The Checkout

Anticipating Tax Refunds May Cost You

January means the start of tax preparation season and those W-2s should be landing on your doorstep any day.

For the hundreds of thousands of consumers who took out so-called pay stub loans, the arrival of the W-2 could signal an early financial reckoning, in addition to the one they still face on April 15.

A pay stub loan is a short-term, unsecured loan based on an estimated tax refund. It's the latest twist on tax refund anticipation loans and comes with a fee ranging from $40 to $70. Trouble can arise when the estimated tax refund on which a pay stub loan is based turns out to be wrong. The borrower, of course, is still on the hook.

Banking regulators in Maryland have misgivings about such loans and said last week they are taking a look at them. If the tax preparers are charging fees, they must have the right license and comply with Maryland's interest rate cap of 33 percent, according to Maryland Department of Labor, Licensing and Regulation Deputy Commissioner Joe Rooney.

Depending on the size and term of the loan, the fees translate into APRs that reach 70 percent, Rooney said. Consumer advocates contend the APRs can soar into the triple-digits.

The weird thing about pay stub loans is tax preparers themselves profess not to like them.

Last June, H&R Block chief executive Mark Ernst initially called on competitors not to offer pay stub loans, saying "the economics of the product have more in common with payday lending than refund lending."

Liberty Tax Service chief executive John Hewitt also disapproves of them and offered this example of what can go wrong:

Say a couple with a child splits up. Only one parent gets to claim the child as a dependent on his or her taxes. If it's not worked out ahead of time, whichever tax return the IRS gets first is the one that gets to claim the kid. That means the other parent can end up owing money instead of being owed some. Hewitt says this is a common scenario and "one of many types of errors that can occur" with estimated returns.

Hewitt says there aren't the same surprises with traditional tax refund anticipation loans because the money isn't given out until the return is filed and the IRS has accepted it.

(This is not to say that regular tax refund anticipation loans are a great deal either. Find more on the pitfalls of RALs here.)

So why did Liberty even offer a pay stub loan this year?

Short answer: It can't afford not to.

Jackson Hewitt was the first out of the gate with a product called the Holiday Express Loan Product (HELP). After hundreds of thousands flocked to Jackson Hewitt for HELP, H&R Block followed suit with a version called the Instant Money Advance Loan. Liberty's doesn't have a catchy name. Hewitt just called it a pay stub loan.

H&R Block charges a fee that depends on whether the consumer takes the loan in the form of a debit card linked to a bank account or as a check. The card comes with a finance charge of 36 percent. The check comes with a similar charge, plus a fee of $24.95. Liberty's version comes with a fee of about $40.

Hewitt said they're not a good deal for consumers. And he hopes they figure that out soon.

"I don't like the product and would like it to go away," he said.

Have you taken out a pay stub or tax refund anticipation loan? And have you been caught short after filing your return?

By Annys Shin |  January 18, 2007; 10:00 AM ET Consumer News
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Please email us to report offensive comments.

I'm lucky: one paycheck, standard deduction, no kids. (I guess it would be nice to have some assets, but I don't, which simplifies the process.) I do turbotax and I can wait the two weeks it takes to direct-deposit my return.

Posted by: Mona | January 18, 2007 11:10 AM

I have used Jackson Hewitt for the past 6-7 years. I have a mortgage, no kids, and get a nice return each year. Not stupendous but better than having to pay. By filing electronically, I get my State refund within a week and Federal within 3 weeks, so I can wait for it rather than pay a fee and get a loan on the return.

Posted by: Southern Maryland | January 18, 2007 11:48 AM

I've got a mess with loads of charitable deductions, capital gains, multiple 1099-INTs and DIVs, and excess social security tax paid. Still, I got everything keyed into TurboTax Online and am just waiting for ADP to spit out the W-2s so I can confirm the W-2 numbers which I calculated. I've also got the numbers sitting in Virginia's online filing system -- why pay Intuit to file it when I can do it myself -- waiting to be submitted when the w-2s hit, too. Tax preparation is generally a rip-off in this age, and pay stub loans are the worst form of predation on those least able to afford them.

Posted by: fytnmad | January 18, 2007 12:15 PM

No one should be happy if they get a refund instead of owing money - all that means is they gave the government a free loan across the previous year. If you are getting a refund every year fill out a new w4 and raise your exemptions.

Posted by: AA | January 18, 2007 5:36 PM

There is no predation at my tax preparation business. Customers can choose to pay our preparation fees up front and have us electronically file their tax returns directly with the IRS--the least expensive option. If they choose to have their refund directly deposited into their bank account they're looking at refunds in 8-15 days. The problem is that the taxpayer's who choose RALs don't have the money to pay our fees, and want the money fast. They won't wait 2-3 weeks for the IRS to send them a refund check. My fees are the same whether they choose a RAL or pay me up front for my is the bank that charges fees and finance charges on the loan, which is secured by the anticipated refund. If the loans aren't funded (usually due to outstanding federal debt like past due child suppport, unpaid student loans or unpaid federal or state taxes), then I don't get paid for my services (even though the taxpayer, who knew about the outstanding federal debt, has filed their 2006 tax return at my expense). I take issue with the notion that tax preparers like myself are "preying" upon unsuspecting taxpayers. Not true. Personally, I wouldn't choose a RAL. We offer these products because they are very popular and in high demand with working class people who are too impatient to wait 2-3 weeks for their full refund. We do not pressure customers to choose these products, and ALWAYS explain that the least expensive option is to pay our tax preparation fees up front so that they can get the entire amount of their refund from the IRS in 2-3 weeks. It makes no difference. Our customers demand the RALs and expect us to provide it to them; I know that they would go elsewhere to get a refund loan if we didn't offer the product.

Posted by: TaxGuy | January 19, 2007 2:27 AM

TaxGuy - if the same people are getting RAL's year after year, why don't you have them adjust their withholding so they don't have any refund? Tax preparation firms ought to change their tack - why deposit any extra to the government?

To be truly consumer friendly - tax preparation firms should look at this differently. For some unknown reason, people like getting a refund at the end of the year. The tax preparation firms should review the customer's situation, let them know that they can avoid paying extra, and, if the customer wants, a portion of what would have been withheld in taxes can go into a fund which earns interest. At the end of the year, the customer can pay for tax preparation immediately from this fund and any balance can be refunded to the customer, or allowed to remain with interest for the next go-round. The agreement would pay your preparation fee upfront immediately.

Frankly, I think people ought to have their head examined if they fall for these "deals". A little advance planning would get them their full amount, (with interest) in an interest bearing account.

Posted by: Michelle | January 22, 2007 11:33 AM

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