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DEAR SENIORS LEGAL LINE:

I plan to file my taxes soon. I believe I will be receiving a refund. Being elderly and on a fixed income, I could really use the refund. I heard that if I go to a tax preparer, they may be able to give me my refund on the spot. Is this true and how does it work?

Signed, Ike

These "instant refunds" are not really refunds - they are loans. You are referring to a "refund anticipation loan," which is a quick way to borrow money against your own anticipated tax refund money. However, it is also a quick way to borrow trouble. These loans can be risky because they typically have high costs and interest rates. The interest and fees charged on the loan are deducted from the expected refund amount, reducing the amount you receive. The annual percentage rate (APR) paid by a borrower can range in the triple digits from 67 to 700%!

The tax preparer and a separate lender (usually a bank) work in tandem with each other to provide the loan money to the borrower. After the borrower signs the loan contract, the bank opens a temporary bank account for the borrower to receive the electronic deposit of the refund. The loan contract instructs the IRS to directly deposit the refund into that account. The contract usually contains a "right of setoff" which means that the lender can take the money directly out of the account without the borrower's authorization. Therefore, the lender is repaid when the refund appears in the account. The refund does not go to the borrower because it is used to pay back the loan. If the refund amount is less than expected, or does not cover the loan amount plus interest and fees, the borrower is still liable to repay the full contracted amount. You can imagine, with the high rate of interest this can become a serious problem for the borrower.

Historically, consumers did not realize that they were taking out a loan when they opted for this quick money, so the State of Minnesota has made efforts to safeguard consumers by making a law that the tax preparer/financial institution must provide the borrower with written disclosures about the loan so that the borrower knows what they are getting into. For example, the written disclosures must spell out that the money is a loan, what the APR is for the loan, and that the refund will be used to repay the loan including fees, interest, and other charges. It must tell the borrower that if the refund is delayed for whatever reason, more interest may have to be paid on the loan. Further, it must disclose that a person can get the full refund in about two weeks if they file their return electronically and have a bank account. In other words, they may not need the loan, and can get more money without it. Finally, the written notice must be signed and dated by both the borrower and the tax preparer. See Minn. Stat. § 270C.445.

In my opinion, most people do not need the refund anticipation loan because they would receive their full refund directly from the IRS within a short time after filing their taxes, typically within 5 to 10 days if you file electronically and have a bank account. For more information about these loans, you may wish to check out the Minnesota Department of Commerce website at www.commerce.state.mn.us, or contact them by telephone at 651-296-4026. For free tax preparation help for low to moderate income taxpayers, go to a Volunteer Income Tax Assistance (VITA) site. To find one in your area, call the IRS help line at 1-800-TAX-1040. In the Duluth area, Community Action Duluth offers free tax preparation and filing to anyone earning $39,000 or less this year. Contact Community Action Duluth by telephone at 218-726-1665 or toll free at 1 866-761-5257 for times and locations.

This column is written by the Senior Citizens' Law Project. It is not meant to give complete answers to individual questions. If you are 60 years of age or older and live within the Minnesota Arrowhead Region, you may contact us for legal help or questions by writing to: Senior Citizens' Law Project, Legal Aid Service of Northeastern Minnesota, 302 Ordean Bldg., Duluth, MN 55802. Please include a phone number and return address. To view previous articles, go to: www.lasnem.org. Reprint by permission only.