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Free Tax Help Protects Low-Income Filers From Pricey Loans

As this year's tax deadline approaches, hundreds of thousands of low-income Americans are relying on free services to help them with their returns.

Tax preparation fees — even a few hundred dollars — can be a burden for those living on the margins. And taxpayers desperate for cash can fall prey to high-cost loan offers that eat into their refunds

At the free tax-preparation site at the main library in Washington, D.C., about 30 taxpayers wait for help from volunteers.

Millicent Gamble is hoping for a big refund this year. Last year, the retired hotel worker got more than $1,000 back from the government. She already knows how she wants to use this year's check.

"To pay my rent and maybe take care of some doctor's bills and so forth," Gamble says.

It seems almost everyone here plans to use their refunds — if they get them — for basic expenses. Teresa Hinze of Community Tax Aid, the nonprofit that provides this free tax help in collaboration with the IRS, says the group's clients' average income is about $17,000 a year.

"They don't have the money to pay tax-preparation fees," Hinze says.

But, she says, some people who should come for help do not; they're either unaware that it's available, or they need some quick cash. They turn instead to private preparers or other programs that offer short-term loans in advance of getting their money back from the government. Hinze says it can be a risky move.

"The average fee in this area is around $170 to $200. And we had a woman a couple of years ago who paid $900," she says. But the woman didn't realize it because the fee was deducted from her refund.

Chi Chi Wu with the National Consumer Law Center in Boston says there are plenty of pitfalls out there for desperate low-income taxpayers. She says this year the good news is that regulators have stopped banks from offering something called refund anticipation loans. These loans charged taxpayers exorbitant fees to borrow against their expected refund. She says the bad news is that they've been replaced with something else.

"It's called the refund anticipation check," Wu says. "It's kind of like a cousin of the refund anticipation loan."

Instead of borrowing the whole refund amount, individuals can pay extra to have their tax preparation fee delayed and deducted from their refund. A typical charge might be only $30, but Wu says paying that to effectively borrow a $200 tax preparation fee for a few weeks can be costly.

"If you calculate that out at as an annualized percentage rate, an APR, that's the equivalent of 260 percent," she says.

Companies that offer such services say they help those who can't pay the tax preparation fee upfront. But consumer advocates say all these things chip away at the refunds of those who can least afford it. Wu also warns that while banks no longer offer refund anticipation loans, payday lenders and others are stepping into the void — which can be even riskier.

I wanted to see for myself, so I decided to go online and do a quick word search. Within seconds of typing "tax, refund loan," the screen is filled with offers. I click on one of them, and there, next to a smiling woman with a handful of dollar bills, is a flashing sign that says "Get Cash Now!"

Underneath, it reads: "Tax refund loans are available now. Just apply above and receive an approval within just 90 seconds."

That sounds pretty attractive.

But the site wants some personal information — like my bank account, bank routing and Social Security numbers. I decide to go with some made-up ones to see what happens. And lo and behold, in just over a minute, I get a message that I've been pre-approved for a one-week loan of up to $750.

But here's the fine print: The annual percentage rate, if I agree to this, is 1,368.75 percent. Wow.

It's really just a payday loan, prohibited in some states but not all. Wu says you also don't know who's getting your personal financial information. It could be a scam. Her advice? Find a free tax preparation site. There are 13,000 across the country. The IRS also offers free online filing for low-income taxpayers.

Copyright 2020 NPR. To see more, visit https://www.npr.org.

Pam Fessler is a correspondent on NPR's National Desk, where she covers poverty, philanthropy, and voting issues.
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