Attorney General Lockyer Urges Consumers to Avoid "Instant" or "Rapid" Tax Refunds

(LOS ANGELES) – Attorney General Bill Lockyer today warned consumers not to sign up for "rapid" or "instant" tax refunds being aggressively marketed throughout California, often to low- and moderate-income taxpayers.

"These financial products are not rapid refunds," said Lockyer. "They are high-priced, short-term loans that carry interest rates as high as 700 percent and bleed hundreds of dollars away from low- and moderate-income families. While most tax preparers operate honest, professional businesses, an increasing number are disregarding consumers' interests in selling these loans. Hard-working Californians should be aware they can receive their tax refunds just a week later without paying an exorbitant fee."

Storefront tax preparation operations that offer cash advances based on consumers' anticipated refunds have proliferated in the state's neighborhoods, shopping malls and department stores, and on street corners. These cash advances actually are costly loans that, depending on the tax refund amount, can force consumers to pay the equivalent of a 700 percent annual interest rate. And while taxpayers can obtain these cash advances in two days, those who have bank accounts can avoid paying the exorbitant fee and still receive their tax refund in 10 days through electronic deposit.

Lockyer noted that if a preparer miscalculates a consumer's taxes, and no refund is due, the consumer still must pay back all the borrowed money. Often, payment on these loans is due as soon as two weeks after the date of the transaction. Late payment of a refund anticipation loan can subject consumers to large amounts of interest and late fees.

The economic burden of tax refund loans falls particularly hard on familes who can least afford the cost. About 40 percent of the families who signed up for these loans in 2000 – some 4.32 million families – received the federal Earned Income Tax Credit (EITC), according to a 2002 study by the National Consumer Law Center and the Consumer Federation of America. The EITC provides financial assistance to the working poor. The 2002 study found that in 2000 alone, EITC recipients spent $324 million in tax refund loan fees, and another $130 million in fees when they cashed the loan checks. So, to get their tax refund cash one week early, these low-income families paid a total of $454 million – money they could have used to feed their families or pay their rent. Further, the same families spent an additional $500 million to have their tax returns prepared.

The businesses that market refund loans charge other fees for their services, including "tax preparation" fees, "e-filing" fees and/or "document" fees. These charges can total $90 or more even for simple tax forms. But low- and moderate-income families do not have to use these expensive services.

"Free tax assistance from trained volunteers is widely available throughout California," said Lockyer. "I encourage all consumers to find out if free tax preparation assistance is available to them, and to use their own bank accounts so they can receive quick electronic refunds."

To find out if they qualify for free assistance, consumers should contact one of the following organizations:

Orange County, Compton and Norwalk: The Legal Aid Society of Orange County offers clinics in Spanish and English. For information, call (800) 834-5001.

Sacramento, Yolo and Placer Counties: Legal Services of Northern California and the Volunteer Income Tax Assistance Program jointly offer clinics in Spanish and English. For information, call (916) 551-2150.

Statewide: The Volunteer Income Tax Assistance Program ("VITA") trains volunteers throughout California to assist others with the preparation of their tax returns. To find a VITA volunteer in your neighborhood, call (800) TAX-1040 or (800) 829-1040.

Lockyer also urged low-income families to find out whether they qualify for the EITC. "Unfortunately, many of these families cannot prepare the complicated EITC tax forms without assistance," he said. "They should check out the free tax assistance programs in their communities before they pay a tax preparer."

Taxpayers eligible for the EITC also have the option of filling out their own tax forms by following a free and easy step-by-step program at www.icanefile.org. This Website (I Can Electronically File) provides all the required tax forms, as well as a video guide and instructions in English, Spanish and Vietnamese. Computers with Internet access often are available at local libraries, and also may be available at local legal aid or legal services offices. After completing the program on this Website, consumers may either print out their tax returns and submit them to the IRS by mail, or, if they have an e-mail address, submit the tax returns to the IRS electronically.

Consumers who believe they have been victimized by a tax return preparer can register a complaint with the Attorney General's Office at www.ag.ca.gov/consumers/mailform.htm. Or they can contact the Public Inquiry Unit of the Attorney General's Office at (800) 952-5225.