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The High Cost of Refund Anticipation Loans and Checks
Many people who do their taxes want their refunds as fast as possible. So they get a loan or a check from a tax preparer the same day. What they might not know is those advances can cost a lot of money and they don’t get their money much quicker.
Refund Anticipation Loans
Many tax preparers offer a refund anticipation loan (RAL) if you want your refund right away. The tax preparer will give you your refund within a day or two of filing your taxes. You don’t have to wait for the IRS to send you the refund or deposit it in your bank account.
There is a fee for the RAL, on top of the cost of getting your taxes done. There are often other “administrative” fees, too.
When you get an RAL, you are borrowing money. The RAL fee the tax preparer charges you is really interest. In 2011 one tax preparation chain charged $61.22 for an RAL of $1,500.00. That is an annual percentage rate (APR) of 149%. Credit card APRs are around 12 or 14%. They might jump to about 30% if you default. So the APR of an RAL can be more than 10 times higher than your credit card's APR.
An RAL is a loan from a lender who works with a tax preparer. It must be repaid. You must repay it even if the IRS denies or delays your refund. You must repay it if your refund is smaller than expected. So if your tax return is garnished to pay another debt, you will still have to repay the RAL, along with any fees, interests, and other costs.
If you don’t pay back the RAL, the lender will take actions that hurt your credit rating. This can include sending your account to a debt collector.
When you apply for an RAL, you are giving the lender the right to take your tax refund to pay for old tax loan debts the lender claims you owe.
Banks do not fund RALs anymore. If you get an RAL, it is from a non-bank lender,like a payday loan.
Refund Anticipation Checks & Pre-paid Cards
The IRS says you can expect your refund in fewer than 21 days after you e-file your tax return. It is even quicker if you have it directly deposited into your bank account.
If you do not have a bank account, tax preparers may offer you a refund anticipation check (RAC) or pre-paid credit card to help you get your refund sooner. If you do this, a bank or lender the tax preparer is working with opens a bank account for the IRS to deposit your refund into. Once the bank or lender has the refund, it gives you a check or a pre-paid credit card for the amount of the refund, minus any fees it charges.
You can also use an RAC to delay paying your tax preparation fees. This might be an expensive choice. If you pay a $30.00 fee for the RAC in order to delay paying a tax preparation fee of $189.00, you are paying an APR of 414%.
The prepaid credit cards often have other fees, like ATM cash-withdrawal fees, ATM balance inquiry or denial fees, and over the counter withdrawal fees. The bank or lender may claim zero liability if someone uses the card without your permission. So if your card is lost or stolen, you lose whatever remains of your tax refund.
Many tax preparers add fees to the RAL or RAC fees the bank or lender charges. These can add up. Here are some of the fees you may be charged:
- Application fees
- Data and document storage fees
- Document processing fees
- E-filing fees
- Service bureau fees
- Transmission or software fees
- Technology fees
Some preparers will charge several of these fees, making the cost of RALs and RACs even higher.
Volunteer Income Tax Assistance (VITA)
Volunteer Income Tax Assistance (VITA) is a program that does people's taxes for free. To qualify, your income must be roughly $54,000.00 or less. If you qualify, an IRS-certified volunteer will do your taxes for free. VITA volunteers can tell you about special tax credits you may qualify for, such as the Earned Income Tax Credit, Child Tax Credit, and Credit for the Elderly or the Disabled.
Use the VITA site locator to find a site near you. Check with your local VITA site for dates and times you can get help with your taxes, or call 2-1-1. Call 888-636-4211 if your area doesn’t have 2-1-1. The IRS also offers links to sites that provide free filing services at irs.gov.
The IRS also gives links to online software you can use to prepare and file your own federal tax return. If your income is less than $62,000.00, you can use free software available at IRS Free File to prepare your federal and possibly your state tax returns.