Taxpayers might keep more of their own tax refund money in their
pockets this year because banks no longer make the costly loans
often advertised by tax preparation companies as rapid refunds. But
consumers watch out: other quickie loan products might be even
In the past, refund anticipation loans (RALs) enticed millions
of consumers to get very high-interest loans for up to the
estimated amount of their refunds. Through RALs, they got money in
one or two days rather than waiting at least one to three weeks for
their Internal Revenue Service refund. (See "
11 options for filing tax returns for free
But federal regulators cracked down on refund anticipation loans
after investigations found that many tax preparers, who were acting
as agents for banks offering the products, were not complying with
federal lending regulations and state laws. Federally regulated
forced out of the RAL business
, and in 2012, only one still made the loans. This year, none
Cash-strapped consumers, though, still want refunds fast,
experts say -- especially this year.
"People plan on that tax money," says Morgan Flynn, director of
sales and marketing for the Association of Registered Tax Return
Preparers, founded by the president of M&M Income Tax Service,
a South Carolina tax preparer that offered refund anticipation
loans last year. Since the IRS delayed the start of tax season by
over a week in 2013, due to last-minute tax code changes by
Congress, consumers desperate to get money for rent or medical
bills will be in even more of a bind, he says. Also, consumers
education tax credits
will have to wait about two weeks longer (around mid-February) to
file. And, unlike last year when the IRS predicted that many
taxpayers would receive their refunds within 10 days, the agency
this year states that most taxpayers will get their money within 21
So, tax preparers will be on the lookout for ways to speed up
the refund process for their clients, and to make up the income
they're losing from not being able to offer bank refund
anticipation loans, says Tom Feltner, director of financial
services for the Consumer Federation of America.
But consumers should think twice before biting on offers for any
of the products that are replacing refund anticipation loans,
Feltner says: "Consumers need to realize they are paying a fee to
get their own money."
Here is a roundup of 2013's RAL-like substitutes
Tax preparers still offer quick cash
This year, tax preparers are still partnering with financial
institutions to offer three main products: refund anticipation
checks (RACs), which have been around for years, as well as
personal loans not tied to a tax refund and non-bank refund
anticipation loans. Here's how they work:
RACS and similar products
-- Consumer advocates say a refund anticipation check is
basically a costly short-term loan of the tax preparation fee.
Some consumers use them to defer paying their tax preparation
fees, which average $143 for a nonitemized 1040A federal and
state tax return, or $246 for an itemized return, according to a
survey by the National Society of Accountants. Most tax preparers
require consumers to pay for that service when the return is
filed. But with a refund anticipation check, the preparer agrees
to wait and take that fee out of the refund, essentially floating
a loan for the cost of that fee to the taxpayer.
To do so, a temporary bank account is opened for the consumer.
After the tax refund is deposited into that bank account --
usually 10 to 21 days later -- the tax preparation fee and other
fees are taken out, and the taxpayer gets the remainder by check
-- or, in variations on the RAC, by direct deposit or
. The lender usually charges a fee of $30 to $35, and the
preparer might charge an additional fee of $25 or more, according
to Chi Chi Wu, staff attorney for the National Consumer Law
The three biggest tax preparation chains all are offering refund
anticipation checks this year. H&R Block offers a RAC for a
fee of $34.95 for direct deposit, or that amount plus an
additional $20 for a paper check. Liberty Tax Service has
electronic refund deposits or electronic refund checks --
check-like products -- for a $29.95 bank fee plus a $9
"transmittal fee." And Jackson Hewitt advertises on its website
that taxpayers can "get up to $9,999 fast" through an Assisted
Refund, which functions like a refund anticipation check and
costs as much as $49.95. After fees are subtracted, the consumer
can get the remainder of the refund via direct deposit, check or
on a Jackson Hewitt smart card Prepaid Visa Card, which carries a
monthly fee of $5.95 and a $2.50 fee for ATM cash
Personal lines of credit
-- Several big preparers are offering personal loans that they
are careful to say are not tied to a tax refund. "It's based off
of a person's credit, not the size of their tax refund or their
status with the IRS," says Flynn, noting that the amounts are
much lower than the $3,000 or more many consumers were able to
get with RACs.
For example, in some states Jackson Hewitt is offering the new
"SmartLine" personal line of credit of $200 to $1,000, which the
consumer repays in monthly installments. It has a $6.95 monthly
maintenance fee, an interest rate of 35 percent, a late fee up to
$35 and an "access fee" of 3 percent or $10, whichever is
greater, to transfer funds. Until Jan. 24, H&R Block offered
a line of credit called an "Emerald Advance," with funds put on
the H&R Block Emerald Prepaid MasterCard. It had an annual
fee of $45, a $5 late payment fee and an APR of 36 percent.
Flynn says M&M Income Tax Service considered offering similar
loans, but decided against it because it's too much of a gamble
for the lender and likely won't last as a RAL replacement: "They
know a good percentage of these are going to default," he says,
noting that's why the loan amounts are lower.
-- Lenders other than banks can still make refund anticipation
loans, and these loans, especially if they come from payday
lenders, could be "riskier and more expensive" for taxpayers than
the traditional refund anticipation loans, Wu says. However,
consumer groups say these lenders likely will not have the
capital to make these loans on a widespread scale the way banks
could. For example, in order to make 100,000 loans of $1,500
each, a lender would need $150 million. This year, Liberty Tax
Service is partnering with a nonbank lender that will make refund
anticipation loans for a $39 fee plus finance charges based on
the loan amount, which can be up to $3,000.
A RAL by any other name
In a related twist, AIT Financial Group, a company whose "goal is
to provide you with options to replace the refund anticipation
loans that are no longer available," is now offering to "buy" part
of taxpayers' refunds for a hefty fee.
Here is how the product, called "Simple Cash Option," works,
according to Nathan Adams, senior vice president for AIT Financial.
The taxpayer goes to a tax preparer, who completes their tax
return. The consumer then goes online and, with the transaction
recorded by a webcam, "offers to make a sale" to AIT of a portion
of their refund. The company either accepts or rejects the offer,
but Adams won't say how they decide or what percent they accept.
The customer has two days to back out without incurring fees.
Within 48 hours of the return being accepted by the IRS, the
company issues the taxpayer a check.
The company won't reveal its fees, saying they change from day
to day based on factors such as how much money they have "on the
street" at the moment. However, on its website, the company gives
several hypothetical examples: a taxpayer who wants $600 might sell
$700 of their refund, which amounts to a fee of $100. Or, a
taxpayer who wants $1,200 might sell as much as $1,600 of their
refund, so the fee would be $400. The cost is "lower than a loan
they'd get from a payday loan company," says Adams, who states that
the product is "not a loan."
Consumer groups say taxpayers should be very wary of these types
of products. "This is RAL lending in the form of a 'tax refund
assignment' or purchase of a tax refund," Wu says. "This is a
disguised loan and a nonbank RAL."
Watch out for 'shady' tax preparers
In 2012, the U.S. Department of Justice and other officials sued
certain tax preparers for a variety of unsavory practices,
including offering refund anticipation loans to get consumers in
the door as a bait-and-switch scheme. The department sued a chain
called Instant Tax Service, alleging they advertised refund
anticipation loans, then turned down more than 90 percent of
"A really dirty tax preparer will say, 'Yes, we have a RAL,' to
get you in there," Flynn says. "You file your tax return and then
they will call you and say, 'Sorry, you're not approved for the
RAL. Thank you for filing with us.'"
In a case that's still ongoing, the Department of Justice in
2012 tried to shut down the national chain Instant Tax Service and
five of its franchisees, for allegedly inflating the size of
customers' tax refunds through fraud, such as making up dependents,
then skimming huge, sometimes undisclosed, fees off the refund.
Also in 2012, Illinois Attorney General Lisa Madigan sued
national tax preparation chain Mo' Money Taxes for similar
activities. The company allegedly advertised "instant cash" to
low-income consumers, then siphoned as much as $700 from each
refund before handing over the rest to the taxpayer. In December,
the department also sued a Mo' Money licensee in Tennessee for
fraud, including getting taxpayers' refunds for thousands of
dollars when they should have owed money.
Hairstylists licensed, but not tax preparers
The IRS in 2011 began requiring tax preparers to register and,
except for CPAs, attorneys and enrolled agents, pass a competency
test. But a federal judge in January temporarily derailed the
program, saying the IRS does not have the authority to regulate tax
preparers. The IRS plans to appeal. "You need a license to cut hair
in most states," Wu says. "But in this court decision, the court
was saying you don't need one to prepare someone's taxes for
In order to avoid questionable preparers and onerous fees,
consumer advocates recommend that low- and middle-income taxpayers
consider getting free tax preparation help through a volunteer
program such as
Volunteer Income Tax Assistance
. Through the program, consumers who have bank accounts can e-file
their taxes and request direct deposit for their refunds, and in
most cases get them in 21 days or fewer. Consumers who don't have
accounts can e-file and have their refund put on a prepaid card,
including a prepaid or payroll card they already have, Wu says.
The Consumer Federation of America's Feltner says consumers
should steer clear of risky loans and look at their tax refund as a
way to add to savings or pay down debt. He says: "Try to use it to
build your finances, not to get further in debt."
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