Tax refund anticipation loans, which are short-term advances made at tax time at high interest rates, are far less prevalent now partly because of a federal crackdown on banks that had been making the loans, according to a new report.

But consumers may not be aware that similar tax-time financial products can also be costly, according to the report, from the National Consumer Law Center and the Consumer Federation of America. Some tax preparation firms, like Liberty Tax Service and Jackson Hewitt, continue to make the refund anticipation loans using nonbank partners.

Some firms also offer a related item called refund anticipation checks. While these checks are not as expensive or risky as the tax anticipation loans, they can represent a high-cost loan for the tax preparation fee, the center said, an issue because many of the taxpayers who sign up for these products have low incomes.

The checks work like this: a bank opens a temporary account, and the Internal Revenue Service deposits a refund into it. Fees for the refund anticipation check and for tax preparation are paid out of the account, and the customer then gets a check, or a prepaid card, for the balance. The bank then closes the account. Firms may work with outside banks or, in the case of H R Block, its own affiliate bank, said Chi Chi Wu, staff attorney at the consumer law center.

Refund anticipation checks aren’t any faster than a direct deposit of a refund into a bank account, but they allow customers pay for their tax preparation fee out of their refund, instead of paying it upfront.

The checks are a costly option. Banks typically charge $30 to $55 for a refund anticipation check, and tax preparers add on their own fees, ranging from $25 to hundreds of dollars.

Plus, the process can make it difficult for consumers to comparison shop for tax preparation fees since they are often lumped in with other fees. “Clearly, there is a need for reforms in the disclosure of tax preparation fees,” the report said. “Tax preparers should be required to provide a clear, simple disclosure of tax preparation fees to consumers before beginning the process of tax preparation.”

The fees can be significant for the lower-income consumers who tend to use refund anticipation checks. About half receive the earned-income tax credit, a refundable tax credit aimed at helping low-wage workers.

And the report noted that the cost was “still pricey” for what is “essentially a one-time-use bank account.”

This year, for example, the report said, HR Block charges $24.95 for a refund anticipation check delivered on its Emerald Card; $34.95 if delivered by direct deposit to another bank account; and $54.95 if delivered by paper check. Both Jackson Hewitt and Liberty Tax charge $29.95, the report said.

With less availability of refund anticipation loans, more consumers may be shifting to the checks, the center said. In 2011, the center said, the number of taxpayers getting the checks rose to about 18.3 million, up from 12.9 million in 2009.

Have you ever used a refund anticipation check? How did it work out for you?

Article source: http://bucks.blogs.nytimes.com/2013/03/27/a-new-variation-of-a-costly-tax-time-offer/?partner=rss&emc=rss