I’m sharing this as a sort of public service, because the truth is, I don’t like the whole “early refund” silliness…
On the other hand, I cringe a little bit when I hear young people talking about getting their return “fast tracked” or I see “early refund” deals offered by some of the big preparation services.
You’ve seen them too, seemingly everywhere during tax season telling taxpayers not to wait for the IRS to send their refund. The ads offer return checks in 24-48 hours, or in some cases, “instantly” and guess what? When you do the math, those folks taking advantage of this “service” are getting robbed.
First of all, the integrity of the service isn’t what I find fault with. The marketing is … “mostly” true and if someone needs money fast, these loans can be helpful, but they are certainly not free.
A recent post in Nerdwallet mentioned this issue, and the truth is, many nationally known (and respected) tax preparers do offer zero percent interest loans on tax refunds. The tax preparer hands over cash for at least some part of the refund (usually there is some loan limit), and then the actual tax refund then goes from the IRS to the tax preparer, not you. If you have some refund left, the preparer issues you a debit card when they receive the tax refund.
If you don’t want a debit card, then some preparers will offer a direct deposit or a paper check for a fee. These fees can range from a flat fee of, say, $40, to a percentage of the total refund.
So let’s look at that… In some cases, those national preparation firms can charge up to $400 for tax prep and filing (which covers the “easy refund” option as a line item in that invoice), then there are the associated fees for filing, and on top of that, whatever the alternate payment plan fees might be.
In other words, there is still no free lunch.
If you do get a debit card, using it for cash at an ATM will be easy, but it will cost you in fees of $3 per use or more and you will be limited in the amount you can take from the ATM. Alternately, we’ve all dealt with the challenges of “gift cards” and how they work great … usually. It’s tough to use these types of cards in some situations, like paying rent, or a car payment, for example. Transferring the balance to a bank account can be a lesson in frustration, too.
I’ve read multiple times how so-called “consumer advocates” question the fairness of these types of tax loans, and more than a few of the articles I’ve consumed liken them to carefully hidden “check cashing” business models – where underserved and underprivileged consumers are taken advantage of.
My take on the whole thing? These companies are using the tax advances to loan your own money back to you, and administrative fees or tax preparation fees act as high interest rates, even if the loan is technically zero percent. The products and terms vary from one company to another, so if you know filers – especially young folks or those who may not know better – share this insight with them to hopefully help them recognize they are being taken advantage of.
I can remember an incident last tax season, I think, where a new client had used a service like this the previous year and the “loan” they had gotten back from that preparer did not include their Recovery Rebate Credit. Now, whether this was a mistake or a systemic issue, I don’t know, but the result was this was a bad bet for someone who haven’t received their stimulus dollars and was counting on the cash through their tax refunds.
In terms of availability, these tax advance loans usually don’t consider creditworthiness, since the loan is, technically, the taxpayer’s own money. But if there are existing liens on paychecks – such as for back child support – the IRS is going to catch it and “your” money isn’t going to show up (at least not the amount you planned on…).
Ultimately, these loans are – at least to me – simply predatory and unfair, but I understand some people have to do what they have to do. These days, though, with the IRS generally fast to refund – usually within three or so weeks, my advice would be to have a conversation with creditors to buy the few weeks’ time you need and simply get ALL the money you’re owed in your refund.
As always, I’m happy to clarify these ideas and share more of my own in a call, but this time of year? It’s tough. Just beware of these issues and be safe with YOUR money.
All the best-