Oregon Sen. Jeff Merkley co-sponsored legislation Friday outlawing predatory "refund anticipation loans" targeting low and middle income families expecting to receive the Earned Income Tax Credit.
The bill also promotes the use of secure financial services by millions of taxpayers.
Advocates say the loans are meant to bridge the gap between the time a taxpayer submits their taxes and the time they receive their refund. Right now, many low and moderate income taxpayers are forced to choose between waiting a month or more for their tax refund or turning to high-interest "anticipation" loans.
The loans can have an annual interest rate ranging from about 50 percent to nearly 500 percent and tack on additional fees, resulting in massive costs for a very short-term loan.
Merkley said in a statement that more than half of such loans are used by earned income tax credit recipients, despite the fact that only 17 percent of taxpayers receive the EITC. B
y banning these high-cost loans and expanding the use of low-cost Electronic Transfer Accounts to include EITC benefits, the Taxpayer Abuse Prevention Act allows more taxpayers to receive their refunds quickly and securely.
"The Earned Income Tax Credit benefit is designed to assist working families with their vital needs like food, housing, and clothing," Merkley said. "By tricking taxpayers into high-interest refund anticipation loans, tax preparers who offer these loans are undermining the EITC and basically stealing money away from working families."
The Taxpayer Abuse Prevention Act provisions include:
-- Prohibiting refund anticipation loans that utilize earned income tax credit benefits;
-- Ending the Debt Indicator program, which shares taxpayers' personal information - beyond what is necessary - with tax preparers;
-- Prohibiting mandatory arbitration clauses for the loans to ensure that consumers have the ability to take future legal action if necessary; and
-- Requiring that the Treasury Department provide the opportunity for low and moderate income taxpayers to open a low-cost direct deposit account at a federally insured bank or credit union through the use of appropriate tax forms.
Filing electronically and having the refund direct deposited into a bank or credit union account permits taxpayers to receive their refunds in approximately seven to ten days, without paying the high fees associated with "anticipation" loans.
Between 25 and 56 million American adults are not using mainstream, insured financial institutions like checking, savings, or electronic transfer accounts, Merkley said.