WASHINGTON - November 29 - Believe it or not, tax season has already begun, at least for companies
that exploit low-income taxpayers desperate for cash. The tax preparation industry is offering a
new breed of high cost, high risk loan products targeting the tax refunds of hard working
Americans. Called “pay stub RALs” or “holiday RALs,” these new loans are a variation on
refund anticipation loans (RALs), but are made as early as November. Consumer advocates are
warning taxpayers to stay away from pay stub and holiday RALs, noting that they drain even
more precious dollars from tax refunds and can pose dangerous risks to consumers.
Refund anticipation loans (RALs) are high cost loans secured by and repaid directly from
the proceeds of a consumer’s tax refund from the Internal Revenue Service (IRS). About 12
million taxpayers took out RALs in 2004, costing them over $1 billion dollars in loan fees. Pay
stub RALs differ from a traditional RAL because they are offered earlier, before a taxpayer
receives her W-2. Since a taxpayer cannot file a tax return without a W-2, pay stub RALs are
made before the tax season officially starts, from January 2 to mid-January, and are based on the
consumer’s most recent pay stub. Holiday RALs are made even earlier, during November and
December. Both types of loans are offered by tax preparers, and are expected to be repaid from
the proceeds of the consumer’s tax refund.
NCLC Staff Attorney Chi Chi Wu stated, “Pay stub and holiday RALs represent one
more step down the slippery slope of selling more products at more expense and more risk to
American taxpayers. How much more do these companies want to take from the tax refunds of
working poor families?”
Pay stub RAL fees can be as high as $102, translating into triple digit APRs. In addition,
at least one tax preparation company, Jackson Hewitt, charges a $50 “deposit” for services when
making the loan. Furthermore, Hewitt customers must pay for another RAL or a refund
anticipation check to repay the pay stub RAL.
In contrast, H&R Block appears to be offering less expensive versions of pay stub and
holiday loans. Block has committed to offering pay stub/holiday RALs at a 36% APR if the
consumer chooses its debit card product. Consumers will be charged an additional $25 by Block
if they opt to receive a paper check.
In addition to added costs, pay stub and holiday RALs pose significant risks to
consumers, because they are made based on estimated tax returns before taxpayers receive their
final tax information from a W-2. At the time that the pay stub RAL is made, for example, the
tax preparer would not have any information if the IRS is planning to seize all or part of the
taxpayer’s refund to pay a child support or student loan debt. The taxpayer may have pre-tax
deductions such as retirement contributions that are not accurately reflected on the taxpayer’s
final pay stub. A taxpayer might have other sources of income not reflected on his pay stub that
reduce his refund, such as a second job, income from a 1099, or unemployment compensation.
“Consumers should stay away from expensive and risky pay stub RALs. These loans
must be paid back by mid-February whether or not their tax refund is large enough to cover the
loan and fees,” warned Jean Ann Fox, director of consumer protection for Consumer Federation
of America. “Borrowers run the risk of burdensome new debt or a ruined credit record.”
Another problem with pay stub and holiday RALs is the fact that one tax preparation
company, Jackson Hewitt, is apparently forcing pay stub RAL borrowers to return to the same
tax preparer and same office for tax preparation. This prevents borrowers from seeking a less
costly alternative for tax preparation, such as filing the return themselves through the IRS Free
File program or obtaining free tax preparation services from a VITA site. Pay stub RAL
borrowers cannot even comparison shop for a less expensive commercial tax preparer.
A significant threat posed by pay stub and holiday RALs is the fact that they enable the
RAL industry to keep draining tax refunds and Earned Income Tax Credit (EITC) benefits. The
IRS has been working on efforts to speed the delivery of refunds, which should help to reduce
the use of traditional RALs that put cash in taxpayers’ pockets within a day or two of filing the
tax return. Instead of phasing out controversial tax refund loans, the RAL industry appears to be
responding to the potential of faster IRS refunds by introducing a loan product that can get the
“jump” on tax filing season, allowing tax preparers and high rate lenders to continue exploiting
the tax refunds of cash-strapped low-wage workers.
The National Consumer Law Center and Consumer Federation of America have issued a
report on pay stub and holiday RALs entitled “Pay Stub and Holiday RALs: Faster, Costlier,
Riskier in the Race to the Bottom.” The report will be available on NCLC’s website at
www.nclc.org/action_agenda/refund_anticipation/content/PaystubRALsReport.pdf. The new
report calls upon the Comptroller of Currency to require the national banks that make pay stub
and holiday RALs to exit this market.