Everyone, it seems, is advising consumers not to seek tax-refund-anticipation loans. Everyone, that is, except the businesses providing them.
These short-term, high-interest loans, issued against filers' expected tax refunds, seem like a sweet deal to people hard up for cash. But critics say these loans amount to making folks 'pay to borrow their own money,' and dispute their value in an age where electronic filing has become easier and free tax help is readily available.
'The problem is that for a high cost, they don't do a heck of a lot,' says John Keckhaver, a research analyst with the Wisconsin Council on Children and Families. 'They're in the same category as check-cashing and payday-loan outlets. They target low-income communities.'
The loans are a cash cow for tax preparation agencies, which charge filers up to $300 to process them. With the average tax refund around $2,000, this fee is akin to an interest rate of more than 500%. 'For some families, that's a week's worth of pay and several weeks' worth of groceries,' says Keckhaver.
According to Keckhaver, providers of refund-anticipation loans made $2.7 million from 11,000 Madison-area residents in 2004. Statewide, residents spent $32.5 million on these loans that year. This means consumers had that much less to spend on other goods and services that create and sustain jobs and businesses.
These loans appeal especially to consumers who are barely getting by. Keckhaver says 22% of statewide tax filers who qualify for the earned income tax credit for low-wage earners took out these loans, compared to 5% of filers overall. The loans 'dilute the effect of the earned income tax credit, which is arguably the most effective anti-poverty effort ever created in this country.'
But Patrice Gillespie, district manager for H&R Block in Madison, defends refund-anticipation loans, saying they're what people want.
'They're not for everyone,' she says. 'Sometimes the money is needed very quickly. The IRS isn't...even going to process your tax return for several weeks. If your financial situation let you go in a different direction, you would.'
Refund-anticipation loans have been around for at least 20 years, and were once the only option for those unwilling to wait the eight weeks it typically takes to receive a refund via snail mail. But with the advent of e-filing, it is now possible for filers to get their refunds deposited into a bank account in as little as three days, for no charge.
Plus there's been a boom in free tax services, like Volunteer Income Tax Assistance (VITA) sites for people who are low-income, elderly or disabled. These provide a variety of tax preparation help, including e-filing. Last year, more than 5,000 Madison residents took advantage of VITA sites, which were launched around six years ago.
'There's lots of good government help out there,' notes Keckhaver. 'Unfortunately, people don't know that these options exist.'
Over the last two years, the Wisconsin Council on Children and Families has partnered with the Wisconsin Department of Revenue, the Wisconsin Credit Union League and other groups to promote VITA sites and other tax-help alternatives. But this loose-knit coalition can't compete with the marketing prowess of big-name providers.
Keckhaver is now urging Gov. Jim Doyle and the Department of Revenue to work toward increasing the annual percentage of filers who use free tax assistance. 'We have the data, so it would be very easy for the state to set a five-year goal with annual benchmarks,' he says.
The coalition also wants to help poorer people forge relationships with financial institutions. One reason anticipation loans are attractive is that many people lack bank accounts, making it difficult to cash refund checks.
'Opening an account will help bring them into the financial mainstream,' says Chris Olson, spokesperson for the Milwaukee-based Credit Union League. 'We want to help people escape the trap of predatory lenders. If you look at the neighborhoods where these lenders set up shop, it's a pretty bleak scene.'
Gillespie takes umbrage at the idea that her employer is a 'predatory lender.' And she says studies stressing the negative effects of anticipation loans are inaccurate, although she declines to identify specific inaccuracies.
Rather, she says, there is a clear market demand for these loans. And even if H&R Block stopped offering them, others would. (Tax service Jackson Hewitt, another major refund-anticipation loan provider, declined repeated requests by Isthmus for comment.)
'To say that someone is 'preying' is pretty strong, because it's about making choices,' says Gillespie. 'We don't want anyone to feel like they're being taken advantage of, which is why we have a long disclosure process. Following that process, it's up to each individual to decide whether it's something they can or can't do.'
Three years ago, when Jim Holmes began working as a tax preparer at Fast Refund Express in Madison, he discouraged clients from seeking refund-anticipation loans. Eventually, he persuaded his company to stop offering them. But customers continue to ask.
'We get calls for them all the time,' says Holmes, who thinks these loans are an all-around bad idea. 'If there are two words you [should fear], it's 'anticipation loan.' It's in anticipation of an anticipated amount of money. If you don't get it all back, you're stuck with that loan. It's a very risky deal for both parties.'
Because they're legal, refund anticipation loans don't generate many complaints. Just six have been filed with the Wisconsin Department of Financial Institutions' consumer protection division since 1996. Last year, the state's Better Business Bureau received only two complaints.
In the coming weeks, the Credit Union League will begin airing a public service advertisement promoting VITA sites. But Olson doesn't expect anticipation loans to go away anytime soon.
'A lot of people will still take the path of least resistance, but we want people to realize you can get your money just as fast and not pay a cent,' she says. 'There are better alternatives.'
In the meantime, agencies like H&R Block will continue making millions off of these loans. 'I hope I'm never in a position where I have to take one,' says Gillespie. But 'if someone needs one, I'll help facilitate it. It only looks bad on paper, because it's hard for people to understand.'
Tax help is available
There are eight Volunteer Income Tax Assistance (VITA) sites available to low-income, elderly and disabled Madison residents. Most require appointments and will facilitate e-filing. For specific information on dates and hours of operation, as well as Dane County VITA sites outside of Madison, see revenue.wi.gov/faqs/pcs/vita.html.
ACORN, 2349 Allied Drive #126, 628-3658
Lakeview Branch Library, 2845 N. Sherman Ave., 246-4547
Madison Senior Center, 330 W. Mifflin St., 266-6581
Villager Mall, 2300 S. Park St., 261-5077
Pinney Library, 204 Cottage Grove Rd., 224-7100
Saint Dennis Catholic Church, 505 Dempsey Rd., 246-5124
Westside Senior Center, 602 Sawyer Terrace, 238-0196
Wil-Mar Center, 953 Jenifer St., 257-4576
