A new federal law is intended to make it easier for the Internal Revenue Service to find and stop tax refund fraud, but it could also delay taxpayer refunds and push consumers toward predatory tax refund anticipation loan providers.
According to Tenesha Carter, SVP of tax preparation services at State Employees' Credit Union, a $34.3 billion-asset institution based in Raleigh, N.C., it’s almost “inevitable” that there will be “a small uptick” in the number of taxpayers who turn to predatory loan products as a result of the expected refund delays.
“However, because there has been so much education over the years on the pitfalls of predatory refund anticipation loans, we are hoping that most affected taxpayers have prepared themselves for the delay and will continue to avoid these products,” she added.
G. Michael Moebs, an economist & CEO at Moebs $ervices in Lake Bluff, Ill. cautioned that, unfortunately, whenever the IRS makes an effort to improve the tax-processing system, someone usually tries to take advantage of it.
“The tax refund anticipation loan lenders will lure some consumers and small businesses into less than honorable refund schemes,” he said. “This is due to the delays the IRS [has been] incurring in getting refunds out. Credit unions should alert members. Also credit unions can do some of this lending themselves so members get funds they need, but from a good lender.
Maria Martinez, chief executive officer of Border FCU, a $143 million-asset institution based in Del Rio, Texas, believes that delays in tax refunds “will definitely” drive people into obtaining predatory tax refund products.
“Although there were media advertisements on the delay of these refunds, most people are indicating that they were not aware of [the] new law,” Martinez told Credit Union Journal. “Therefore, many of them committed their income tax refunds to paying debt to others as soon as their income tax refunds were received in January or early February.”
But now, she added, their refunds will not be in their hands until late February.
“I’m sure this delay is going to make them late on their payments and they will have to pay late fees and/or additional higher interest on loans they committed to,” Martinez lamented. “I just hope that they get a hold of a credit union first before reaching out to payday lenders.”
VITA still vital
Like many credit unions, Border FCU offers Volunteer Income Tax Assistance services to its members as a way to help them through tax season.
“One of the great advantages of our credit union is that when the VITA clients come in for their income tax assistance, we are able to discuss their financial needs and many times our certified counselors will assist them with advice,” Martinez said. “Not too many VITA sites have this privilege of having free financial counseling and free income tax preparation under one roof -- we do and that’s a great advantage for our underserved community.”
Martinez further said that they don’t issue refund loans to their VITA clients at this time, “but I know that some predatory lenders do, and their interest rate and fees are too high.”
In previous years, she noted, prior to 2011, the IRS would furnish a “debt indicator” on each client every time Border FCU would submit income tax returns to the IRS.
“This debt indicator would notify the tax preparer about debts that could result in an offset or seizure of a tax refund,” she explained. “If we still had this debt indicator, our credit union could use this information to determine how risky the loan would be and propose a refund anticipation loan at a lower rate than what our clients are getting from predatory lenders.”
‘Very likely’ to lure consumers
Brian Turner, president and chief economist at Meridian Economics LLC in Plano, Texas, looked at the broader context of tax refund loans.
He warned CU Journal that with consumers facing stagnant wages, paying higher health care costs and carrying a greater debt burden, it is “very likely” that a greater number of people may be drawn in by the lure of refund advance loans.
Turner noted that back in 2002, nearly 13 million consumers paid more than $1 billion in fees for such tax refund loans. “Analysts note nearly 1 million customers took out refund loans last year and many anticipate that number may double this year,” he said.
In an “endless effort” to gain new business, Turner added, most of the major tax preparation firms have already advertised “no interest, no fee” refund advance loans.
“Many struggling tax companies acknowledge the incursion into refund advance loans is to make up for the loss of traditional walk-in traffic and direct-processing alternatives like TurboTax,” he explained. “And borrowers need to understand there’s a good chance they might not receive the entire refund they are expecting and the associated costs may be significant.”
Indeed, Turner observed that despite their “no interest, no fee” offer, these firms will still charge their regular preparation fee, which can cost “hundreds of dollars” compared to the $40 average filing fee paid by the firm.
“So if a borrower seeks a $1,250 advance, the firm will advance only a portion of that amount, in addition to their regular preparation fee,” Turner offered as an example. “Many people believe these services offer them the chance that they might get their money faster, a common misperception. If the full refund doesn’t come through, the borrower may be left to foot the bill. Moreover, these same firms offer additional services most taxpayers don’t need and refunds are commonly put on debit cards leaving the borrower with additional service fees as they access the funds.”
