AARP Bulletin - April 2010

Your AARP ; The Law
By Emily Sachar
; Ask the Experts
; The issue: What are the restrictions on tax preparation firms
that arrange loans in anticipation of clients’ tax refunds?
It’s an all-too-familiar tax season routine:
Go to a storefront tax preparer and find
you’re owed a refund. The preparer offers
a quick refund if you sign some papers.
Then in a few days, you have your cash.
This may sound good, but it’s a raw deal,
say AARP attorneys. Instead of a quick
refund, it is actually a cash advance called
a refund anticipation loan (RAL), a short-
term, high-interest loan with annual per-
centage rates as high as 600 percent. That
refund doesn’t arrive much faster than
one you’d get filing electronically with
the Internal Revenue Service, which pro-
cesses refunds within 10 days, said Julie
Nepveu, senior AARP attorney. “It is an
absolute travesty that the lowest-income
taxpayers are losing money they need to

live on when they could be getting their
refund quickly for free,” she said.

Indeed, the fees are stiff (an average of $250 on a $1,000 refund), and many states limit the practice. The West Virginia Supreme Court is slated to hear a case this month involving thousands of residents, including Christian and Elizabeth Harper of Pliny. “The loans hurt vulnerable senior citizens and low-income individuals who can’t afford exorbitant fees,” said Eric Snyder of Bailey & Glasser in Charleston, an attorney in the lawsuit naming the national tax preparer Jackson Hewitt Inc.

AARP filed a friend of the court brief supporting the Harpers, who argued that Jackson Hewitt obtained a fee from a national bank, Santa Barbara Bank and Trust, a division of Pacific Capital Bancorp. Those fees violate the law, Snyder asserts in the brief, because Jackson Hewitt did not properly disclose its relationship with the bank, which provided the loan.

Cases challenging RALs are pending in several other states, including Missouri, Ohio and Maryland. Nationwide $1.5 billion in various fees is paid by low-income workers eligible for the earned income tax credit, according to the National Consumer Law Center. In West Virginia, those fees totaled $12.7 million.

According to the suit, tax preparers that provide full consumer services are designated by state law as credit service organizations (CSOs) and must make basic disclosures to consumers about RALs. In court papers, Jackson Hewitt has argued that it should not be considered a CSO and that it follows the law carefully. Today Christian Harper, a computer analyst, recognizes his error. “I would have waited the extra week for my refund and saved grocery money for two weeks, but they did not tell me that was an option. Ever since, that’s exactly what I’ve done,” he said.

Getting that tax refund fast is great. But you are usually better off just dealing directly with Uncle Sam.

; What it means to you: If you need fast access to your tax refund, file electronically with the IRS. Free tax preparation services are available from AARP Foundation’s Tax-Aide or other volunteer tax preparation providers. ;

QA few years ago, we took out a $35,000 home equity loan to help our daughter get out of debt. She signed a contract and agreed to pay us $300 per month. She has never made one payment.

Do we have any legal recourse?

AYou can sue your daughter for breach of contract.

As with any lawsuit,
though, the problem may not be in getting a court judg-
ment against her, but in collecting. You may need to
garnish her wages or her bank account. A legal services
attorney can help explain what you need to do, or there
may be an elder law hotline in your state that can walk
you through the necessary steps.

QWhen I turn 66, can I claim Social Security spousal benefits on my husband’s record, then switch over
to my own account at age 70 and get a higher benefit?

AYes, you can. When you’ve reached your full retire- ment age of 66, you may choose to receive only your
spousal benefit, if your husband has filed for benefits by
then. By doing that, you delay claiming your own retire-
ment benefit, and that delay will increase your full benefit
amount by about 8 percent a year. You must make clear
when you file for benefits that you are applying only for
the spousal benefit.

QMy father took out a reverse mortgage before he married his new wife. Now that Dad has died, who
is responsible for paying off the reverse mortgage?

AWhoever inherits the house—most likely the spouse—must pay off the reverse mortgage, which
becomes due when the borrower dies. Interest continues
to be charged on the unpaid loan balance, so it’s to the
heir’s advantage to repay the loan as soon as possible.
The home would have to be sold only if neither his estate
nor his widow could arrange to refinance or take out a new
reverse mortgage. For more information about reverse
mortgages, go to AARP online at www.aarp.org/money/
personal/reverse_mortgages/. —Carole Fleck

Emily Sachar is a journalist and author based in Brooklyn, N. Y.

Experts: Jean Setzfand of AARP on suing a family member and spousal benefits, Sally Hurme of AARP on reverse mortgages. Send your questions to Ask the Experts, AARP Bulletin, 601 E St. N.W., Washington, DC 20049, or e-mail askourexperts@aarp.org.