Tax-Refund Predators Put On Notice

Opinion By Michele Jacklin

March 16, 2005

Come on down to the QuickScam auto dealership for your one-stop shopping. Have they got a deal for you! They'll sell you a car, prepare your tax return and give you a short-term loan to tide you over until your IRS refund arrives in the mail.

But don't bother reading the fine print in the contract. If you did, you'd be aghast. The interest on the loan could be as high as 600 percent and your car was probably used as collateral. That means if the IRS delays your tax refund for any reason, your car could be repossessed and your interest repayments will make the federal debt seem modest by comparison.

This couldn't really happen in Connecticut, right? Wrong. Even with the protections provided to consumers by usury and predatory lending laws, there's nothing to stop enterprising scam artists from setting up shop, charging sky-high interest rates for so-called "rapid refund" loans and preying on low-wage earners seeking refunds under the federal Earned Income Tax Credit program.

In fact, it happens all the time. In 2001 (the last year that data are available), about 46,000 households across Connecticut received both an EITC and a refund anticipation loan, also known as a RAL. To qualify for an EITC, a family's yearly income can't exceed $35,438.

"The target audience for RALs [are] people who need their refund to pay the rent, buy food or pay down credit card bills," James Horan, executive director of the Connecticut Association for Human Services, told members of the General Assembly's Banks Committee last week.

"Many people do not realize that they could get their refund in seven to 10 days by filing electronically or that they could get their taxes prepared for free at Volunteer Income Tax Assistance sites," said Horan.

But many EITC qualifiers lack the knowledge, the sophistication and the English-language skills to know where to turn for assistance.

Take Ms. R, a single mother who emigrated to Connecticut from Puerto Rico in 2000. (Her identity is protected under tax confidentiality laws.) Three years ago, having strung together several minimum-wage jobs, she was told she could qualify for the EITC if she filed a tax return. Thus began her descent into RAL hell. She visited the office of a tax preparer, who told her she was eligible for a $2,500 refund and could get it more quickly if she filed electronically. The fee would be $180. The tax preparer also told her that she'd receive her RAL within three days and her EITC shortly thereafter.

Three days turned into six months, whereupon the IRS informed Ms. R that her return was being examined. When she tried to call the tax preparer, his phone had been disconnected and there wasn't a forwarding number.

Ms. R. turned for help to the tax clinic at the University of Connecticut School of Law. It took another year and a half to resolve her problems with the IRS. By that time, she had spent the money that had been advanced to her. Debt collectors were dunning her, and her credit record was blemished. To this day, she's still trying to extricate herself from the financial morass.

"She is wiser now," says Diana Leyden, director of the UConn tax clinic. But, adds Leyden, "most of our clients who have been persuaded to take out RALs truly do not understand that they are loans. They see the money as the refund the tax preparer tells them they're entitled to."

H&R Block, which has 124 offices in Connecticut, insists that its tax preparers - unlike those who set up shop in poor neighborhoods and later disappear - abide by federal and state law and don't engage in duplicitous practices. Robert Weinberger, vice president for government relations, told legislators that low-wage earners are often "financially stressed" and appreciate having the money upfront. The high interest rates, he said, "are a solution, albeit an expensive solution."

Legislators weren't swayed by Weinberger's arguments or his altruistic motives. Tuesday, members of the Banks Committee approved a bill that would set the interest rate cap on RALs at 36 percent, which is the highest allowed under state law. Up until now, tax preparers have been able to skirt the law by making the loans through out-of-state banks. Under this proposal, that practice would be outlawed.

The measure also would ban fly-by-night tax preparation by auto dealers, pawn shops, supermarkets and the like.

That could spell the end for QuickScam and its kind.

Michele Jacklin is The Courant's political columnist. Her column appears every Wednesday and Sunday. To leave her a comment, please call 860-241-3163.