The State of Massachusetts has ordered tax preparation giant H&R Block as well as other tax preparers to file for a license that will prevent the tax companies from collecting exorbitant interest rates on the popular tax refund anticipation loans. The Massachusetts law would limit tax preparers and banks to an annual interest rate of 23% on the rapid refunds.
Rapid refund loans enable taxpayers to get their tax refund money as soon as they file their tax returns, or within 2-3 days, as opposed to waiting 10 days or more for the IRS to produce the money. Tax preparation companies who offer the loans generally charge a fee for the loan that amounts to interest. While the fee may seem reasonable in the short run, quick calculations show that the annual interest rates on these loans average as high as 100-200 percent and can go even higher, sometimes as high as 2,000 percent.
At H&R Block, the fee for a refund loan ranges from $29.95 to $89.95, depending on the size of the loan. The finance charge portion of that fee ranges from $5 to $65. While a $5 fee on a $500 loan may seem small, consumer groups point out that many taxpayers don't realize that the fee, when annualized, amounts to an interest rate of higher than 30%. If the entire fee is treated as interest, which the consumer groups argue is the proper way of regarding the fee, the annual interest rate soars to over 200%.
While tax preparation companies argue they are performing a valuable service for people who have waited long enough for their refunds and desperately need a return of the money the IRS has been holding all year, consumer groups contend that the tax preparation groups are taking advantage of many low-income people who don’t understand how high the interest rate is when annualized. "Tax preparers and banks are...taking money that could otherwise be used to pay bills or build a nest egg for a home or education," said Chi Chi Wu, staff attorney of the National Consumer Law Center in Boston.
Mary Dupont, executive director of the Nehemiah Gateway Community Development Corp. agrees. "That money can be used for all kinds of meaningful investments in that person's life."
Tax preparers aren't so sure. Martha O'Gorman, vice president of marketing for the Liberty chain of tax preparers says, "The people who get these loans just want the money as fast as they can."
H&R Block plans to fight the licensing regulation in Massachusetts, claiming it doesn't need state licensing because its loans are actually issued by a California bank.
Meanwhile, New York is launching its own initiative at protecting low-income taxpayers from the high interest rates charged by the tax preparers. New York City Council members are trying to get a bill passed that would force companies offering the rapid refund loans to better explain the high cost of the loans.
Some lenders contend that the high interest rates are no different than the high rates charged on returned checks, late payments, and automatic teller fees.