For many individuals struggling to make ends meet, a big tax refund is a like a financial windfall that cannot arrive too soon.
While recognizing the importance of a quick turnaround on your tax refund, the IRS cautions lower-income households not to be tempted by fast-cash products offered through third-party tax preparers, many of which carry hefty fees.
Consumer protection groups and U.S. regulators are happy to report that the main culprit in the bloated fast-cash refund market – the Refund Anticipation Loan, is no longer offered by most large tax prep agencies. But that hasn’t stopped companies like H&R Block, Jackson Hewitt and others from marketing alternatives.
Renamed a “refund anticipation check,” or RAC, companies are now charging taxpayers in a new way. Unlike a refund anticipation loan, the RAC is actually a temporary bank account set up by the preparer in order to divert a taxpayer’s refund. Close to 19 million taxpayers took the option of a RAC in 2011.
The advantage of paying extra for a RAC? Because the IRS can process and disburse a refund quicker using direct deposit, a taxpayer can generally receive their refund in about 7 to 10 days quicker than waiting for a paper check to arrive in the mail. Taxpayers can also easily deduct the fees from their refund, rather than paying up front.
“It’s a big convenience,” says Susan Ehrlich, president of financial services at H&R Block.
Critics question the fees however. H&R Block charges $34.95, or $24.95 if the refund is loaded onto one of its Emerald debit cards. If you want to have a paper check mailed out to you after the company deducts its fees, it's a whopping $55. Intuit software, which operates via TurboTax, charges $29.99 to set up a bank account. This is in addition to the regular tax preparation fees.
One way to look at a RAC is to consider it as paying interest on a loan. For example, a company may charge $200 to prepare a tax return, then an additional $30 for a RAC. Essentially, the consumer is delaying having to pay the $200 up front, and for the benefit of getting their refund about one week earlier, they would be paying an additional 15 percent on the $200. That’s the equivalent of a 260% annual interest rate.
Many taxpayers may not be aware of the free tax prep assistance that is offered by the IRS. Some free tax-help programs offer prepaid debit cards as well for those who do not have a bank account. Too, most banks do not charge a fee to set up an account with them. Some in fact will actually pay you to bank with them.
“We’re always concerned when consumers don’t receive the entire balance of their tax refund,” said Tom Feltner, director of financial services for the Consumer Federation of America.
This year, the IRS Free File program is available to anyone with gross income under $57,000. Through the IRS web site, the agency will pair you with a reputable tax company for the free preparation and electronic filing of your federal and state returns.
Low-income taxpayers can get free income tax preparation through the IRS Volunteer Income Tax Assistance (VITA) or at walk-in Taxpayer Assistance Centers. VITA sites are staffed by IRS employees and volunteers and offer free tax assistance.
Elderly taxpayers can receive free help as well through AARP and Tax Counseling for the Elderly sites (TCE). For a listing of VITA and TCE sites in your area, see the article Free Tax Return Preparation for You by Volunteers at IRS.gov.
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