*sigh* After the eggnog has been drank, tree taken down, the ball dropped and resolutions made and for some already broken comes another season, that many are eagerly anticipating. Income Tax Season. People, who have overspent and over indulged or were unable to do what they wanted to do for the holidays look forward to Income Tax Season, and those Refund Anticipation Checks (RAC) which for many can bring in anywhere from $1000 to $5000. You can see why folk are checking the mail for their W-2’s every 20 seconds. They are not the only ones who are eagerly waiting for them to receive them, there are numerous companies that have preying on the Black community for years extending hours, offering donuts and coffee, and other forms of enticement. Just like the Big Bad Wolf dressed like Grand mom, these companies draped themselves in offers such as, “pay nothing out of pocket”, Wal-mart gift cards, #200 advances, $50 instant placed on a Visa or 10% extra additional on top of your refund.
I understand what it means to be in a pinch financially, I understand the desperation that comes with not knowing how or where the money is going to come from to take care of your needs. I understand the overwhelming feeling that can come when there is something you want, the pull of that particular item. In no way am I attempting to to throw jabs, or be insensitive towards those who are undergoing financial hardship. But what I am going to do is share with you how these companies are preying on folk who are already in a bad spot.
One of the most successful rip-offs in history, were the Refund Anticipation Loans (RAL) they were short-term loans offered on the basis of your tax refund. With an RAL, a tax preparer would offer you a payout somewhat smaller than your actual refund, but make it available almost immediately, so you would not have to wait for the IRS to cut you a check or deposit the money into your account. The preparer would then take the entirety of your tax refund. To get the loan, you would be asked to pay a loan origination fee in addition to your electronic filing fee. If you choose to accept such a loan, you would receive a check immediately for the total amount of your refund, minus the loan origination fee and other fees associated with preparing both your tax return and your RAL. You don’t have to pay back your loan or take care of any future paperwork. Instead, you sign a form that allows your tax preparer to receive your refund check.
Then, your tax preparer cashes the check and keeps it to cover your loan. Example….you go to one of the Big Bad Wolves, and you get your taxes prepared, they tell you “The amount of your tax return is $4500.” Your thinking DAMN, that sounds great, I can pay off Peter, Paul, and throw a couple of dollars to Sallie Mae…PLUS have a couple of dollars left over….THANK YOU JESUS!!!” Your next question is going to be when will it be here. That’s when the Big Bad Wolf smiles and shows it fangs. Next thing you know that $4500 is now $3000, because of all the fees, yet because of your current financial state, and the fact that many of us are easily seduced by instant gratification we accept it. That’s what a predator does it see’s your weakness and vulnerability and does whatever it can to exploit it for their gain. These companies know what is taking place within the Black community, they are well aware of the low income status of a large portion of Black society, they know the desperation of those in our communities, they have researched the spending habits, they also know about the 1 billion dollars of spending power, and finally they know about how many within our communities spend and buy to uplift their image of self…so they market their products to look good, taste good but are poison.
In 2013, we saw the end to this particular practice. Did you catch that in the last sentence, the end to that PARTICULAR practice. There is another practice in place, but let me school you on why the RAL was done away with, the IRS remove the opportunity for these predators to check for “debt indicators” . “According to the IRS, remember RALs were loans secured by a taxpayer’s anticipated tax refund. Currently, tax preparers who electronically submit a client’s tax return receive in the acknowledgment file an indication of whether an individual taxpayer will have any portion of the refund offset for delinquent tax or other debts, such as unpaid child support or delinquent federally funded student loans. This acknowledgment is known as the debt indicator, and is used as an underwriting tool for RALs. Any and every predator will switch up their method of attack, when other methods do not work. Peep this tax preparers earned millions from RAL’s (a high of $1.24 billion at their height in 2004), so they had to figure out a way to compensate for the lost.
That’s exactly what has taken place, there is no longer a RAL, well let me introduce you to his brother Refund Anticipation Check, aka RAC. With refund anticipation checks (RACs), the bank opens a temporary bank account into which the IRS directly deposits the refund check. The bank waits until the IRS directly deposits the consumer’s refund into the account and then issues the consumer a paper check or debit card, minus fees for tax preparation and the cost of the product. Consumers who already have bank accounts also can receive their refunds using direct deposit, but without any fees attached. Unlike RAL users, RAC users do not receive their money earlier than other filers using direct deposit.
Not seeing what the problem is yet…okay here it is…
RAC users are disproportionately younger, low income, and from impoverished communities.
RAC users are more likely to have children and are more likely to be single heads of households. RAC users have less formal education than those who do not get an advance refund. All of the things add up to a larger refund. So here is what these Big Bad Wolves have done now that the RAL is gone, RAC is nothing more than a costly short-term loan of the tax preparation fee. Tax preparers charge fee’s of anywhere from $30 to $140, and that is only one fee, these Big Bad Wolves are creative with the fee’s processing fee, filing fee, transmission fee, etc….most tax preparers would require you to pay that money up front. If you are one of the folk above who more than likely are living paycheck to paycheck or receiving government assistance, that amount is not affordable.
So what these Big Bad Wolves do, they create an offer for you to agree to wait for your refund to come up, and then they take their fee out of your refund, they do not WAIVE the fee, they wait until your refund is placed into your account (whether it be your own or one they create for you, for a fee of course) then they subtract their fee’s. “According to the NCLC report, many tax-preparers engage in deceiving practices that allow them to squeeze as much money as they can from consumers. Tax-preparers often charge add-on fees such as document processing or e-filing fees. Thus, the report estimates that RAC consumers paid a total of $140 million in add on fees in 2011. The study also points out that many people use RACs to pay for the services of the tax-preparer, which ultimately serves as a loan with a usurious interest rate. For example, a person is, in essence, paying $30 to defer a $200 tax-preparer fee for three weeks when they use a RAC. The annual percentage rate (APR) equivalent here is 260%. In addition, by allowing taxpayers to deduct the cost of tax-preparation from the RAC, the consumer is less sensitive to the cost of tax-preparation.”
This is the point I want folk to really get, if you are low income, and filing Head of household, more often than not you will be receiving EITC, Earned Income Tax Credit. “The EITC is the nation’s largest federal anti-poverty program providing nearly $58 billion to 26 million families in 2011. The EITC is meant for low-income people earning incomes near the federal poverty level. According to the NCLC (National Consumer Law Center), EITC recipient who purchased RACs paid a total of $2.2 billion to tax-preparation organizations. Theoretically 100% of the this money should be in the hands of low-income people, but because our tax system is so contrived, complex, and inefficient, tax-preparation companies like H&R Block and Jackson Hewitt are able to siphon off a large chunk of this money (almost 4%). ”
What benefit do those Big Bad Wolves serve!?!
RAC’s do not have an advantage of speed over a refund that is direct deposited by the IRS into the your bank account or onto a prepaid card. It takes roughly around the same time frame. People who do not have a bank account should be encouraged to open one, bank accounts can speed up refunds and eliminate check cashing fees (another Predator). With a bevy of do-it-yourself tax software, Volunteer Income Tax Assistance (VITA) program which offers free tax help to people who generally make $53,000 or less, persons with disabilities, the elderly and limited English speaking taxpayers who need assistance in preparing their own tax returns. IRS-certified volunteers provide free basic income tax return preparation with electronic filing to qualified individuals.
Keep your money Family.