When expecting tax refunds, cash-strapped households might consider refund anticipation loans or RALs. However, Better Business Bureau of Southern Arizona warns filers that RALs come with risks.

Based on taxpayers’ expected tax refunds, these short-term loans typically target low-to-moderate income families who could benefit from immediate cash. RALs can carry annual percentage rates as high as 500 percent. In fact, these loans are so expensive that the Military Lending Act bans them for service members.

“With tax refunds, patience is a virtue,” says Kim States, BBB president. “Waiting extra weeks for tax refunds can save consumers from ‘over borrowing,’ excessive fees and high interest rates.”

BBB encourages eager refundees to remember these points:

• RAL recipients are responsible for repaying the total loan amounts, even if tax returns are less than expected.
• Understanding the terms and conditions of RALs is critical. According to The Center for Responsible Lending, the average RAL APR in 2010 was 149 percent. Unexpected fees can cause serious financial damage.
• The Federal Deposit Insurance Corporation has forced all major national banks to discontinue these types of loans. Be wary of sketchy lenders, both online and off.

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In a hurry to get your refund? Some tax preparers offer tax refund anticipation loans, often marketed as “rapid refunds” in the form of checks or “gift” debit cards.

The Better Business Bureau (BBB) advises consumers to be wary of these costly loans. They deliver refunds only slightly faster than the IRS.

Refund anticipation loans are similar to payday loans: They’re short-term loans with high interest rates that can range from 50 to 500 percent. In some cases, they have hidden administrative fees. If the tax preparer makes a mistake in calculating your refund, borrowers could be required to pay fines and fees, too.

“Consumers may assume that the loans will be paid off quickly when their refund arrives, but if the refund is less than the loan, consumers will have to repay the difference, plus fees and fines,” said Kim States, BBB president and CEO.

The IRS usually delivers refunds in as few as 10 days after a consumer files a tax return, if the consumer files the return electronically and takes the refund by direct deposit to a bank account. The speed makes most refund loans unnecessary.

This year, the IRS has another option for refunds if a consumer doesn’t have a bank account: a prepaid debit card. The cards, available only by invitation, can be used to get money from ATM machines or to buy goods and services from retailers. The cards arrive faster than checks, the IRS says, and may allow consumers to avoid check-cashing fees.

The BBB advises consumers to be wary of two common tax-time schemes:

Tax reduction schemes are promoted by companies that claim they can help consumers reduce what they owe the IRS by working on their behalf with the IRS. However, the BBB has taken complaints from consumers who paid thousands of dollars to such companies only to find out that the companies didn’t reduce the amount they owed and, in some cases, had never contacted the IRS.

BBB advice: If you have a debt with the IRS, consult an IRS enrolled agent, a certified public accountant or a tax attorney to determine whether you qualify to file for anything other than paying your taxes, fines and penalties in full.

Phishing e-mails may say that there’s an issue with taxpayers’ refunds, that they are being audited or that a problem is delaying processing of their taxes. Many include a link to a website set up by scammers, where victims are asked for Social Security numbers, bank account or credit card (more…)