund.

32-year-old Amal speaks with her financial counselor. She's seeking help because of mistakes by a previous tax preparer. Amal owes the IRS money and doesn't know why. Amal, originally from Somalia, wears a traditional burqa. She has warm eyes and the high cheekbones of a model.

Amal's new tax preparer, Martin Mohammad, tells her she likely took out a rapid refund loan -- a high-interest loan Amal did not want or need. He asks her whether she received the Earned Income Tax Credit, a tax credit based on the size of a family -- the more children, the higher the refund. She and her husband have six children.

"They always ask a specific question -- how many children do you have. Did they ask you that question?" Mohammad asks Amal.

Yes, she answers. "How many children do you have? How many years you've been working?" Amal says she was asked. "Sign there. When he finish he ask me only that. Sign there. That's it. I give it to him. I trusted him."

The Earned Income Tax Credit Amal likely received, but didn't know about, is part of a federal program designed to keep working families out of poverty. The refund ranges from about $400 to $4,300.

Amal says she simply didn't understand. For Amal, taking out a loan she didn't want was not just about money; it's about religion. Amal is Muslim, and for her, paying interest on a loan is forbidden.

Islam teaches that a person should only profit from work or taking risk. Charging interest for no work violates that rule. A person who pays interest also violates Islam because he or she is taking part in a forbidden transaction.

"I feel uncomfortable because I take loan, and that loan has interest, and I've already used the money," Amal says. "It's very hard to bring back because I don't have anything; only thing I have is my children."

Major tax preparers such as H&R Block and Jackson-Hewitt, as well as small, independent preparers offer rapid refunds.

This is how they work.

A consumer who wants a fast refund signs up for a rapid refund with a tax preparer. The tax preparer has a relationship with a bank that many low-wage workers don't.

Many poor people don't have bank accounts because they can't afford the minimum deposits, or don't have the credit history. That means they can't take advantage of direct deposit of their tax refund. They must wait weeks, sometimes months, for the IRS to send their refund checks in the mail.

After a consumer signs up for a rapid refund, he or she gets a check for the expected tax refund, minus the cost of the short-term loan and other fees.

The National Consumer Law Center says at least half of all those who got the Earned Income Tax Credit took out rapid refunds.

We never meant for part of (the tax credit) to go to multimillion-dollar corporations. We meant for it to go to the families and the communities that needed the income.
- Beth Hainey, Children's Defense Fund

Beth Hainey of the Children's Defense Fund says in some Minnesota neighborhoods, the percentages are even higher. She says in the lowest income neighborhoods, the inner city zip codes in St. Paul and Minneapolis, it's more than 50 percent. On the Indian reservations in northern Minnesota, she says it's 70 percent.

"We never meant for part of (the tax credit) to go to multimillion-dollar corporations. We meant for it to go to the families and the communities that needed the income," Hainey says.

Hainey says she believes some tax preparers are specifically targeting the poor who receive Earned Income Tax Credits, or EITCs. But Tom Linafelt of H&R Block says the company offers rapid refunds to all of its customers.

"We offer them even-handedly, and our offices are evenly distributed by population. So the idea that we're targeting EITC recipients is inaccurate," says Linafelt.

A Brookings Institution study supports H&R Block's claim that nationally, the company does not place more offices in low-income areas. Court documents, however, allege H&R Block put up more rapid refund advertisements in poor areas, at least before the lawsuits.

The company has faced lawsuits claiming it failed to disclose that rapid refunds are actually loans. Linafelt says H&R Block's tax preparers must walk clients through a step-by-step process that discloses the facts about the program. Rapid refunds are also known in the tax industry as RALs -- short for Refund Anticipation Loans.

"No H&R Block RAL client cannot understand that they're taking out a loan," says Linafelt. "The disclosure process we walk clients through not only meets state and federal regulation, but far exceeds it."

Other lawsuits contend H&R Block knew consumers were confused about rapid refunds being loans. The company settled lawsuits in other states, including Florida, Connecticut and the city of New York. A class-action lawsuit representing 28 million consumers is pending against H&R Block in Illinois.

AccountAbility is a nonprofit tax group that offers free tax help to low-income people. It works with the IRS and Department of Revenue, and many of its clients receive the Earned Income Tax Credit. Director Bonnie Esposito was dismayed at the high number of them who took out rapid refund loans.

As a result, the group decided to partner with a credit union and offer free rapid refunds to low-wage workers. Unlike commercial rapid refunds, the recipient won't pay the interest -- the tax group will.

"It would still be a loan, because it will be with the credit union." Esposito says. "There will be no fees and no interest. People will be able to get their money in 24 to 48 hours. But the way they'll get it is instead of a check, it will be deposited into a savings account at that credit union."

Esposito says, however, many low-income workers probably won't need the group's program if they get their own bank accounts, so the IRS can deposit their tax refunds directly into their accounts. AccountAbility will help recipients open savings accounts at the credit union.

Esposito says the tax organization wants to level the playing field for the working poor. Some people who took out rapid refunds understood they were taking out short-term loans, but felt they had no choice. They told her that as poor people, they were used to paying higher prices for items that others with more money get free.

In addition, Esposito says paying the high interest and fees seemed painless, because they were deducted from the refunds -- which are usually quite large.

"It's $1,000, $2,000, $3,000. That's so much more money then they ever have. If they get $200 less, well, it's still $2,500, it's a huge amount of money to them," Esposito says.

Esposito's group will offer the free rapid refunds this coming tax season for low-wage workers who took out rapid refunds in the past. She says, however, anyone can open up a savings account with a Social Security number and ID, to get his or her refund deposited directly.

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