(Ventura County Star (CA) (KRT) Via Thomson Dialog NewsEdge) Mar. 8--Low-income families generally are entitled to the Earned Income Tax Credit, but the paperwork is so complicated that many turn to tax stores for help.

The average tax preparation fee of $150 likely is difficult to squeeze out of an already meager budget, so some people opt for a refund anticipation loan, minus the tax preparation fees.

The quick loans provide people cash in a day or so, as well as remove the problem of how to pay for the tax services. The process doesn't even require a bank account, a potential problem for people who might rely on check-cashing services for financial transactions.

It's an attractive solution that comes with a high price.

The annual interest rate for a quickie refund loan is from 40 percent to 700 percent when all the fees are calculated because the loan is only stretched over a few days. The Consumer Federation of America estimates the average refund anticipation loan costs $100, plus a tax preparation fee and bank fees. The total cost could run to $343 for someone who doesn't have a bank account.

The Earned Income Tax Credit is designed to assist the lowest income families. The maximum income allowed for a married couple with two or more children is $37,263. The highest tax credit, $4,400, is for a parent supporting two or more children. A parent with one child is eligible for a $2,662 credit.

The credit is more than a tax refund. In some cases, a head of household might get back all taxes withheld during the year and then some.

The Consumer Federation says the cost of refund anticipation loans drained $900 million from the tax refunds of the working poor in 2004, reducing the effectiveness of the federal government's largest poverty fighting program.

A refund anticipation loan is more immediate, but not by much. An e-filed return with direct deposit likely is to be in a person's bank in eight to 15 days, and an e-filed return that calls for a check to be mailed takes about three weeks.

Santa Barbara Bank & Trust is the second largest provider of refund anticipation loans, a little known portion of its business. The company has exclusive arrangements to provide loans at Jackson Hewitt tax preparation office and through Intuit's Turbo Tax software. The company had $58.4 million in revenue from the refund anticipation loans and transfer accounts last year, and it expects an 8 percent increase in transactions this year to more than 6 million.

Santa Barbara Bank & Trust provides 30 percent of all refund anticipation loans in the country.

Don Lafler, chief financial officer for the bank's parent company, Pacific Capital Bancorp, said the service the company provides is an important one that gives people fast, safe access to their refunds and helps low-income families pay a preparer to get the tax credit they are due.

"They are able to get the service and the preparer gets their fee," he said.

The loans advance the amount of the return expected and pays for the tax preparer's service. The transfer accounts are not a loan, but a fee to set up a one-time account for the refund to go directly to the bank and to pay the preparer's fee.

He said the average fee is $70 and the average loan amount is $3,000. That would be a high annualized interest rate, Lafler said, but the bank has to cover the costs of the short loan all at one time, unlike a car or home loan. He said there are no late fees if the IRS doesn't send the refund quickly and about 1.2 percent never get paid by the IRS or borrower.

Certified public accountants, tax attorneys and enrolled agents in the state are unlikely to provide refund anticipations loans, said Cyndy Scalisi, an enrolled agent in Goleta. Enrolled agents are licensed through the federal government to prepare taxes exclusively. There are also state licensed technicians who prepare most of the returns at big chains.

Scalisi tells clients to have their taxes prepared on a Tuesday or a Wednesday, and then they only have to be out the money until the refund is directly deposited, probably the next Friday.

A few of her clients have asked about the loans, but few really need the money to pay the fee. She said most can wait a few days to get the money.

"If you can't afford the services of a tax preparer there are so many places where it is free," she said.

The Volunteer Income Tax Assistance is administered locally with products provided by the IRS and is aimed at those families that qualify for the Earned Income Tax Credit.

The Ventura County Financial Empowerment Partnership this year is collaborating to get the services to as many people as possible, said Susan Englund, vice president of community impact at United Way of Ventura County. United Way, El Concilio, the county Job and Career Center, California Lutheran University and several housing and finance nonprofit and county agencies are providing sites and volunteers. Most hours are in the evening or scheduled Saturday sessions.

"Hopefully, we are accessible by having a variety of days and hours to accommodate everyone," she said.

The taxes are filed electronically to the IRS and refunds can come as soon as one week. The volunteers all have been trained on the Earned Income Tax Credit and the child tax credit that are of particular help to families. The volunteers are everyone from students to certified public accountants and bank employees, Englund said.

At the El Concilio site on a recent Saturday, Cabrillo Economic Development Collaborative for the first time brought information about banking and credit to expand the service. Englund said the group would like to expand next year to broaden the financial information available.

In February, California Attorney General Bill Lockyer filed a lawsuit against H&R Block alleging the company promotes its refund anticipation loans in a deceptive way that calls the loan "instant money" and refers to it as a "refund" when it is actually a loan that has many fees attached.

The complaint also claims the loan is suggested to clients over the more financially sound advice that the taxpayer change their withholding to keep more money during the year, and clients often are steered to check cashing locations that give kickbacks to the company for the referral. Additionally, the suit alleges the loan program is used to collect debts from past years, which can accrue when the actual refund is not as large as the anticipation loan that was given out.

Finally, Lockyer said the company is sharing tax information without clients' consent.

H&R Block said the disclosures are prominent and repeated during the explanation and on all paperwork. The company also said this year the process includes a check on any past debt and early notification to the client about potential "cross collection," or money owed a past debt.

For those who go to smaller shops, the refund anticipation loan pitch is less likely.

Linda Zhu, with Yamada & Zhu Certified Public Accountants in Ventura, said its business is tax and financial planning, not loans.

"If they want to get the refund quick, they can come in and do their returns early," she said.

There is not a demand for the refunds to come back any quicker, Zhu said, but if there was, she would likely advise against the high-cost refund anticipation loans. The fees make it a loan with a higher interest rate than a credit card.

"It's not a wise financial action," she said.

Zhu said she believes advertisements for the service should have to include the cost. A perspective on the annual rate might make people think twice about paying for such a short loan.

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