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IRS looking at 'instant' tax refunds

A neon sign that reads "Fa$t Refund$ 3 Day$" is seen in a window of a tax preparation office in Des Plaines, Ill.

TEXT OF STORY

Bob Moon: Have you seen those "Instant Tax Refund" signs in the windows of tax-prepation outfits like H&R Block and Jackson Hewitt?

They offer to get your tax refund back to you early. What they're really offering is a loan -- often a very costly one.

Tax preparers and their bank partners have been making a ton of money off these so-called "refund anticipation loans" for years, but consumer groups say these loans are a terrible idea that ought to be banned.

And now the Internal Revenue Service just might be swinging over to their side. Marketplace's Steve Tripoli has the story.


Steve Tripoli: The Consumer Federation of America's Jean Ann Fox says refund anticipation loans have a long rap sheet.

Jean Ann Fox: They are extremely expensive, they're unnecessary loans that drain money out of the pockets of the working poor and they are risky because the loans are secured by your expected tax refund."

And if that refund is denied you end up with a loan to pay.

Fox says the Internal Revenue Service now worries that big profits from these loans are encouraging shady behavior.

Fox: It gives tax preparers an incentive to encourage larger requests for refunds because then they can make a larger loan. According to the IRS it encourages fraud and causes problems in the tax system as well.

So the IRS is seeking public comment on changing the rules.

But consumer groups cite another problem -- low-income taxpayers who get the Earned Income Tax Credit are targets.

The credit's a type of welfare payment to the working poor, but huge numbers who get it also take out refund anticipation loans.

Ed Mierzwinski at the U.S. Public Interest Research Group says tax preparers smelled that new flow of money.

Ed Mierzwinski: That has caused the tax-preparation companies to change their business model to go after lower-income consumers and skim a large fee off the top in the form of a refund anticipation loan.

How large a fee? Consumer groups say that for the last year measured -- 2005 -- low-income taxpayers alone coughed up $649 million for these loans. All for money that usually was coming soon anyway.

I'm Steve Tripoli for Marketplace.

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