WASHINGTON - February 22 - Cashing in on the promise
of a quick fix, millions of low-income American
workers paid more than $900 million in unnecessary
fees and excessive interest when they filed their
taxes in 2004 to expedite collection of their tax
refunds. An analysis of IRS data by the Children's
Defense Fund (CDF) found that most Refund Anticipation
Loan (RAL) customers were low-income taxpayers who
claimed the Earned Income Tax Credit (EITC), a refundable
credit for low-wage earners, even though they only make
up 17 percent of all taxpayers.
Based on findings in states where CDF has offices, millions
of dollars were spent in order to receive tax refunds more quickly.
Low-income workers in Washington, D.C. unnecessarily
paid $2.64 million in RAL fees and interest. In other areas of the country,
unnecessary expenses were even higher. In Mississippi, RAL fees
exceeded $25 million; in South Carolina over $26 million; in Tennessee
more than $29.4 million was lost to RALs; in Ohio over $35 million.
Low-income workers in California paid more than $65.7 million in fees
and interest; and in Texas over $111 million.
For the 2003 tax year, about 7 million workers nationwide purchased Refund Anticipation Loans (RALs) - short-term,
high-interest loans that commercial tax preparers aggressively market to low-income tax filers in exchange for receiving
their tax refunds sooner, usually within a few days. Some RAL providers deliver these high-priced loans on-the-spot.
RALs are repaid from the tax refund, but the fees associated with them end up costing individuals a significant percentage
of their refunds. Meanwhile, tax refunds from the federal government impose no fees or interest charges and if e-filed and
deposited into an account are usually paid within two weeks of filing. In reducing the value of the refund taxpayers receive,
RALs undermine the very purpose of the EITC, which is to help lift low-income families out of poverty.
"Taking money out of the pockets of working poor families in the form of excessive interest rates and fees paid through RALs
is unjust and indefensible," said Marian Wright Edelman, President of the Children's Defense Fund. "Now more than ever we need
to make certain that working families get back every dollar for which they are eligible to help cover expenses like food, rent,
utilities and child care so that they can stay employed and keep their families intact."
Three years ago, CDF launched a nationwide Tax and Benefits Outreach Initiative to ensure children and working families receive tax,
income, health insurance and other benefits for which they are eligible. Last year, working in conjunction with the Internal Revenue
Service and hundreds of faith and community groups across the country, CDF and coalition partners helped raise awareness and set up
free tax preparation services to allow families to claim - and keep - more than $105 million in tax refunds.
CDF is again participating in the Volunteer Income Tax Assistance (VITA) free tax preparation program this year with coalition partners,
helping low-income families learn about and prepare their taxes free of charge, so they can save or spend their refund - all of it - as
they see fit.
To read CDF's reports on the impact of RALs in six states and the District of Columbia and to learn more about free tax preparation services
in those areas, visit: http://www.childrensdefense.org/Benefits/dc/Rals_National.pdf.