Tax preparers often offer Refund Anticipation Loans to allow you to immediately receive your tax refund. However, RALs are not an actual refund from the IRS but are a short-term loan from the company. According to the Consumer Federation of America, the interest rate and administration fees on RALs can range from 40% to over 700% of your refund. In 2009 Americans spent $664 million on RALs and other fees for money that would arrive in two weeks.
“Refund Anticipation Loans may do more harm than good and just aren’t worth the instant access they provide,” said Norman Wright, president and CEO of your BBB. “That’s a tremendous amount of money to spend to borrow your own money for two weeks.”
The RAL is an estimation made by the tax preparer of your refund amount, not a statement from the government. As a result, your refund could actually be less than the amount of your loan. This means you may end up owing the tax preparer more money than you received in your refund.
Some people believe they can’t wait the two weeks for their refund because of debts and bills that need to be paid. A better option than taking a RAL is to work with debt collectors and let them know a refund is on the way. Losing a portion of the money to a loan only puts you further behind.
To avoid RALs, consider filing your taxes electronically and requesting to have your money direct deposited. This is a much easier process to do on your own now with tax return software. Visitirs.gov/efile
for information on how to file your taxes electronically. While this entire process usually takes 10-14 days, you will receive 100 percent of your money and not have another loan to pay off as you would with a RAL.
The IRS is working to combat RALs. In 2011 they stopped providing tax preparers with a debt indicator notification which was used by tax preparers to decide which customers to offer a RAL. This move has significantly reduced the amount of RALs given out, but will not completely eliminate them.
For additional information you can trust or to find a trustworthy tax preparer, start with bbb.org.