Say "No" to the Tax Refund Anticipation Loan

With tax season around the corner, many Americans are anticipating an income tax refund. Some are so anxious about their refund that they are willing to take out an exorbitant loan at a cost equivalent to the APR of up to 300%, and higher. The loan will only get the money in their hands a couple of weeks sooner, but millions of taxpayers a year are somehow convinced that it is necessary to pay a huge fee to get a tax refund anticipation loan (RAL).

Tax preparation companies know that nobody would opt for these high-priced loans if they had to pay up-front for them, so they attempt to cover up what a rotten deal they are by taking the fees out of the anticipated tax refund check. A tax refund of a couple thousand dollars can feel like a windfall to people who need cash, and some taxpayers may be willing to pay a several hundred dollar fee to get that money back to them a little sooner.

Taxpayers in the lower income brackets tend to be the ones who most often look to RALs, to get much needed money back in their hands to pay bills, but they aren't the only ones who use them. Impatient consumers often pay for the use of a RAL, for material things they just aren't willing to wait for.

Getting a refund of any kind has already cost you money in the form of giving an interest-free loan to the IRS all year; paying to get that money back 10 days sooner is foolish, unless you really need that money to keep your family fed, or to prevent foreclosure or repossession.

It's hard for tax-prep companies to justify the high price of an RAL. RALs are of extremely low risk to the lender; before they approve the RAL, they are notified by the IRS if there are any reasons the taxpayer is not due the refund, such as back taxes, child support, or student loan payments that may be withheld from the refund.

The loan term is only a matter of weeks, which means the lender can quickly turnover funds to make more loans and more money. RALs are a high-profit, low-risk investment for the lender. The high interest rates of RALs might be considered fairly competitive if your only other option is a loan shark.

Many people who have gotten a RAL in the past have said that at the time, they did not realize they were paying extra for a loan. The largest tax preparation company in the U.S. has been involved in a class-action lawsuit involving misrepresentation of the RAL and overcharging for services.

There have been many complaints from consumers who claimed to get their refund no sooner, or even later, than they would have if they filed directly with the IRS. It seems that consumer advocate groups are doing a good job of informing taxpayers of the high cost of these unnecessary RALs; less people each year are falling victim to these outrageously priced loans.

Tax-prep companies have lately decided to lower their RAL fees. This still doesn't make them a good deal. It simply means they they admit to overcharging consumers in the past, requiring much more in fees than they needed to make a profit and stay in business.

It also means that taxpayers, in general, are seeing RALs for the rip-off they are. Now that they are losing customers, and losing profit, they're doing what they can to make the RALs look more attractive. How attractive can it be for someone to say, "I know you're coming into some money. I want to take a chunk of it from you. Why don't you pay to take out a loan, so we can both have some of it?" You'd probably laugh and tell them to get lost; I know I would.

Taxpayers have other ways to get their money back in their pockets faster. E-file your return and you could receive your tax refund in as little as 1-2 weeks if you opt for direct-deposit into your bank account. If you don't have a bank account, it can take 2-4 weeks to receive a check in the mail. A few weeks may feel like a long time if you're waiting for a couple thousand dollars, but don't forget you've already let the IRS hold onto your money all year by overpaying your taxes. How's 10 more days going to hurt?

If your adjusted gross income was less than $54,000 in 2007, you have a great option. Free-file is available for on-line federal income tax filers at no charge. When you're ready to file your federal income tax return, go to the IRS website at www.irs.gov and go to the free-file link.

You may choose from various national tax preparation companies with whom to file your federal taxes. Your federal income tax return will be filed electronically, and your tax refund can be directly deposited into your bank account in as little as a week, for free. If you choose to file your state income tax return through them, you may be charged a fee in the neighborhood of about $10-$30.

It's important to return to the IRS website each year that you qualify for free-file, and then link to the appropriate tax preparer from the IRS website. In a past year, I qualified for free-file through the IRS website, and chose a tax preparer. The next year, I made the mistake of going straight to the tax preparer's site to file directly with them, and was charged their normal filing fee, even though I would have qualified for free-file if I had gone to the IRS website first.

UPDATE: The income guideline for Free File is $56,000 for tax year 2008, but the IRS has recently expanded the Free File program to include online versions of the standard paper forms for all taxpayers, so everybody can e-file for free.