Tax preparation is an industry full of fees seemingly designed to cash in on the misfortunes of the unbanked. These companies will help you calculate your taxes and file your return. They’ll also offer you refund anticipation loans or checks. But the interest rates charged are enormous. One of the more egregious products is being regulated into oblivion after this year. But another product from the tax-prep industry isn’t much of an improvement.
Refund anticipation loan (RALs), according to the 12th annual report from the National Consumer Law Center and Consumer Federation of America, will no longer be available from banks on a wide scale after 2012. This is good news because these loans should be avoided at all costs.
How a RAL works
A RAL is essentially a loan from the bank secured by your expected tax refund, but usually carries exorbitant interest rates and fees. This year, the report found that a typical RAL (from Republic Bank & Trust) for a loan of $1,500 is $61.22, equal to 149% APR, plus another $29.95 for a check to get the rest of your refund.
Should you accept these steep charges, you also risk quickly accumulating debt if you experience complications with your refund.
While these RALs are heading for extinction, refund anticipation checks (RACs) may pick up the slack. Instead of taking out a loan and paying interest, you can receive a check from your tax preparers and pay fees.
RACs do not offer cash advances, and you will not receive any money until the IRS issues your refund to the bank. Therefore, if you have a bank account, RACs do nothing except delay and maybe obscure the payment for tax preparation.
H&R Block has already removed itself from the RAL business and will not offer these loans in 2012. Instead, the company is now putting a greater focus on RACs, which work essentially like a rented bank account.
After the bank prepares your taxes, it will open a temporary account for the IRS to deposit the refund check. Only after the IRS deposits the refund will you be issued a paper check with the money or load it onto your H&R Block branded debit card. Alternatively, if you have a bank account H&R will direct deposit the refund to your own account and close the temporary account, and it charges you for acting as middleman.
The report states, “For taxpayers who can receive direct deposit from the IRS into a bank account or onto a prepaid card, a RAC does not provide any advantage in terms of a faster refund, and the only reason to incur this added expense is to delay payment of tax preparation fees.”
If you have a bank account it’s irrational to opt for a RAC. You would essentially pay for a one-time use of the bank account to hold your tax refund; at H&R Block this equates to $34.95 plus tax preparation.
Another cost of not having a bank account
In 2010, about 14.6 million taxpayers received a RAC, at a total cost of about $438 million. While those with bank accounts especially should not consider using either of these services, it remains to be seen how the impending decrease in RALs will affect the RAC market. Will banks compete for the RACs, which are essentially free money?
Perhaps prepaid debit card issuers will team up with tax preparation agencies to enter this market as well. If they advance some of the cash for a fee, this would attract the masses who relied on RALs for faster access to their refunds. Steep fees aside, the unbanked will always need alternative services for what banked consumers consider standard.