The thought of quick cash is appealing, especially to financially strapped consumers. However, the reality is that taxpayers pay high fees while essentially borrowing their own money in exchange for a "rapid" refund that they otherwise could receive in full in just days.
Therefore, Attorney General Dustin McDaniel today issued this Consumer Alert to inform Arkansans about the pitfalls related to products like Refund Anticipation Checks (RACs) and Refund Anticipation Loans (RALs).
"These types of products are not much faster than an IRS direct deposit," McDaniel said. "We would encourage consumers to think twice before paying the excessive fees and interest associated with borrowing money that already belongs to them, anyway."
Consumers who file their tax returns electronically can expect to see their refunds within eight to 15 days if the refund is directly deposited into their bank account. For those without bank accounts, the IRS offers a prepaid debit card. Many taxpayers can file federal returns for free, thus avoiding the fees associated with RACs and RALs.
While RAL offers have diminished significantly in recent years, RACs are becoming more popular. Tax preparers offer RACs to consumers who want their refunds immediately, don't have the money to pay for tax preparation services upfront, or do not have bank accounts. With RACs, tax preparers and their partner banks open a temporary bank account for the IRS to directly deposit a tax refund.Typically, consumers are charged fees of about $30 for the service. Add-on costs may easily amount to more than $100, and that's in addition to tax preparation fees. The fees and costs are all taken from the consumer's refund.
Tax preparation companies that offer RACs or similar products must comply with the Arkansas Refund Anticipation Loan Act. Enacted in 2009, the Act requires tax preparers to provide specific disclosures when facilitating an RAC or similar product. Companies must prominently display a schedule of fees for the products, as well as provide consumers with a printed notice listing the specific conditions related to an RAL or RAC.
Also, facilitators or RACS and RALs are prohibited from charging fees in addition to those fees assessed by the lender, unless those fees are levied on all tax-preparation customers.
McDaniel said consumers should consider the IRS Free File program, which is offered to taxpayers who earn less than $57,000 in annual adjusted gross income. The Free File program, available Jan. 30, provides consumers with the opportunity to file a return and receive a refund quickly and without the costs associated with RACs or similar products.
Other organizations offer tax preparation assistance to senior citizens or those who may be otherwise unable to afford tax help. For more information about those organizations or programs, visit www.irs.gov or go to the Attorney General's Consumer Protection Division website, www.GotYourBackArkansas.org.
The Attorney General's Consumer Protection Division hotline is (800) 482-8982.