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Feature Articles: Taxes

 

Refund Anticipation Loans: Are they worth it?

Brenda Procter, M.S., State Specialist & Instructor Personal Financial Planning, University of Missouri Extension

 

For families trying to make ends meet, getting the W-2 forms needed to file for a tax refund is exciting. After waiting all year, struggling families can get a large lump sum to pay off bills, solve other financial problems or purchase something that they really need or want.
 

Quick tax loans, or refund anticipation loans, sound like a great idea for taxpayers who are in a hurry to get a refund. You can go to a paid tax preparer to get your tax return filled out and filed electronically, and you can borrow the value of your anticipated refund immediately.
 

The IRS national taxpayer advocate says there are 1.2 million known commercial tax return preparers. Between 300,000 and 600,000 of them are unregulated. There is a good reason that tax preparers heavily promote refund anticipation loans. In 2004, according to the Consumer Federation of America and National Consumer Law Center, refund anticipation loans cost U.S. taxpayers nearly $1.6 billion — that is $1.6 billion that could have been spent on bills or items that families need or want.
 

Are they really worth the cost? Many people have a real distaste for filling out forms, and if you don’t think about the high cost of interest, the fees may not sound that bad. But refund anticipation loans can greatly erode the value of a tax refund, and they may not be necessary. They cost borrowers from $30 to $120 in loan fees, and around $40 in electronic filing fees — for a loan that lasts about 10 days. Refund anticipation loans carry annual percentage rates (APRs) of 40 percent to over 1,800 percent, according to the National Consumer Law Center.
 

There is another potential pitfall with refund anticipation loans. If, for any reason, the refund does not come back from the IRS in the amount the preparer told you to expect, you will have to repay the tax service or its loan company the full amount of the difference anyway. If you’ve already spent the full amount of the loan, that presents a problem.
 

Not only do paid tax preparers offer refund anticipation loans, but so do some check cashers, payday lenders, used car dealers and title loan lenders. Some rent-to-own centers are getting into the act as well through a partnership with major tax preparers.
 

Those who choose to use refund anticipation loans can ask key questions to become fully informed. As with any major decision, it can pay off to check around. Consider checking out at least three paid tax preparers if possible. Ask about fees and the terms of the loans they arrange. Here are some of the questions you will want to ask the preparers:
 

  • What credentials do you have to prepare taxes?
  • How much do you charge for filing a tax return electronically?
  • What is the total dollar amount of all the fees and charges that I will have to pay?
  • What is the estimated annual percentage rate of the loan?
  • What percentage of the total refund will be paid out in other fees?
  • How long will it take to get the proceeds of my loan?
  • Can you file my return electronically if I don’t take out a refund anticipation loan? If so, how long should it take to get my refund?
  • How long will you be in business after tax season?
  • Will you assist me with any IRS inquiries about my return?
  • Will you be responsible for mistakes on my tax return?


It is often not necessary to turn to such costly services and loans. Free help is available in many communities through the Volunteer Income Tax Assistance (VITA) program sponsored by the IRS. VITA provides trained volunteers who can fill out and electronically file tax returns for low- to moderate-income families for free. The refund will come back within two weeks or less (and even faster for those who have their refund check deposited directly into a bank account).

 

The AARP also sponsors Tax Counseling for the Elderly (TCE) sites in many communities. AARP sites will sometimes provide services to low- to moderate-income taxpayers as well.
 

For help locating the VITA or TCE site nearest you, call the IRS at 1-800-829-1040 or contact your nearest Community Action Agency or University of Missouri Extension office.  Additional information for those in Missouri can be found at http://extension.missouri.edu/hes/taxed/vitasites.htm

 

Sources:
Somerville, K. Navy Legal Service Office, Beware of the Income Tax Instant Refund, January 27, 2006, Navy Compass website at http://www.navycompass.com/.

White, J.R. Paid Tax Preparers: Most Taxpayers Believe They Benefit, but Some Are Poorly Served, United States General Accounting Office, April 1, 2003.

Wu, C.C, and Fox, J.A., Picking Taxpayers’ Pockets, Draining Tax Relief Dollars: Refund Anticipation Loans Still Slicing Into Low-Income Americans’ Hard-Earned Tax Refunds, The NCLC/CFA 2005 Refund Anticipation Loan Report, Consumer Federation of American and National Consumer Law Center, January 2005.

 


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