As a single mom with two kids, Debrajean Hill has to make her paychecks stretch. And she's often in need of quick cash to pay her bills.
That's why in years past, the South Side resident typically visited a for-profit tax preparer -- like H&R Block or Jackson Hewitt -- every tax season, paying a few hundred dollars for the so-called "instant" refund option.
Such deals are often called "refund anticipation loans" (RALs): The taxpayer gets money in hand today, while giving up the full amount of the refund that would be sent to them weeks later. And though the price can be steep -- her preparer would often keep more than $200 of Hill's refund for itself -- she's been willing to pay it get a check quickly.
Companies who offer such loans tout them as a service for customers, especially those who are overlooked by other financial institutions. "We offer the loans because the consumer demand is huge," says Martha O'Gorman, a spokesperson for Liberty Tax Service.
Most consumers "are in dire need of their money to pay bills [and] back rent and buy food," O'Gorman adds. And since few of them have bank accounts, they can't have the refund direct-deposited. And while firms like Liberty charge higher rates, she likens that to "the difference in cost to take a bus from New York to Los Angeles versus the cost to fly. In most cases, people are willing to pay extra for speed and convenience."
Consumer advocates, meanwhile, compare the loans to high-interest "payday loans," in which lenders charge stratospheric interest rates to loan to customers until their next paycheck comes in.
"The vendor could charge any enormous rate they wanted to," explains Jackie Lynn Coleman, senior director of the National Community Tax Coalition. "They are going after people who need this [refund] urgently. They are preying on the weak."
In any case, starting this year, the IRS will no longer be giving for-profit tax preparers a "debt indicator" -- a sort of quick credit-check that shows whether the taxpayer will be entitled to the full refund. Without the indicator, it will be riskier for firms like Liberty or H&R Block to offer the loans.
The IRS made the change last August, voicing concern that the refund loans "often targeted ... lower-income taxpayers." But it's unclear what the impact on customers will be, says Khadijah Jones, executive director of the Campaign for Working Families, in Philadelphia. While Jones hopes consumers will shun the loans, they may end up simply paying more in fees and waiting longer for refunds.
"I think people will be unpleasantly surprised to find they won't get their whole refund at once," she said.
Perhaps ironically, the refund-loan business took off in part because of a program intended to help the poor.
Low-income working people like Hill often are due a substantial refund because of the Earned Income Tax Credit (EITC) program.
The tax credit -- one of the country's largest anti-poverty programs -- gives sizable refunds to low-income people who work. The refund can total up to $5,666 for some families, and account for as much as 45 percent of a family's annual income.
The EITC was instituted in 1975 as a way to offset rising payroll taxes. The program has generally enjoyed broad political support from both Democrats (because it gives a boost to low-income families) and Republicans (because it includes a work requirement). But because the credit's benefits come in the form of a refund, tax preparers have found a way to get a cut.
"If people can avoid using refund-anticipation products, they take home more of their [tax credit]," says Elizabeth Kneebone, a senior research associate at the Brookings Institution who studies the EITC.
EITC recipients, and other low-income workers hoping for a quick refund, do have other options.
Rather than using a paid tax-preparation service like H&R Block, Coleman urges consumers to take advantage of free tax services. Locally, such services are coordinated by the United Way of Allegheny County and offered at agencies such as Just Harvest, Goodwill of Southwestern PA, Family Resources and others.
Collectively, the effort bills itself as the Money in Your Pocket Coalition. And in 2010, the Coalition prepared tax returns for 4,486 people who received a total of $7.8 million in refunds. Of that, $3.1 million was EITC dollars, according to the United Way.
The EITC "puts significant cash dollars into the hands of poor people," emphasizes Ken Regal, co-director of anti-hunger group Just Harvest, which has been offering free tax help since 2003. "Our program is aimed at ensuring people who are eligible for the EITC get the tax credits they are entitled to -- and that they can keep it all," without having to spend significant amounts on commercial tax-preparers.
Hill, for one, got her taxes done for free last year at Just Harvest -- meaning she got to keep hundreds more from her refund.
Having "$300 in my pocket is a heck of a lot better than in their pocket," Hill says with a laugh. "If you can just wait a week [for your refund], it saves you 300-and-some dollars."
And these agencies might be seeing more clients this year, according to the National Consumer Law Center and the Consumer Federation of America, which issue an annual report on the refund-loan business. The groups anticipate that fewer such loans will be made -- but that the prices on those loans will be higher.
H&R Block, for one, is already changing its services. Instead of offering loans this tax season, it will be handing out "refund-anticipation checks" -- issuing a debit card in the amount of the taxpayer's refund within eight to 10 days of completing the return.
For more information on the Money in Your Pocket Coalition, meanwhile, taxpayers can visit www.pghfreetaxes.org, or call the United Way's hotline at 412-255-1155.
