No More “Instant” Tax Refunds

The IRS announced on August 5, 2010 that they will no longer provide tax preparers and financial institutions with what is called a “debt indicator”, starting with the 2011 tax filing season.  The debt indicator is an acknowledgment of whether a taxpayer will have any portion of the refund offset for delinquent tax or other debts, such as unpaid child support or delinquent student loans.  This acknowledgment is provided when a tax preparer electronically submits a client’s tax return and is used as an underwriting tool for refund settlement products, such as the Refund Anticipation Loan (RAL).

A RAL is a loan secured by the taxpayer’s anticipated refund, and the taxpayer can receive the refund, or a portion of, as quickly as the same day the return is prepared and efiled.  A Refund Anticipation Check (RAC) is a temporary bank account set up on behalf of the taxpayer into which a direct deposit refund is made and the bank typically issues payment to the taxpayer within 8-15 days.  Both of these products also allow the tax preparation fee and product fees to be taken out of the anticipated refund, leaving the taxpayer with no “out-of-pocket” expense.   

The RAL product typically has a triple digit annual percentage rate (APR) for an 8-9 day loan, and is targeted at lower-income taxpayers, who can  least afford it.  In addition, several of these consumers do not have bank accounts, which leaves them vulnerable to the imposition of other fees to set up “dummy accounts” or maintain prepaid debit cards.  The RAL is an actual loan, and must be repaid in the event a mistake is made on the return, a deduction is disallowed, or the IRS determines that the refund is less than the anticipated amount.  In the event the taxpayer is unable to pay, collection letters are issued and bad credit ratings result.

So what can you do to speed up the processing of your refund and save on tax preparation fees?

• File your return electronically and direct deposit it to a bank account.  The turnaround time is about 10 days.
• Use the IRS Free file program.  Typically adjusted gross incomes under $54,000 will qualify.  Go to www.irs.gov and use their “Guide Me To A Company” link to find a free file company.
• Use the Volunteer Tax Assistance Program available to low and moderate income taxpayers.  You can call 800-829-1040 to find a program near you.
• Adjust your withholding.  In essence, you are giving the government an interest free loan.  If you use your refund as a savings mechanism, you will be better off adjusting your withholding and making that money work for you.  A refund of $2,400 would give you $200 per month that could be deposited into a savings account that would earn you interest, and you would have immediate access to the  money.

On a good note, I see this as increased savings for  lower-income families in the long run.  On the flip side, those without bank accounts for direct deposit, could be waiting 4-8 weeks for their refunds. 

 As a side note, the IRS plans to investigate the possibility of providing a tool to give taxpayers a mechanism where a portion of their tax refund can be used to pay for tax preparation services, and is suggesting this option may be available for the 2012 tax season.

This post is for general informational purposes only, and should not be construed as tax or financial advice.  Consult your tax professional about your specific situation, or give us a call at 603-834-1271.