Tax refunds

Ok, so it's that time of the year again. Everyone has either already received or is anxiously awaiting their tax refund. I mean it's a sweet deal, right? Every year all you have to do is fill out a few pieces of paper, pay a tax man a few dollars and YOU GET MONEY. The best part is it's not even taxable!

But lets take a step back and see why a refund may not be such a sweet deal. First of all we must examine what a refund actually is. For starters it is not the IRS giving you money, it is simply them giving you back the money they shouldn't have taken. The only way that you can actually be given money is if you can qualify for a tax CREDIT like the Earned Income Tax Credit or the New First time Home Owner Tax Credit. This is a brilliant plan by the IRS because they have somehow turned tax time into a happy time for most working class citizens. Except for those of us that have a lot of investments or passive income we can't wait to file and get our returns!

Most people get such gigantic returns because they are raising tax shelters (children) and did not properly account for them when they initially filled out their W-4 forms when they started work. Thus every week/bi-weekly/monthly the IRS is taking more money from your take home pay than they actually should. Essentially what it boils down to is an interest free loan to the government. Now this doesn't make a HUGE difference to each individual family but nationally it adds up fast. Since I have yet to raise any tax shelters of my own I honestly have no idea how big the average tax returns are but lets assume they are on average $1,500. Lets extrapolate that over the roughly 150,000,000 person workforce. Nationally this is a $225,000,000,000 interest free loan to the US Treasury. A loan this size invested in even in a very conservative account yielding 3% amounts to $6,750,000,000 (that is $6.75 billion for those of you keeping score at home). I have NO IDEA what these figures would actually look like and I can't find any sources that say how much IRS gives out in rebates every year. I just used these numbers to make a point

Now assume lets assume the situation is reversed and you underpay your taxes the IRS will be nice right? NOPE. The stated interest rate for first quarter 2009 was 5% interest on deficient payments to the IRS. You can expect to be penalized .5% a month for late returns which increases to 1% per month once you've been notified of intent to levy. If you just "forget" to file your return and you do actually owe money you can expect a 5% per month fee of net taxes due + interest. This is one reason most people make huge over payments on their taxes because they are scared to cut it close.

An even bigger ripoff than a tax return though is getting a refund anticipation loan from H&R Block. In early 2000's they settled a lawsuit regarding the structure of these loans. Generally the money is lent for approximately 10 days and the customer is given cash on the spot minus fees and then the refund goes straight to H&R. In a recent investigations the Consumer Federation of America found that the refund anticipation loans charged APR as high as 774%. U.S. tax prepares generated fees totally approximately $810 million for these ten day loans. That's $810 million less dollars per year in the pockets of the poorest Americans. Ouch...

While I'm on this rant the last thing I was very surprised by was when my own mother, who is selfless enough to actually bother trying to help struggling children in one of North Carolina's poorest school districts, was telling me about the program the school had for extending teachers and school employees pay over the summer. They actually take money from your pay and hold it aside in a separate account and pay it out to you over the summer. The account doesn't even pay INTEREST!!! As if teachers and school employees aren't sacrificing enough already. Come on! Again on an individual level it may not seem like much, what's interest on a few thousand dollars but think of all the teachers in North Carolina. That's one big pool of money. The state is making some serious money on that deal. At least pay the interest back out to the school district or use it for short term loans to fund school programs. Who knows maybe they do, but expecting government to be transparent in their spending is probably not going to happen anytime soon.

That's all for now. Have a great week and enjoy those tax refunds. Don't forget to put some aside for a rainy day.

Sources : http://www.consumerlaw.org/issues/refund_anticipation/content/RAL_final.pdf

TRC