The cost of preparing your tax return will most likely be deducted from the amount you receive if you get the loan through a tax preparation service. Other service and administrative fees may be added on as well. There’s generally no credit check involved because the lender will have a dedicated account set up to receive your refund from the IRS and pay off the loan. Your loan is paid off when the refund is received.
Example of a Tax Refund Anticipation Loan
Let’s say you sign up with XYZ Tax Service to prepare your tax return. The completed return indicates that the IRS owes you a $1,200 refund. XYZ charges you $100 for preparation of the return and $100 in administrative fees for the loan. XYZ will pay you $1,000, which is the amount your anticipated refund is worth after subtracting the tax service’s fees. You can spend the money as you see fit. The refund itself will never come into your possession. The IRS will send it to the lender rather than to you. Theoretically, you shouldn’t have to make any payments on the loan or do anything else. If your refund is less than $1,200, you will have to make additional payments. For example, if the IRS determines your refund is actually $800, you’ll need to pay the lender $400.
Types of Tax Refund Anticipation Loans
Tax refund anticipation loans have changed slightly over the years due to legislation. The most common types as of 2022 include:
Refund anticipation checksRefund anticipation loans
Refund Anticipation Checks (RACs)
The federal government tightened up the rules regarding tax refund anticipation loans just before the 2013 filing season, which prompted banks to stop issuing these loans. Tax preparation companies began issuing refund anticipation “checks” instead. These are the most common types of “loans” in 2022. They are interest-free, but the amount is determined by your refund, and you’ll have to pay tax prep fees. Refund anticipation checks can be convenient if you don’t have a bank account. Your refund would be deposited into a dedicated bank account when it arrives from the IRS, and the lender would send you a check you can cash or a prepaid credit card for the amount of your refund, less any fees.
Refund Anticipation Loans (RALs)
The term refund anticipation “loan” is sometimes used interchangeably with the term refund anticipation “check.” A refund anticipation loan is usually from a tax preparation service working in conjunction with a non-bank lender to front you the refund money before the IRS actually sends your refund.
Disadvantages of Tax Refund Anticipation Loans
Refund anticipation loans can be very risky. You’ll need to repay the difference if your refund doesn’t turn out to be as much as your tax preparer calculated. Numerous federal and state agencies have the right and ability to garnish your refund for various debts and obligations you might owe. These are referred to as tax offsets and they can include:
Delinquent federal student loansUnpaid child supportUnpaid federal tax debtsUnpaid state tax debts
The IRS used to provide tax preparers with a tool to estimate which, if any, of these obligations might affect a taxpayer’s refund, but stopped in 2010. After that, banks began to stop issuing these loans. Your tax preparation service will have no knowledge of these debts without this tool, so it will calculate your refund without taking them into consideration. You could end up with no refund at all, but you would still owe the preparation service the loan amount and any accumulated interest or fees.
Junk Fees
Look into the loan terms carefully, scrutinizing any contract you receive for “junk fees” in addition to the usual tax preparation and administrative fees. You might come across charges like:
Data storage feesDocument storage feesService bureau feesSoftware feesTechnology feesTransmission fees
You might want to move on and look for another service if you come upon any of these terms in your loan paperwork.
Alternatives to a Tax Refund Anticipation Loan
Many experts recommend taking out a refund anticipation loan or check only as a last resort. You might consider these alternatives if you can’t wait 21 days for your tax refund.
Speed Up the Process
It will take up to 21 days for most taxpayers to receive their tax refund. That means you may be able to get your tax refund in less time. You can usually speed up the process a little by e-filing and having your refund directly deposited to your own bank account. You might be able to shorten the wait time to as little as 10 days if you take these steps.
Free Tax Prep Services
Some taxpayers resort to anticipation loans and checks because they can’t afford to pay someone to prepare their returns for them, and this cost is rolled into the RAL or RAC. You might qualify for a free tax service. Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) are programs offered by the IRS that may be able to help you with your tax preparation. Income limits and other rules apply. You can look for locations in your area by searching by your zip code online.
Take Out a Personal Loan
You might take out another type of loan, instead, or use a credit card, since it typically has a lower interest rate. You can pay it off as soon as your refund arrives. But if your refund wasn’t as much as you anticipated, you might end up owing money that you can’t afford to pay.
