I saw two of them just this morning. Those tax guys in statue of liberty garb, waving their signs on street corners. Tax places seem to sprout up out of nowhere this time of year, filling any empty storefront they can find. “Get your refund today!” they cry, trying to replace something everyone hates (doing taxes) with something everyone loves (getting money).
They may be preying on our city’s most desperate communities: low-income neighborhoods where banks are scarce and misinformation is a-plenty. How do these get-money-now schemes work? Read on.
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Many of these pop-up tax preparers offer two deals to get your money faster: a refund anticipation loan or refund anticipation check. The loans generally go to people with bank accounts, while the checks go to someone without a bank account. In both, the person getting the tax done has the preparation fees automatically deducted from the refund and pays some considerable fees for getting the money sooner.
A new study from the Urban Institute shows how much people are paying for these financial services and just who is paying for them.
How much does it cost? Well, there’s the price of the tax preparation–anywhere from $187 to $350, the study says. Then the fees can vary from $57 to $117–as much as 12 percent of a person’s total refund. It costs more if you want the money the same day.
For someone with a bank account, a refund anticipation loan might not even come much faster than the regular refund through direct deposit. But ignorance about the tax system is just one of the ways these financial products get sold.
Who is using them? About 18 percent of filers use these services. But that 18 percent isn’t spread out across everyone. It’s concentrated in low-income communities and particularly used by young, poor people, especially single mothers, with less education.
Many of them receive the Earned Income Tax Credit. That’s a tax credit that goes to poor working families with children–designed as a boost to their wages. But it has a catch–it’s tricky to fill out the forms, so many families need help if they want to get the credit, and thus, need to go to a tax preparer.
A lot of families who get the services are also “unbanked,” meaning that they don’t have or use a bank account. Just like payday lenders are numerous in communities without banks, so are refund loans and checks. In fact, a recent survey shows that unbanked households are twice as likely to get an advance on their tax refund.
African Americans and Hispanics are much more likely to use the service–13 percent of African Americans and 9 percent of Hispanics, compared with 6 percent of white people.
Why does all this matter?
Well, tax refunds belong to us, right? They’re the money that Uncle Sam has determined we don’t owe him. The Earned Income Tax Credit belongs doubly to all of us–they’re money that we’ve decided should go to working people to help them get a leg up. Those dollars are designed to be spent in the regular economy–for school supplies and groceries, paying rent or overdue utility bills. It wasn’t put in place so that financial institutions can make another quick buck off the poor.
So the next time you see one of those Lady Liberties on the street, be kind. After all, they have to stand on a street corner through the coldest season of the year. But you now know you and Uncle Sam will get a better deal without them.
Photo credit: Alaina Buzas