Targeting the Poor With Tax 'Refunds'

When Shawanna Boyd turned 18, her friends told her that as a working single mom, she'd have to file her taxes every April. Everyone she knew went to H&R Block, so when Boyd got her W-2 in the mail that year, she drove to the franchise nearest to her home in Elmont, Long Island, and paid a tax preparer to do the paperwork.

Except for the four years she spent in the Army as a weapons mechanic, Boyd, now a 27-year-old medical assistant who earns $10 an hour, has gone to H&R Block to get her taxes filed. Most years, Boyd has also needed help from H&R Block to claim an Earned Income Tax Credit for working families who make less than $35,000 a year, which has helped her buy new shoes, snacks and school supplies for her son.

And most years, as the tax preparer finishes up, Boyd is asked how she'd like to get her refund. Usually, Boyd chooses to get her money through something called a "refund anticipation loan," which allows her to get a check within forty-eight hours instead of waiting the four to six weeks she was frequently told it would take otherwise.

Though Boyd had some idea that getting her money back fast meant taking out a loan, she didn't realize until recently that she was paying about $130 extra in fees and interest so that she could pick up her refund check just ten days earlier than if she had filed her taxes electronically.

"I didn't know it was costing more than it was supposed to," Boyd says. "All of my friends go to H&R Block, so I thought it was normal. But then other friends told me it was only costing them $50 to get their taxes done. I was like, That's kinda crazy. I shouldn't be paying more than $100 more. I could have used that money to pay bills, the car insurance, buy food, a whole number of different things."

Consumer advocates say that Boyd's experience is emblematic of the problem with refund anticipation loans, high-interest financial products whose terms are not always spelled out clearly and are invariably most attractive to the working poor.

"Refund anticipation loans are directed toward the poorest of the poor, so what ends up happening is that people who can least afford to give up, say, $114 for a loan on their own money for ten days are targeted for these products," says John Roddy, a Boston attorney who has filed a class action lawsuit in Ohio against H&R Block over the loans. "This is the kind of product that makes absolutely no economic sense for the recipient, but it makes huge economic sense for the provider."

It's undisputed that refund anticipation loans tend to be taken out by low-income individuals. According to the Internal Revenue Service, 78 percent of the people who filed for a refund anticipation loan in 2004 had an income of $35,000 or less. The IRS also reports that 56 percent of those who took out the loans qualified for the Earned Income Tax Credit, which means that about $700 million was depleted from the federal anti-poverty program in 2004.

A November 2005 survey conducted by the Consumer Federation of America also found that the loans tend to be taken out by minorities with less formal education. According to the organization's research, more than 50 percent had a high school education or less, and one out of seven, or about 15 percent, are African-American.

Sometimes billed as "instant money" or "rapid refunds," refund anticipation loans are offered by tax preparers like H&R Block and Jackson Hewitt that partner with financial institutions like HSBC or BankOne, so that the taxpayer can get an advance on his or her refund. Consumers are typically charged an administrative fee by the bank to set up a "dummy account" so that it can collect the refund directly from the government, as well as what can translate into triple-digit annual interest rates. For Boyd, costs for the loans generally totaled between $100 to $150 for a refund check of about $2,000.