In a small waiting room in St. Paul, dozens of people sit patiently, clutching their W-2s. Diana Eicher, 42, braved subzero temperatures to have her taxes done for free by non-profit AccountAbility Minnesota.
The mother of two earns just over $40,000 a year working full-time and is looking forward to finding out what her refund will be.
The tax preparer tells her that her refund comes to $4,000.
Tax preparer GeorgAnn Burns says Eicher is also saving at least $400 on what the filing would have cost at the average commercial firm.
"That's way beyond what I was expecting," says Eicher. "Thank you very much for your expertise. I really appreciate it."
Eicher's low income means her refund includes the federal Earned Income Tax Credit for working people hovering near or below the poverty line. Depending on income and family size, the credit can be as much as a few thousand dollars.
AccountAbility Minnesota aims to help taxpayers keep every penny of it. One way they do that is by offering low cost "refund anticipation loans," which loan people money up front against the tax refund they are expecting. AccountAbility Minnesota charges no more than $30 for such a loan, compared to the hefty prices charged by commercial tax services like H&R Block and Jackson Hewitt. They charge fees ranging into the hundreds of dollars and interest rates as high as 500 percent.
The IRS found that refund anticipation loans diverted more than $8 million from taxpayer refunds in 2007. Because they are targeted at low-income people, the IRS calculates they have drained more than $2 billion in Earned Income Tax Credits that should have gone to the working poor.
IRS Spokeswoman Verlinda Paul says keeping the Earned Income Tax Credit in the hands of people who need it most is more important than ever in the recession.
"So many people lost jobs last year or received lower wages than they would have in the past and we are anticipating that even more people may fall below the threshold and be entitled to this credit," she says.
If you file electronically and have your refund deposited directly into your bank account, it usually takes about a week to get your money. Paul says the IRS wants people to know they don't have to pay to get their refunds. But that's easy to miss in the barrage of advertising at tax time.
“Our main goal is to get people banked, get them putting their money into the bank.”Bonnie Esposito, AccountAbility Minnesota
At the end of a typical H&R Block TV Ad for refund anticipation loans, a screen flashes up with tiny white letters explaining the terms of the deal. If you blink, you could miss that it's a loan they're selling.
"This is big business," says Chi Chi Wu, a staff attorney at the National Consumer Law Center, which has been involved in lawsuits over the marketing of refund anticipation loans. Wu says that, since the loans are made based on estimated returns, they can lead to trouble, especially if the refund is smaller than expected.
"That can have an impact in terms of your credit record," she says. "You might face debt collection if the refund doesn't arrive to repay that loan."
Tax refunds are often the largest check many people, especially those who get the Earned Income Tax Credit, see in a year, making the prospect of getting them faster too good to pass up.
Bonnie Esposito, director of AccountAbility Minnesota, says many tax firms push refund anticipation loans without telling clients that they would get their refunds in about a week, even without a loan. She says it's even harder for people without bank accounts to resist taking them because they must get their refunds by mail, and that can take several weeks.
To combat this problem, AccountAbility Minnesota offers free savings accounts so clients can have their refunds direct deposited. In the past three years, that strategy has saved taxpayers about $300,000 that they would have spent on refund anticipation loans.
Data shows that most clients' savings accounts were still active one year later.
"Because our main goal is to get people banked, get them putting their money into the bank," says Esposito.
That's what taxpayer Diana Eicher plans to do. This year, she plans to save as much of her refund as she can.
"Even if I feel like I don't have that much money I'm trying to save money just to have in case of emergency. So I guess I look at it like yes, I could always spend it but I just really need to save it because I haven't ever. So, it's more like I'm not giving myself an option," she says. "I'm just going to save half of it and that's that."
And building equity is what advocates hope will help pull people out of poverty. The free service at AccountAbility Minnesota opens officially for tax season today.