Instant Tax Refunds come under fire

With tax season under way, advocates are once again warning consumers against so-called "instant" or "same-day" refunds.

The controversy surrounding what tax preparers call "refund anticipation loans" is not new. In 2006, California Attorney General Edmund G. "Jerry" Brown sued major tax preparers to stop marketing the loans as refunds. In January, he announced a $4.85 million settlement with tax giant H&R Block. Another major tax preparer, Jackson Hewitt, settled in 2007. Other, smaller suits have been settled in recent years.

Despite the eye-popping rates, nearly 1 in 15 taxpayers opted for an early refund in 2007 – a total of $900 million spent to get paid an average of 10 days early, according to Americans for Fairness in Lending, a nonprofit advocacy group in Boston. The majority of those were lower-income families who received the Earned-Income Tax Credit, the group says.

Big industry players walk the line between meeting what they say is a strong demand for RALs and ensuring that customers are aware of the costs.

"We agree that the best thing is for taxpayers to e-file and get their refunds direct-deposited by the IRS," says Nancy Mays, spokesperson for H&R Block based in Kansas City, Mo. "We are on the same page with the advocates....Our tax professionals are trained to tell clients that e-filing is the least expensive and entails a reasonable waiting time."

A few years from now, the point may be moot. The Internal Revenue Service is developing a filing system called the Customer Account Data Engine, which the IRS says will dramatically shorten refund wait times.