State Warns Consumers to Steer Clear of Refund Anticipation Loans
Consumer Affairs, Department of Revenue say taxpayers should be wary of unnecessary tax season expense
"This is a classic example of buyer beware-consumers should not be lured into paying a hefty price to gain access to their own money," said Daniel C. Crane, Undersecretary of the Office of Consumer Affairs and Business Regulation. "Refund anticipation loans can cost the typical taxpayer anywhere between $30 and $130, and additional charges for interest. The Office of Consumer Affairs advises Massachusetts consumers to steer clear of these loans in order to avoid burdening themselves with such an unnecessary expense."
The effective annual interest rates for RALs can range from about 50 percent to nearly 500 percent. These types of loans must be paid back even if a consumer's tax refund is denied, less than expected or frozen. If a taxpayer is unable to repay the RAL, the lender may send the account to a debt collector.
Taxpayers who file returns electronically and opt for direct deposit can receive refunds in 10 days or less, a fact that should make RALs promise of instant cash less appealing to consumers. "Given the speedy nature of processing electronically filed returns with refunds, there is little cause to take out a refund anticipation loan," said Department of Revenue Senior Deputy Commissioner Navjeet Bal. "Taxpayers should think twice before agreeing to accept them."
OCABR and DOR recommend the following tax filing strategies for consumers to use instead of resorting to RALs this tax season:
- Open a bank account (if you haven't already) and take advantage of direct deposit for both your tax refund and your pay check. Many banks reduce or eliminate checking account fees when you have your pay check deposited directly to your checking account.
- File your tax return electronically (E-file) with the refund deposited directly into your bank account. You should receive your refund in three to four business days. As of January 11, 2008, both federal and state tax returns may be filed electronically. Last year, the Massachusetts Department of Revenue issued 2.3 million refunds worth an average amount of $480.
- When you do receive your tax refund, avoid check cashers. They charge fees to cash RALs and tax refund checks. Cash your check at a bank instead.
- Reduce your income tax withholding so that you won't have to wait for a refund next year.
- For free tax preparation, low- to moderate-income tax payers can take part in the Volunteer Income Tax Assistance (VITA) program, which is coordinated by the IRS. VITA sites can be found in libraries, community centers, local governmental offices, non-profit organizations and other locations during tax season. Most locations offer free electronic filing to expedite the receipt of tax refunds.
- If you earned $54,000 or less in 2007, you can use the IRS Free File program to prepare your taxes online at http://www.irs.gov/efile.