RAC and RAL

Two other types of predatory financial practices confronted me in my recent survey of my neighborhood (5.7 Lenders per Mile). The solution to these practices is the Foundation Communities Tax Assistance Centers, one of which is also found in my neighborhood. Here is a PDF of their flyer, please spread the news. These are Volunteer Income Tax Assistance Centers sponsored by the IRS and are an excellent volunteer opportunity, although you might be too late for this year since the training sessions for the volunteers occur well before the present tax preparation peak. VITA centers may be found using Google maps from the IRS website.

Avoidance of refund anticipation checks and refund anticipation loans by the above or other means is the best practice. And why, you ask, would someone want a RAC or RAL? The answer is that this is often the means of paying the fees for commercial tax preparation. Hence the value of the free tax assistance detailed above.

For an overview of RAC and RAL volume, I will pick on Jackson-Hewitt Tax Services, the new kid on the block, but found in every Wal-Mart to my knowledge. Note the declining volume, which is mostly a decline in RALs that I will discuss below.

Explore more JTX Data at Wikinvest

Here is a volume comparison to H&R Block, which has two brick and mortar locations in the 1.4 mile perimeter of my neighborhood that I surveyed in my earlier post. (I didn't include them in the 5.7 lenders per mile calculation, however.)

Explore more JTX Data at Wikinvest

Besides being a means of paying commercial tax preparation fees, the RAC is a way for a person with a low-income and typically without a bank account to get an IRS refund in two weeks or less by direct deposit instead of six weeks or more by a paper check from the US Treasury. The problem from the consumer's point of view is that the tax preparers typically charge about thirty dollars to set up this account, which automatically closes when the account balance is zero. If the account is emptied using a paper check from the tax preparer, there are check-cashing fees as well. The account may also be loaded onto a debit card that has usage fees. A major hope for curtailing these practices is a Department of the Treasury pilot program that issues refunds on Treasury debit cards. If someone receives their pay on a debit card, the Treasury will also load the refund onto that card.

RALs have been declining in volume because the US Comptroller of the Currency has stopped federally-chartered banks from providing the money that the tax preparers use to make these predatory loans. There are some state-chartered banks that are fronting this money, but they are much smaller financial institutions that have much less money available for this purpose. Combining the interest charged for the short-term loan with the fees for providing the RAL in cash or loading it onto a debit card with usage fees, the annual percentage rate for a RAL varies from about 40-400%. For much more detailed information, see the 2012 CFA/NCLC Refund Anticipation Loan Report by the National Consumer Law Center and the Consumer Federation of America.

The executive summary of a recent US Treasury report summarizes the characteristics of the people targeted by providers of RACs and RALs as "lower income, young adulthood, single head-of-household filing status, receipt of the Earned Income Tax Credit (EITC), and use of a paid preparer." The report also finds that "RALs and RACs are highly spatially concentrated and that living in the poorest communities is associated with dramatic increases in use of these products, even after controlling for a taxpayer’s income and filing status." Anyone who had any interest or dividend income, indicating that they had an account with a bank or credit union, "used RALs and RACs to a much smaller degree than did those with otherwise similar characteristics."

A Volunteer Solution to Predatory Tax Refund Loans

This City of Austin press release calls for volunteers to sign up here to provide  free tax preparation and simultaneously solve a problem with a different type of predatory loan offered by commercial tax preparers. The industry's name for these loans is refund anticipation loans. The interest rates are sometimes in the triple digits, and the fees are also high. For example, until the end of 2010 H&R Block and HSBC contracted to provide these loans, then in 2011 H&R Block offset the loss of income from the contract by raising fees on what the industry calls refund anticipation checks. You can read the details of the federal class action lawsuit that arose from these practices in Matt Reynolds' article, H&R Block Accused of Preying on Poor.

The Community Tax Centers mentioned in the CoA press release arose from the Volunteer Income Tax Assistance program initiated by the IRS. Many of the tax refunds are due to the work performed by families which are eligible for the Earned Income Tax Credit. Susan Combs, Texas State Comptroller, stated “Last year [2009], more than 2.3 million Texans claimed the credit and received more than $5.3 billion in EITC refunds. That’s an average of $2,313 per qualifying household, bringing financial relief to families and a boost to the Texas economy.” RAISE Texas reported:

In 2010, community tax center programs in Texas prepared over 93,200 returns resulting in over $72 million in Earned Income Tax Credits, over $37 million in Child Tax Credits, over 3.1 million in Education Tax Credits, and over $142 million in refunds to hard working families. These free tax preparation services also saved participants over $10 million in fees that tax preparers would charge them for their services. There are over 200 VITA sites in Texas, located in over 40 counties throughout the state. In order to reach more Texans, community tax centers need support from public and private entities.

In Austin, this support is provided by Foundation Communities.