Taxpayer Alert: Rapid Refund Loans Harder to Get

Getting your tax refund quickly using a rapid refund loan has gotten harder for the second straight year. That may frustrate the customers who are turned down for these expensive short-term loans. But consumer advocates say it's good news.

The number of refund anticipation loans available this tax season shrank after a major tax preparer was unable to find a suitable lender to back some of its loans. That loss will combine with tighter credit standards to limit how many people can get refund loans, which provide money to individuals in one or two days. Some see this as positive development because the loans are expensive and sold mostly to low- and moderate-income taxpayers who can least afford them.

''They're a complete ripoff,'' said Alan Strauss, a tax attorney and CPA in New York. ''It's like legalized loansharking.''

Banks started using stricter lending standards for these loans last year in the midst of the financial crisis. Since the people who use these loans often have limited income and shaky credit histories, many were turned down although they had no problem getting them in prior years.

The Internal Revenue Service couldn't provide the number of refund anticipation loans issued last year. About 10 million mostly low-income people got these loans in 2008.

This year the pool of loans will be even smaller because Santa Barbara Bank & Trust was denied approval to make these loans by federal regulators. The bank funded about half of Jackson Hewitt Tax Service Inc.'s refund anticipation loans.

The nation's second-largest tax preparer said last week it couldn't find another bank to step in, leaving it with about half the funding it had last year. The company wouldn't say how many loans it usually makes.

In addition, H&R Block Inc., the country's largest tax preparer, is downplaying these loans after heavily advertising them in recent years. Company officials didn't say if they expect a reduction in the number of loans. But CEO Russ Smyth told investors in December the company is moving away from what he called an ''overemphasis'' on ''fast money'' because it damaged the company's brand image.

Disadvantages of refund loans

Those who want their tax returns quickly will see these developments as a disappointment, but they cost so much that consumer groups say it's good to limit them.

''It is massively expensive, and there better be an extremely critical reason for someone to even consider one of these,'' said Todd Mark, vice president for education at the Consumer Credit Counseling Service of Greater Dallas.

The expense comes in the form of fees for processing the loan. A 2008 Treasury Department study found that fees charged in association with these loans -- including tax preparation, set-up fees and fees for e-filing returns -- range from 5 to 25 percent of the refund amounts, with the higher percent applied to the smallest refunds.

Research from the Consumer Federation of America and the National Consumer Law Project that translates those costs into annual interest rates found they can be as high as 72 percent on an average refund loan of $3,300.

Some tax preparers also push customers to get their refunds deposited onto prepaid debit cards they provide, which can charge additional fees.

Most borrowers say they know the loans are expensive, but they need the money to pay bills.

''If your finances are in such crisis mode, you're going to need every last dollar that really belongs to you,'' Mark said.

In many cases, the time difference between getting a loan and the actual refund is just a few days. An IRS spokesman said taxpayers who file their returns electronically and use direct deposit will get their refunds within 10 days. Direct deposit can also be used with prepaid cards for those who don't have bank accounts. Checks are mailed within three weeks of an electronic return being filed. The wait can be up to six weeks for those who file paper returns and want checks mailed.

Beyond speed, another factor that appeals to filers short on cash is that these loans usually fold in the cost of preparing their tax return. ''Most people, even people who are financially savvy, are petrified by tax forms,'' said tax attorney Straus. That leads many to accept high charges, even for simple forms.

But since tax prep software can help most taxpayers, it may be worthwhile to try a do-it-yourself approach. With the IRS's Free File program, anyone who earned $57,000 or less in 2009 can access software online and submit their returns at no charge. Links to free file software are on the IRS Web site at www.irs.gov.

-- If you don't have a computer, or you need help filing your return, free help is available through IRS-authorized programs nationwide. You can find a local Volunteer Income Tax Assistance Program site by calling 1-800-829-1040 and pressing 2, then 4 to reach a representative.

-- Public libraries often host tax help programs, and they have computers for the public to use. Many state tax departments also list free prep locations on their Web sites.

-- Seniors can get free help from AARP volunteers. Call 1-888-227-7669 or visit the money page at www.aarp.org to find locations.