Tax season: Pros and cons of refund advances
While filing taxes each year can be a daunting task, a majority of Americans look forward to receiving a refund check from the Internal Revenue Service (IRS) each year.
This year, the average refund as of March 15 was $2,957, essentially in line with last year.
Many households rely on their annual tax refunds. More than 70 percent of Americans receive money back from the IRS during tax season. The majority of Americans plan to spend this year’s refund on debt, according to a recent study.
Some who want that cash quicker might consider a refund advance product.
These advance products allow a qualifying taxpayer to get her money as soon as the day that she files a return. It is essentially a loan that you will pay back once the IRS sends your refund.
About 1.7 million refund anticipation loans were taken out in 2017, according to a report from the National Consumer Law Center.
Major banks and financial institutions, like H&R Block, originate refund advances.
The benefits are obvious, especially to people who need the money as soon as possible to pay off a bill or make a debt payment.
It could be particularly attractive for people receiving the earned income tax credit, whom now have refunds statutorily delayed until mid-February.
On the other hand, there are a number of downsides when opting for advanced refund products. Among them are the possibility that your tax preparer made a miscalculation on your documents, which could mean that you end up receiving less money from the IRS than you borrowed from the bank. Nevertheless, you will still be responsible for paying back the loan in full.
Additionally, there are a number of fees and rates that preparers might charge, which could take a chunk out of your refund. This can be the case even when the products are advertised as “no-fee.”
“Some tax preparers are actually imposing other fees to make up for the lack of a direct cost for the [refund anticipation loan], in effect charging a disguised fee,” according to the National Consumer Law Center.
Regardless, you will still owe the bank the total amount given to you by the IRS. So experts say you are essentially paying to borrow your own money.
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Further, to access the product you need to obtain the services of a tax preparer, whom typically charge a services fee. For those who weren’t planning to pay for those services in the first place, that acts as an added expense.
Industry experts like to remind taxpayers that it won’t take that long to receive your check from the IRS, especially if you file electronically. The agency itself says it takes less than three weeks.