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
"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
Reprinted with permission of the Hartford Courant.
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