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.
In reality, however, many tax season services are less about convenience and more about taking a hefty portion of refunds consumers have already earned. Each year, high cost tax-related services drain an estimated
A RAL is a high-cost, short-term loan secured by the tax-payer'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.
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 (EITC). For 2011 and depending upon family size, the maximum EITC will range from
According to the
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
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. These locations can be found online at: http://rspnsb.li/ wxAmeA.
Most importantly, anyone who hires someone to assist them with their returns should be aware that
Tax refunds represent monies owed. Every consumer is entitled to keep as much of it as possible.
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