Tax refund anticipation loans or checks seem like a good idea, but hidden costs and fees should deter taxpayers from this choice and as a New York Tax Attorney, these types of arrangements should be avoided.
As background, if you plan on getting a tax refund but cannot pay for the tax-preparation service, you can sign up for a Refund Anticipation Check (RAC). In order to use a RAC, the taxpayer usually gets a temporary bank account. The IRS then direct deposits the refund into the account. Once the refund is deposited, the bank then issues a check, but subtracts the charge for the tax preparation, and then closes the account. Typically, banks will charge around $30 to $35 for the RAC service. A RAC is basically a short term loan for taxpayers who cannot afford to pay for a tax preparation service. Therefore, while unfiled tax returns should be avoided, you also need to avoid all excessive costs in preparing and filing the tax return.
RACs have become a popular option for taxpayers. The National Consumer Law Center (NCLC) estimates that approximately 9.2 million taxpayers received a RAC in 2009, 14.6 million taxpayers in 2010, and 18.4 million taxpayers received a RAC in 2011. The RAC program has replaced the Refund Anticipation Loan (RAL) as an option for taxpayers who do not have a bank account for a direct deposit or are strapped for cash. RALs gave the taxpayer their refund instantly, but are criticized for their high costs and lack of availability. RALs will no longer be an option by the end of 2013 due to heavy criticism from regulators and consumer activists.
Taxpayers should consider all their options before setting up a RAC or a RAL. Though advantageous in that the tax preparation fee is automatically deducted from the refund, taxpayers should realize that they are paying fees and interest to borrow money that already belongs to them.
The IRS does offer free programs for low-income individuals and elderly taxpayers:
- The Volunteer Income Tax Assistance (VITA): program for taxpayers who earn $51,000 a year or less.
- Tax Counseling for the Elderly (TCE): program is open to all taxpayers, but priority is given to those aged 60 and older.
- The IRS Free File Program: program that is available to all taxpayers whose income is less than $57,000. You can prepare and file your return online for free.
Overall, it would be a wise decision to avoid refund anticipation programs. Taxpayers who qualify for free tax preparation or filing should take advantage of the option. If you have a bank account and can afford to pay for someone to prepare your tax returns for you, your return can be refunded by direct deposit into your bank account.
New York Tax Attorney Tip: With a RAC, be aware of the additional bank charge of $30 to $35, there is also the cost of the actual tax return preparation.