Early Tax Refund Options Could Trap Your Cash
Don’t be fooled into thinking you’re not getting a loan — because you really are.
You could be itching to get your tax refund earlier — and we don’t blame you. As of early February, IRS tax refunds are bigger, with an average payment of $2,065. That’s over 18% higher than this time last year.
But the IRS can have lengthy processing times, causing you to search for a faster way to get your refund. Last season, 22 million taxpayers found a quicker possibility in early tax refund options.
These strings-attached alternatives will get you an early payment but may also lead to fees, upcharges, and interest rates as high as almost 36%.
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Be aware. Know what you’re signing up for, or you may risk owing money on your federal tax refund.
Early tax refund choices for your return
Before we get into the data, let’s look at the definition of refund anticipation loans and checks. Both products operate differently to give quicker access to your tax refund amount.
- Refund Anticipation Loans (RAL). Taxpayers borrow money based on the expected refund amount, with attached interest and fees. Funds go directly into the lender’s account when the IRS disburses payment.
- Refund Anticipation Checks (RAC). The taxpayer’s refund is deposited into a temporary bank account, which the tax preparer uses to write a check (or give a prepaid card) to the taxpayer. Effectively, this option is a preparation fee loan as tax preparer costs are deducted before payment is made to the taxpayer.
In both cases, a third party receives the payment and the taxpayer pays service fees before receiving a smaller refund. While RAC has an average fee of $40 (which might be small for some) the real danger lies in refund anticipation loans.
After all, what happens if you take out a loan and then the IRS reduces your refund or the anticipated amount is smaller than expected? Well, you’re now on the hook for money you no longer expect to receive.
Are early refunds for your taxes legal?
It may sound surprising, but these early tax refund options are legal products. Many taxpayers have used these sometimes costly alternatives to get their refunds early, as recently reported by the Treasury Inspector General for Tax Administration (TIGTA):
- Last tax season, U.S. taxpayers lost over $842 million in early tax option fees.
- One provider offered a 35.5% interest rate plus a finance charge of 7.5% on all loans.
- Loan periods were as short as three months (repayment after the due date would result in late fees and interest).
This means that taxpayers who sought tax relief may have instead signed up for a financial headache, potentially owing more money than was initially due to the IRS. Plus, as of the TIGTA report date, some who chose refund loans were still waiting for payment from the tax agency.
How to get an IRS tax refund early
Fortunately, you may get an “early” refund without signing up for a loan. Here are just a couple of ways to expedite your federal tax refund:
- File early. The busiest part of the filing season is late March to mid-April. If you file earlier, you can stay ahead of the curve and may see a shorter processing time on your payment.
- File electronically and direct deposit when you can. Avoiding the post office during the busy tax season could get you a refund faster and help protect your check from tax refund mail theft.
Remember: Do your research. If you need a tax preparer, find a reputable one. If you want an inexpensive tax preparation service, you can try an IRS service like VITA, which gives eligible taxpayers free tax counseling and preparation services.
Stay informed. And don’t fall for something that sounds too good to be true.
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