Not so fast, says Attorney General Kilmartin. “The IRS does not process refunds the same day you file your tax returns, whether through the mail or electronically. These so-called ‘rapid refunds’ are really ‘Refund Anticipation Loans,’ and can cost consumers a lot of money in hidden interest rates and fees. When taxpayers look for quick cash, they often fall prey to promises of instant refunds, not realizing those promises can come with high fees and interest rates that cut deep into the amount a taxpayer would receive from the IRS or the state.”
What Is a Refund Anticipation Loan (RAL)?
A Refund Anticipation Loan (RAL), otherwise known as an “instant tax refund loan,” is a loan you apply for through your tax preparer that is secured by your expected tax return. When you receive an RAL, your tax preparer lends you the amount of the tax refund that you expect, minus interest and fees. Then, when the government sends your actual refund check, it is direct deposited into the bank that made the loan. Because the loan is paid back when you receive your tax refund, the term of an RAL can be anywhere from seven days to several weeks, depending on how long the IRS and the State takes to process your refund.
It may sound like an easy way to get your tax refund a little faster. But make no mistake: an RAL is a LOAN, with all of the costs that come with taking out a loan – and then some. Unlike a traditional loan, the interest rate (the annual percentage rate or APR) for RALs tend to be very high - in many cases more than 20 percent. In addition, these companies often charge exorbitant fees to process your tax returns.
Taking out one of these loans can be a costly trap for consumers who don’t realize that an RAL is not a short cut to getting a refund but simply an expensive short-term loan. Some lenders will even allow you to borrow more than the expected amount of your refund. But the high interest rate applies for the entire loan, not just the amount of the refund.
“You’ve earned this money, and you should keep every penny you are entitled to,” said Attorney General Kilmartin. “There are legitimate tax preparation companies and accountants who are properly licensed and regulated. Many of the companies that offer RALs set up shop in low income and immigrant neighborhoods hoping to lure those in need of quick cash or who may not be familiar with the tax preparation process.”
Who Takes the Hit?
According to a study by the Consumer Federation of America and the National Consumer Law Center, the consumers paying the highest price for these RALs are low-income families that cannot afford to pay a significant portion of their tax refund in loan fees and interest.
It is a vicious cycle of fees for a consumer who needs an instant refund or RAL. To get an RAL, consumers often pay a loan fee, an electronic filing fee, a document preparation fee and a tax preparation fee. Then when the consumer receives a loan check, he often pays an additional check-cashing fee.
It Is Your Refund – Here’s How to Keep More of It!
While the IRS doesn't hand out "instant refunds," its e-file system coupled with direct deposit can put a refund into your account quickly -- and it doesn't cost anything. Many taxpayers can even qualify for free tax-filing software from the IRS. This year, every taxpayer with a 2011 Adjusted Gross Income (AGI) of $58,000 or less may visit www.IRS.gov to prepare, complete and e-file tax returns at no cost. If the AGI is higher, taxpayers should look at the website for other government-provided assistance programs. In addition, the IRS provides a list of companies and individuals that are authorized to file tax returns electronically.
It is against the law in Rhode Island to charge interest rate in excess of 21 percent. If a tax preparation company charges interest on the RAL in excess of 21 percent, the consumer should contact the Consumer Protection Unit of the Office of the Attorney General at 401-274-4400.
If you are going to tackle filing your tax return without the assistance of a professional, Attorney General Kilmartin offers the following safety tips to remember:
- Be cautious of emails claiming to be from the IRS that seek personal information. These types of emails are known as “phishing” attempts. They look official and may include subject lines that read “Refund Notice” or similar misleading phrases, but the IRS never asking for personal information to process refunds.
- Do not give any personal information to someone you don’t know who calls or emails you and offers to help with your taxes.
- If you are using a website to file your taxes, make sure you are on a secure site (https, not http) and look for the padlock icon at the bottom of the screen.
- If you decide to use a certified public accountant (CPA), make sure that the CPA is licensed with the Rhode Island Department of Business Regulations.
- If you decide to use a tax preparer, ask about service fees up front. If you enter into an agreement with a tax preparation service, make sure to get and read a copy of the signed contract and other paperwork before you leave the business.
- Be cautious of tax preparers who try to sell you an extra guarantee. These guarantees claim that the company will reimburse you if they make a mistake with your tax returns and your filing fee has to be amended.
- Avoid tax preparers that ask you to sign a blank tax form.
- Be careful with all documents that contain personal financial information or tax related information. Scam artists know that mailboxes and trash bins often contain sensitive documents, especially during tax season. Make sure to collect your mail regularly and store all tax related documents in a safe place. Shred all documents that contain personal financial information before throwing them away.
“The best prevention to being taken in by fraudulent practices is education and vigilance. No matter if it’s tax season or not, it’s important that consumers practice common sense when protecting their identity and their finances,” continued Kilmartin.