Refund advance products: What you should know

Young African-American man sorting through mail and looking for his income tax refund check.Image: Young African-American man sorting through mail and looking for his income tax refund check.

In a Nutshell

If you need your tax refund right away, it’s important to know what your options are for getting some money in advance while you wait for your refund. Each has financial ramifications that could last long after your refund is spent.
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This article was fact-checked by our editors and reviewed by Christina Taylor, MBA, senior manager of tax operations for Credit Karma.

Less than 21 days — that’s how long the IRS says it typically takes to issue a federal income tax refund.

But if you’re among the 78% of Americans living paycheck to paycheck, those extra weeks could be too long to wait. Plus, multiple factors could delay your return. You may be considering a refund advance product to get some money before your refund arrives, if you’re owed one.

The idea of getting some money early can seem like a no-lose situation. But be careful. As with any financial product, refund advance products have the potential to affect your finances positively or negatively, depending on the deal you get and how wisely you use it.

Cash slowdown

The tax filing season, which is actually for the taxes you owe from the previous calendar year, usually opens in late Jan. 29. That’s the day the IRS says it will begin accepting federal income tax return filings. However, the longer you wait to file your return, the longer it could take to get any refund you’re owed.

Other things that could possibly delay your refund include:

  • You file with an Individual Taxpayer Identification Number that’s expired.
  • You claim the Earned Income Tax Credit or Additional Child Tax Credit. When you claim either, federal law requires the IRS to hold your entire refund until at least mid-February.
  • You mailed a paper tax return or requested the IRS to issue a paper check, rather than e-filing and using direct deposit. The IRS says e-filing and opting for direct deposit are the fastest ways to get your refund.
  • Something on your tax return, such as a mistake, causes the IRS to further review the return.

When you really need your tax refund, the reason why it’s delayed may seem less important than how you’re going to get by until the refund arrives. You do have options for getting your some money early, but it’s important to understand the financial ramifications of each before you agree to any kind of refund advance product.

What’s more, not all refund-related options are created equal.

The demise of refund anticipation loans

One option you probably won’t have much access to is a refund anticipation loan, or an RAL, from a bank. RALs — loans made by banks using the borrower’s anticipated federal income tax return as collateral — were once very popular.

Basically, after taxpayers completed their federal income tax returns and knew they were expecting a refund, they could take out an RAL while waiting for the refund to arrive. The bank would lend the taxpayer the amount of the anticipated refund, minus interest and fees for the loan. When the refund became available, the money went to the bank to repay the loan, rather than to the taxpayer.

Federal regulators and consumer advocates both disliked RALs.

In fact, the FDIC (you may know it as the organization that insures bank deposits up to $250,000) strongly encouraged banks to get out of the business of making refund anticipation loans in 2011 and 2012. While the loans technically remain legal, most banks no longer offer them.

The FDIC wanted banks out of the RAL business because of the risk of loss to the financial institutions. Consumer advocates wanted to see the loans go away for different reasons.

For example, the National Consumer Law Center said refund anticipation loans were extremely high-cost, short-term loans used mostly by people who could least afford them — low- and moderate-income consumers. The Center on Budget and Policy Priorities, a research and policy institute, notes that while most banks no longer issue RALs, some tax preparers might turn to other riskier sources, like payday lenders, to secure the loans for their customers.

If you’re strapped for cash, the idea of getting some money sooner is probably still attractive. Today, other forms of refund advance products have evolved to effectively allow taxpayers to “borrow” against the federal refund checks they’re expecting.

Just because a product is available, however, doesn’t automatically mean it’s a good idea.

The current state of refund advance products

Many big-name tax preparation companies still offer a tax refund-related product that’s similar to an RAL. Although these products might not charge you interest on the loan, they can still come with significant limitations, including:

  • You are only eligible for the products if you pay to file through the company’s tax preparation service.
  • The company may limit the amount it will approve you for, meaning you might not get the full refund amount. For example, you might be expecting a $5,000 refund, and really need that amount, but the company might approve you for only $1,300.
  • Additional fees, beyond just the tax preparation fee, could be deducted from your refund.
  • The company may charge an extra fee if you want it to issue a paper check.

What are refund anticipation checks (RACs)?

Another way to tap some money before you actually get your tax refund is to secure a refund anticipation check.

Here’s how they work:

  • Your professional tax preparer opens a temporary bank account where the IRS can directly deposit your tax refund.
  • Once your refund lands in the account, the preparer deducts the fee for preparing and filing your return and RAC fees from your refund.
  • The preparer then issues you a check or prepaid card for the remaining amount, and closes the temporary account.

This scenario might sound good if you don’t have the cash to use a tax preparation service to help you prepare and file your taxes. However, RACs have some significant issues, just like RALs:

  • The IRS can reduce the amount of your refund if you owe any kind of federal or state debt, such as child support, back taxes or student loans. That means you might wind up with far less in that temporary account than you or your tax preparer anticipated. After tax preparation fees and RAC fees, you may have much less left than you were hoping for.
  • Tax preparation fees can vary wildly by hundreds of dollars. A study by the Government Accountability Office found fees for preparing a simple tax return ranged from $160 to more than $400.
  • RAC fees can range from $25 to $60, plus preparers can add on additional fees that vary from $25 to several hundred dollars.
  • You won’t get your refund any faster.

Bottom line

You can take some steps to help your federal income tax return come sooner, including:

  • Filing as soon as possible after you have all the required documents you’ll need.
  • Double and triple checking for errors that could slow the processing of your return.
  • Choosing to e-file rather than mail a paper return.
  • Opting for direct deposit from the IRS.

Be aware that if you claimed either the Earned Income Tax Credit or the Additional Child Tax Credit, federal law requires the IRS to hold your refund until mid-February.

However, if you can wait the 21 days or so the IRS usually takes to send a tax refund, you may choose to avoid the complexities and potential costs of a tax refund advance product. If you just can’t wait, it’s important to carefully evaluate your refund advance loan options. Be sure you understand all the terms, conditions and fees associated with any product you’re considering, and choose the one that will take the smallest chunk out of your refund.

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.

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