BBB urges caution with Refund Anticipation Loans

February 14, 2011
BBB warns that two conditions in the marketplace may make getting a Refund Anticipation Loan – a short-term, high-interest advance against your tax refund – even riskier this year. The IRS is no longer providing the Debt Indicator “credit check” service to tax preparers. And the BP oil spill may complicate tax time for taxpayers along the Gulf Coast who aren’t prepared to pay taxes on checks for lost wages.
“Just like payday loans, Refund Anticipation Loans are expensive, short-term loans in which consumers pay to borrow their own money,” said Norman Wright, president and CEO of your BBB|Northwest Florida. “But if the tax preparer makes a mistake in calculating their refund or if a refund is delayed for any reason, taxpayers could be required to pay additional fines and fees, too. And given that many taxpayers may not be expecting to receive a 1099 form from BP oil spill funds, it’s possible that some taxpayers could be in for a surprise this year.”
While they may seem like quick cash, the National Consumer Law Center found that the effective annualized rate for RALs can range from about 50 percent to nearly 500 percent. The loans usually only last 7-14 days, until the taxpayer’s IRS refund repays the loan.
The IRS recently changed its policy and no longer provides the Debt Indicator to tax preparers, which revealed whether a taxpayer’s refund might be intercepted for government debts. Without this Debt Indicator, RAL lending is expected to decline and become much riskier and thus even more expensive for taxpayers as well.
Gulf Coast taxpayers who received funds from BP for lost wages may find themselves in unfamiliar territory when they receive an IRS Form 1099 if they are accustomed to only receiving a W-2. And taxpayers accustomed to receiving a refund may be shocked to learn that taxes are not withheld on BP lost wages checks and instead of receiving a refund, they now owe taxes.
Your BBB offers the following advice for taxpayers considering a Refund Anticipation Loan:
  • Consider e-File and direct deposit: It’s the fastest and most secure way for consumers to receive refunds; taxpayers can have their money in as little as 8 to 15 days.
  • Don’t fall for the “convenient” debit card: These cards are another way for tax preparers to make money. The debit card often includes hidden fees and some have limits on how much money you can access at one time.
  • Finance purchases other ways: If consumers are looking to purchase specific high-priced items with their refunds, BBB encourages financing options other than RALs, such as store credit promotions and offers.
  • If you must, then shop around: If necessary to have a refund immediately, BBB suggests consumers shop around and look for good deals. Fees and RALs vary by tax preparer. Consumers can check out tax preparer’s record of integrity and performance free-of-charge with BBB Reliability Reports, available online at