By Colleen Copple, CCDO Consultant
Each year, many low-income families are duped by tax preparation companies that advertise loan programs using anticipated tax refunds as collateral. The ads begin well before tax season—in November and December—but the consumers who take out these refund-anticipation loans often are unaware of the preparation fees and high-interest rates they will pay. In New Hampshire, the Manchester Community Resource Center (MCRC) has found a reasonable alternative to such loans.
MCRC is offering the Reduced-cost Emergency Anticipation Loan Option (REAL Option). Although it may sound like another shady loan, this program is actually an effort to attract low-income people in financial crisis and educate them about options.
"The high demand for the refund-anticipation loans motivated the MCRC site to pilot this program," said Torey Kortz, Program Director. "We can reach a population we're not able to reach otherwise."
Commercial refund-anticipation loans can cause more harm than good, explained Joy Barrett, Coordinator of the Greater Nashua Asset Building Coalition. With fees for tax services and interest for a refund-anticipation loan, taxpayers often end up receiving only about $600 out of a $1,000 refund. Kortz added that low-income taxpayers can save $100 to $200 simply by going to a free tax preparation site rather than a paid preparer.
As a Volunteer Income Tax Assistance (VITA) center, MCRC offers free tax preparation to community residents and encourages low-income residents to use the Earned Income Tax Credit (EITC) and Child Tax Credits. Last year, MCRC's VITA center processed over 474 returns worth more than $600,000 in tax credits and refunds to residents. Nationally, 50 Weed and Seed sites processed over 11,000 returns worth more than $15 million in refunds and tax credits for Weed and Seed residents.
MCRC is the only VITA site in the nation to offer refund-anticipation loans. Through its pilot loan program, the MCRC VITA center can have a cashier's check for a taxpayer in 1 to 3 days or the loan can be deposited directly into a preexisting bank account, such as an Individual Development Account (IDA), a form of savings account. Right now, the bank fee is $33 to borrow up to $1,000 against a refund and $79 to borrow up to $2,000. If taxpayers can wait 2 weeks, they may receive their full refund directly from the IRS and avoid loan fees and interest.
The goal of the project is to educate taxpayers about the actual cost of a refund loan, offer financial counseling, and save the taxpayer from paying fees charged by commercial preparers. As a result, REAL Option offers other solutions to taxpayer's financial difficulties, such as taking only a portion of their refund as a loan to decrease fees and setting up an IDA. The program also offers financial education classes for taxpayers who want to learn how to avoid a financial crisis next year.
"We're not going to hard sell it," Kortz said. "Paid preparers have incentives to push loans, not to teach clients to save money by waiting 4 or 6 more days for direct deposit of their refund."
For next year, MCRC plans to negotiate a flat fee—for all loans regardless of the amount—with the REAL Option partner, Chase Bank. MCRC also plans to enhance its electronic filing services. E-filing provides a more accurate and secure means of processing the tax return and a faster refund—in just 10 to 14 days if taxpayers have their refunds deposited directly into their bank accounts. MCRC also is pilot testing a new software package from USA Tax Systems, which donated the software to support the REAL Option project.
REAL Option also gives volunteers and counselors a chance to educate people about the EITC. "In some cases, people think they don't earn enough to file a return," said IRS Senior Tax Specialist Gregg Woodes, "but they may be eligible for up to $4,536 in credit if they have children and earn less than $38,536 from a job. [It's] not public assistance."
For more information, contact:
Torey Kortz
Program Director, Manchester Community Resource Center
603-647-8967
