In a TV commercial for H&R; Block, a tax preparer empathizes with a young mother overwhelmed by financial pressures. She then hands the mom a check and smiles benignly at having helped pay the overdue bills.
The check wasn't from the Internal Revenue Service, though. It was a refund anticipation loan, and consumer watchdogs aren't smiling about refund loans.
The mom, they would argue, bought into one of the biggest tax-time rip-offs: "paying to borrow your own money."
Refund loans, like cash advances from credit cards, are short-term loans with high interest rates.
For a flat fee, a tax preparer lends you the amount of your refund when you file your return - you don't wait for the IRS to write a check. The fee might seem small, but it can end up being the equivalent of a 100 percent annual interest rate.
In the past, when paper returns ruled and refunds could take up to two months to be mailed, refund loans offered a time advantage. But with electronic filing and direct deposit, the IRS can return your money in as little as 10 days.
"It's hard to accept the argument that a week is too long to go without the money when they've gone without it for a year," says Colleen Dailey of CASH Coalition, which helps coordinate free tax preparation services in Washington, D.C.
At H&R; Block, a $2,500 loan carries a finance charge of $75. If the loan is outstanding for 10 days, that's an annual percentage rate of 103 percent.
You also have to pay bank fees to set up an account for the loan, as well as the usual cost of preparing and filing a tax return. Altogether, the charges amount to $220.
Still, the use of refund loans remains popular, especially among young filers.
According to Household International, which services refund loans for H&R; Block and other providers, one-third of borrowers for the 2002 tax season were 30 and younger.
"What we see is just a byproduct of the ATM society," says Mark Friedlander of Household. "It's the same concept that people want quick access to their funds."
But there's an added risk for cash-strapped borrowers: If the IRS does not approve your refund, you are still responsible for paying back the refund loan. And the IRS will withhold your money if, for instance, you've missed a student loan payment or you're subject to a government lien, say for back taxes.
Household now requires that tax preparers screen for these risks, but the process is no guarantee, especially if a government lender reports a problem later. Should the funds be denied, the loan then accrues a 1.5 percent interest rate on any outstanding balances per month.
If this all sounds too risky, one alternative is the Free File program, which allows taxpayers who qualify to submit returns for free through the IRS Web site, www.irs.gov (refer to the Web site for specifics on eligibility).
Though you won't receive money instantly, you can prepare and submit your return at no cost and receive funds electronically.
The service is offered through private tax companies, but you don't have to sign up for a refund loan.
If you make less than $35,000 and need help with a return, you can turn to the Volunteer Income Tax Assistance program, which provides tax preparation for free in communities throughout the nation. To locate a site near you, call 800-829-1040.
Increasingly, VITA programs are partnering with credit unions, which can provide loans equivalent to your refund but at competitive interest rates - no more than 18 percent depending on your credit history.
Unlike refund loans, however, these loans will be reported to credit bureaus, so handle them responsibly.
Finally, if you want a refund loan, make sure the tax preparer fully discloses the loan's terms, and stay current with any other debt obligations. Some providers to consider are H&R; Block, Liberty Tax Service and Jackson Hewitt, since they must comply with a series of "best practices" newly established by Household.
And of course, the cheapest option is to plan ahead. If you foresee a cash flow slump, don't wait until the last minute to file for your refund.
E-mail Carolyn Bigda at email@example.com