Instant tax refunds are bad deal for consumers With nearly no risk, firms front the money while soaking clients with interest and fees.

Posted: March 02, 2004

You've seen the signs and heard the commercials offering "instant" tax refunds. Well, these are actually loans. Like fool's gold, they dazzle people with thoughts of quick cash, but in the end, they just tarnish the pocketbook.

Taxpayers who sign up for Refund Anticipation Loans (RALs) pay high fees to borrow their own money, their tax refund. Private tax-preparation companies peddle RALs as lightning-fast loans that help tax filers save time. But, except for loan sharks, no other lenders charge higher fees. The effective annual percent rates of Refund Anticipation Loans range from 60 percent to 700 percent if you factor in fees for tax preparation, electronic filing and check cashing.

The alchemy of the loans works, however, for the tax-preparation companies that peddle them. The majority of tax returns for which the loans are sought are simple and easy to file. The loans are relatively free of risk for the companies because the lender extracts from the tax filer the right to collect the filer's refund directly from the IRS.

There is an alternative to these loans for low-wage working families in the Philadelphia area: the Campaign for Working Families. This effort by local civic organizations offers about two dozen free tax-preparation sites - 19 in Philadelphia - where people are helped to file their taxes electronically. Electronic filing speeds up the processing of returns by the IRS. A 10-day wait, at most, separates a taxpayer who files his return at no cost through the campaign from one who pays for a RAL. (A checking or savings account at a bank or credit union is needed to receive a tax refund electronically.)

The campaign has filled a void in the region. It has given people choices.

Not too long ago, Paula Abad, a Spanish translator with Community Legal Services in Philadelphia, believed that taking out a Refund Anticipation Loans was part of the tax-filing experience. In 2001 and 2002, she took out such loans and paid $295 and $400, respectively, to file her taxes.

"I thought you always had to pay to get your taxes done, and that the only way to get your refund quicker was to pay more," she said. When the Campaign for Working Families began last year, Abad participated, eager to avoid another RAL. She did the same this year. Now, she keeps all of her refund.

The loans have a negative impact. They suck money from working-class neighborhoods and put it into the coffers of franchises or national companies that have no real relationship with our communities.

The amount of money siphoned off is substantial. Private tax-preparation companies processed 69,554 RALs in Philadelphia in 2002, according to the IRS. If a conservative figure of $300 per loan transaction is used, then $20,866,200 was spent on the loans by Philadelphians.

A few weeks ago, Paula Abad made some minor repairs to her home with the money that she otherwise would have spent on an RAL. Next year, she plans to begin accelerating the payments on her mortgage. Thousands of others can do these things, too - if only they would break free of these loans.

Will Gonzalez of Holland is executive director of Ceiba, a consortium of Latino organizations in Philadelphia.

Tax return help

The Campaign for Working Families, managed by the Greater Philadelphia Urban Affairs Coalition, helps working families keep their entire tax refund by helping them avoid refund anticipation loans. Tax returns are filed electronically, which speeds up the refund process.

Tax preparation locations:

Call the campaign at 215-686-2599 for information on free tax preparation sites in Chester, Delaware, Montgomery and Philadelphia Counties. Information is available in English and Spanish. Preparation sites also can be found by logging on to

For locations in Bucks County, contact the Internal Revenue Service at 800-829-1040, and for sites in the state of Delaware call the Delaware Helpline at 800-464-4357.

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