When tax preparation services advertise “Fast Cash Refunds,” or “Instant Refunds,” beware! These offers are actually high-interest Refund Anticipation Loans (RALs.) When you get a RAL, you're getting a short-term loan secured by your anticipated refund – in effect, you're borrowing your own money. RALs are extremely expensive considering that they give you access to your refund just a couple of weeks earlier than the IRS would normally send it. If you look at the paperwork – which you should! -- you will see that the amounts withheld from your refund to pay the fees represent an interest rate (APR) of several hundred per cent!

Besides being expensive, RALs can be risky. The loan isn't actually made by your friendly storefront tax service – it's made by a bank acting in partnership with the tax prep people. It must be repaid in full even if you get a smaller tax refund than expected or if the IRS freezes your refund for any reason. Also, in the tiny print of the contract, you will usually find that you are giving the lender the right to seize your tax refund to pay off other old loans.

RALs are aggressively sold to people who need money the most -- lower-income workers who receive an Earned Income Credit (EIC). For you, the individual taxpayer, it's an offer to pay triple-digit interest to borrow your own money. In the aggregate, it's a mechanism to suck enormous amounts of money from hard-working families of modest means into the pockets of profitable banking corporations. A study conducted by the National Consumer Law Center and the Consumer Federation of America found that in 2004 about 12 million American taxpayers spent a total of $1.6 billion in unnecessary fees and interest charges to get their refunds a couple of weeks faster. About one in every ten tax returns involved a RAL, but among lower-income families with children who claimed the EIC, the figure was one in three.

As a result of such publicity and advocacy by NCLC, CFA, and other consumer advocates, the federal government has taken some baby steps to provide alternatives to RALs for taxpayers who want their refunds as fast as possible.

•  If you have access to a home computer and internet access and your annual income is less than $52,000, you can take advantage of a service called Free File. Go to the IRS web site, http://www.irs.gov, and follow the links to Free File. The services are provided by commercial tax preparation services, and they are still allowed to try to sell related products, including filing of your state tax return, which unfortunately is not included in the Free File offer. But for the first time in this five-year-old program, the companies have agreed to minimize the distracting advertisements and, in particular, not to pitch RALs to people who sign up for Free File. Free File can also be used to request the Telephone Excise Tax Refund, a one-time refund available to anyone who paid for long-distance telephone service after February 28, 2003, and before August 1, 2006.

•  Find a Volunteer Income Tax Assistance (VITA) site near you. VITA now assists not only elderly taxpayers, but also families who qualify for the EIC. Some VITA sites have electronic filing capabilities, which speeds up your refund. To find the nearest VITA site, call the IRS general help line at 1-800-TAX-1040 or go to www.tax-coalition.org.

•  The fastest way to get your refund without paying for the privilege is to combine e-filing with direct deposit of your refund into your bank account. This year for the first time the IRS is allowing you to split your refund and designate up to three accounts into which it will be deposited. This is intended to encourage saving in regular and retirement accounts. The CFA reminds you that if you don't have a bank account, there is no better time to open one than when you expect to receive a large deposit.

If you belong to a community organization and want to educate your peers about the risks and costs of RALs, you can download a brochure prepared by NCLC, “Don't Pay to Borrow Your Own Money,” at www.consumerlaw.org/initiatives/refund_anticipation/content/RALBrochure.pdf.

In short, resist the hype, wait a little longer, and get back all of your hard-earned money.

Attorney Roher welcomes questions of general applicability for publication in future columns.