Need to Know Tips on Tax Refund Advances

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Impatient for your tax refund? It usually takes about 21 days to receive your refund after filing, but tax preparers are increasingly offering ways to get your funds immediately. Better Business Bureau recommends waiting to receive your tax refund in the mail or by direct deposit from the IRS. However, if you cannot wait and choose to use a refund advance service, we are providing the following need to know tips regarding this type of service.

Types of Tax Refund Advances

There are many different kinds of tax refund advances and promotional agreements, and each has its own set of pros and cons. To help you make a wise decision, here are some more details about the most common ways to receive your tax refund in advance.

Refund Anticipation Loan (RAL). Refund anticipation loans are a loan against your estimated tax return. A tax preparer will calculate what the IRS owes you and loan you a portion of that amount right away.

It works like this: a tax preparer prepares and e-files your return. The loan provider reviews your tax return and may consider other factors like your income and credit score. You then receive a short-term loan based on their findings. A temporary bank account is set up in your name by the tax preparation specialist where the refund will be directly deposited. When your refund is deposited to the account, the amount of the loan, the tax preparation service charge, and any fees will be deducted from the account. Whatever money remains will be paid to you.

Car Dealership Tax Refund Promotions. Every year, car dealers offer tax refund promotions. Some simply ask you to bring in your tax refund and use it as a down payment on a car. But other dealers actually offer loans against your anticipated refund. Always make sure the dealer and tax preparer are reputable before you share your tax information.

Prepaid Debit Card or Gift Gard Promotions. Some tax preparers offer to deposit your refund onto a prepaid credit or debit card, or even a gift card. This means you’ll get your refund money right away. But if you choose this option, be prepared to pay extra fees for this convenience. These may include an initial fee, an ATM fee, a fee for point-of-sale transactions, and an “inactivity” fee.

On the other hand, some tax preparers offer to deposit your refund onto a gift card after receiving the money from the IRS. For example, big name tax preparer like H&R Block and TurboTax have offered the option to receive your tax refund on an Amazon gift card. Gift cards generally come with no setup or spending fees, and tax preparation firms typically offer a bonus on top of your tax refund. That said, receiving your tax refund this way means you must spend it at one specific retailer. In addition, replacing lost or stolen gift cards can be complicated and inconvenient.

Refund Anticipation Check (RAC). Many commercial tax preparation firms and individual tax preparers offer RACs for individuals looking to have their taxes professionally prepared but need to delay paying the preparation fee until the tax refund is received. Basically, this is a loan for the tax preparation fee.

With an RAC, the tax preparer opens a temporary checking account in your name. Your tax refund is deposited there when it arrives. The preparer’s fees, plus any RAC fees, will be deducted from the total amount. The rest of the refund will be paid to you. This option doesn’t get you your money any faster, but it does allow you to delay paying the tax preparation fee until your refund arrives from the IRS.

What to Know Before You Agree to a Refund Loan or Promotion:  

  • Check the preparer’s qualifications. Regulations require all paid tax return preparers to have a Preparer Tax Identification Number. A paid preparer must sign the return and include their PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return.  The preparer must also give you a copy of the return. In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes. The IRS is also phasing in a new test requirement to make sure those who are not an enrolled agent, CPA, or an attorney have met minimal competency requirements. Those subject to the test will become a Registered Tax Return Preparer once they pass it.
  • Check on the preparer’s history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents. 
  • Make sure you understand all the fees and fine print. Some tax preparers offer 0% interest refund loans, but they do charge fees for preparing your taxes. Consider all costs before agreeing to a loan. Under no circumstances should all or part of your refund be directly deposited into a preparer’s bank account.
  • Know what factors can affect the anticipated refund amount. While tax refund loans are generally a safe way to get your tax money faster, they do come with one important risk. This kind of loan is based on the amount of money you anticipate getting refunded. If you owe a federal or state debt, back taxes, student loans, or child support, the IRS can reduce the amount of your refund. This means you could end up with a lot less money than you had imagined. You could even end up needing to repay part of the refund loan!

For More Information

See BBB’s tips for hiring a tax preparer. Learn more about protecting yourself from tax ID theft by visiting the Consumer Financial Protection Bureau website and by reading Scam Alert: Watch Out for Tax ID Theft.

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