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What’s Eating Your Tax Refund?
A refund anticipation loan (RAL), also known as “Rapid refund”, “Instant Refund”, “Easy Cash Refund”, or “Fast Cash Refund” is a short-term loan a taxpayer makes with the tax preparer and a bank to be repaid with his or her income tax refund. It is important to note, that the Internal Revenue Service is not involved with the agreement or approval of the loan. The IRS does not answer questions regarding the loan agreement. The tax preparer files the tax return electronically, the taxpayer signs the RAL agreement, and once the return has been accepted by the IRS (usually in 1 to 2 days), the bank authorizes the tax preparer to issue the RAL check to the taxpayer. Once the IRS releases the refund (usually 8 to 14 days), the loan is repaid, the tax preparer fees are paid, and the all parties have been serviced. In a utopia, this process appears to benefit all parties involved, but does it really?
RALs have extremely high interest rates, processing fees, and electronic filing fees. There have been reports of 30% – 50% annual percentage rates on these short-term loans. Here is a likely scenario for a RAL on a $1,000 refund:
Anticipated refund………………………… $1,000
RAL fee to the bank……………………….. $ 35
Tax preparation fee to preparer…….. $100
Electronic filing fee to preparer……… $20 (155)
RAL check to the taxpayer……………… $845
The $35 fee seems small enough, but the effective interest rate on this loan is roughly 32%! This is a 32% interest on a 10 day loan. The most alarming truth is that a RAL can take up to 10 days to process, the same amount of time it takes the IRS to process tax refunds. Some people are paying RAL fees for nothing.
Because this is a loan, loan fees are assessed according to risk exposure. The main tool that was used by banks underwriting RALs was the debt indicator made available by the IRS. Through the taxpayer’s consent, the banks were allowed to research if any unpaid federal taxes, state taxes, unpaid child support, or any other liens existed that would inhibit the taxpayer from receiving the full income tax refund. The debt indicator allowed banks to minimize risk exposure by knowing if the refund would cover the loan. On August 5, 2010, the IRS stated the debt indicator would not be available to banks offering RALs. This means, yes, more risk exposure and higher RAL fees.
The IRS feels its electronic filing process has been successful in recent years in refunding taxpayers who electronically file their return. The IRS has been able to return refunds in less than 10 days. Because of this efficiency, the IRS felt there was no longer a need to provide debt indicators to banks for RAL purposes. Don’t let your refund be eaten by RAL fees. Consider the efficiency of the IRS electronic filing process and save your refund. Barring any extraordinary events, or liens against your refund, your money can be returned to you in less than 10 days. Remember that the RAL is a loan, without the debt indicator, the banks will not be able to access this important information. If your RAL is approved and the refund is held due to a lien, you are still responsible for repayment. Don’t get sucked in this tax season.
Antonio Brown, CPA, MBA is a Contributor to healthyblackmen.org. He is President of AC Brown, CPA & Associates, PLLC in Flint, Michigan.