03-25-2009 - Be careful when borrowing tax refund amount upfront

BY PATRICIA KITCHEN | patricia.kitchen@newsday.com

Getting back what the government owes you in a day or two may sound appealing, especially this year when money is tight and consumers are strapped.

But, if you're thinking of getting a tax refund loan - in which you borrow the amount of your tax refund upfront - you'll want to ask plenty of questions about how much it will truly cost in fees.

"Even under the best of circumstance this is expensive credit for such a short period of time," said Jean Ann Fox, director of financial services for the Consumer Federation of America, which together with the National Consumer Law Center prepares reports on refund anticipation loans and services.

A seven-to-14-day loan for $3,000 can cost $62 to $110 in fees, according to this year's report, "Big Business, Big Bucks: Quickie Tax Loans Generate Profits for Banks and Tax Preparers While Putting Low-Income Taxpayers at Risk."

Yet, filing the return electronically and having the IRS deposit it directly to your bank account can get you your return in about 10 days at no extra charge, Fox said.

Cary Carbonaro, a certified financial planner in Huntington Village, said she could see the need for access to quick cash back when it took six to eight weeks to get a refund.

But now, she said she would advise taking out such a loan only in "life or death situations" or "if you have no money and need to feed your kids."

Otherwise, "I don't see any reason to do it - ever."

Of course, some tax preparers "don't always make clear" how quickly the IRS is processing electronically filed returns, said Chi Chi Wu, staff attorney with the National Consumer Law Center.

She pointed to shopper research that found only one in 17 preparers telling the customer they could get a return in eight to 15 days by e-filing.

In 2007, 8.7 million American taxpayers forked over about $833 million in tax refund loan fees, according to the report.

Some also paid more than $68 million in related "add on fees" called "application," "administrative," "e-filing," "service bureau," "transmission," or "processing" fees, which can cost from $25 to several hundred dollars.

Not all tax preparers charge such add on fees, Wu said, so it's wise to comparison shop ahead of time if you must go the tax refund loan route.