State warns of tax scams

MADISON – Earlier than usual, the Department of Revenue, the Department of Financial Institutions and the Department of Agriculture, Trade and Consumer Protection, warn of a new tactic some tax preparation firms are using to lure new customers into high cost advancement loans well before tax season begins.  The Wisconsin Better Business Bureau also has announced recently that Advanced Fee Loans were the worst scam in Wisconsin in 2006.

Tax preparation firms and their banks are offering a new type of tax Refund Anticipation Loan (RAL) available before the traditional tax season even begins.  Called “Holiday RALs” or “pay-stub RALs” the RALs are based on an individual’s pay stub.  The RAL is secured by a taxpayer’s “expected” refund, but does not reflect actual refunds, which can be adjusted for liens and levies or other sources of income.  A RAL is also accompanied by various types of fees and charges.

Some tax preparation firms are also requiring a $50 “deposit” for each loan.  The deposit is only returned when the taxpayer returns to the same office to file the tax return.  

Essentially, taxpayers who use RALs, are paying a high price to borrow their own money.  These loans have high, often hidden costs. 

“Wisconsin should know that a RAL is not the only resort – other options are available,” stated Secretary of Revenue Michael L. Morgan.  “Volunteer Income Tax Assistance (VITA) sites are available to provide free tax preparation assistance around the state.”

Taxpayers can visit any free tax preparation site where they can have their taxes electronically prepared for free.  For more information about VITA, check the DOR web site at: http://www.revenue.wi.gov/faqs/pcs/vita.html and typing in VITA.

By e-filing a return, the refund can be directly deposited into the taxpayer’s checking/savings account within a matter of days, all free of charge.

However, many residents do not have a checking/savings account. To help the ‘unbanked’ avoid a RAL, several dozen VITA sites have partnered with local financial institutions to offer taxpayers the opportunity to open a personal checking/savings account while visiting the VITA site. Opening an account would allow a taxpayer to receive a refund via direct deposit within a few days. In addition, the new account holders would also be able to build their credit histories and more easily save money by not having to pay for check-cashing services.

Statistical Information:

·         In 2004, approximately 130,000 Wisconsin taxpayers paid about $32.5 million in RAL and associated fees, according to a report by the Wisconsin Council on Children and Families.

·         An average tax refund of $2,000 can carry RAL-associated fees of $250 or more.  That is equivalent to paying an annual interest rate of 521% for a 10 day loan. 

·         Plus, if a refund is delayed or denied for any reason, the consumer is responsible for paying back the loan as well as all fees.

·         Before electronic filing, these high interest loans may have been attractive because paper tax returns would take several weeks to process.  But with today’s e-filing, state and federal refunds are available within a matter of days when deposited directly into a checking or savings account, all at no cost to the taxpayer.

·         For more information on free tax preparation or RAL scams, go to www.revenue.wi.gov, www.wisconsin.bbb.org, or call 1-800-829-1040