The Truth About Rapid Refunds: Refund Anticipation Loans May Not be Worth the Risk

Refund Anticipation Loans or “RAL’s” were originally marketed as “rapid refunds”, with the goal of expediting the receipt of income tax refunds for tax filers.  What many filers believed was a refund was actually a loan made directly to the taxpayer by the tax preparer, with the refund being “assigned” to the tax preparer.  The filer would walk out with a check from the tax preparer, and the refund would be mailed directly to the tax preparer from the United States Treasury some weeks or even months later.  At the time the income tax return was signed, an assignment and power of attorney would be executed, allowing the tax preparer to receive and negotiate the refund check.  The tax preparer made money because the “rapid refund” given to the filer was less than the amount of the refund.

Eventually, tax preparers were required to more accurately disclose that the “rapid refund” was actually a loan extended by the tax preparer, to be repaid by the filer.  While an RAL will put money in the pocket of the filer much quicker, it comes at a price.  Often the tax filer will overpay for the cost of preparing the income tax return itself.  In addition, interest and convenience charges will further diminish the amount of money that the filer will receive.  Now that returns can be filed electronically, and the refunds can be deposited directly into a bank or credit union account, the amount of time between the filing of the return and receipt of the income tax refund has been significantly diminished.  As a result, the fees associated with a RAL may not be worth the convenience of receiving the refund a few weeks earlier.

Another thing to keep in mind in considering a RAL is that it is a loan, and in the event that your income tax refund check is less than what you received, you will be liable to repay the full amount of the loan, plus interest and penalties.  For instance, a filer may file an income tax return which generates a refund of $5000.  The tax preparer will “loan” the filer $4500, and accept the income tax refund later in full payment of the loan.  However, if the refund should be adjusted by the IRS for any reason – such as non-disclosure of additional income or disallowance of dependents – the filer would have to pay the difference.  So in this example, if the refund check is only $2500, then the filer will have to repay the $2000 difference, plus interests and fees.  In some instances, the income tax refund may be seized, either for student loan debt, child support or back taxes.  In that event, the filer will have to repay everything.  If you believe that your income tax refund may be subject to seizure, do not obtain a RAL.

While many people need the money immediately, to catch up rent, utilities and other expenses, the best thing is to avoid an RAL altogether.  The hundreds of dollars that you save by waiting for your income tax refund via electronic filing will be worth it.