Tax refund delays spark refund anticipation loan comeback

Those tempted to grab quick-cash options should watch for fees

By Kay Bell  |  Published: February 6, 2017

Tax refund delays spark refund anticipation loan comeback

The Internal Revenue Service helped effectively kill refund anticipation loans in 2012. Now quick cash options based on expected federal tax refunds could be making a comeback, thanks to that very same agency.

In 2017, the IRS is holding some 2016 tax year refunds until at least Feb. 15. In addition, the agency is implementing more security features to catch fraudulently filed returns.

These steps could put added pressure on filers who rely on early tax refund money, making cash-strapped taxpayers ideal targets for refund-related financial products that could end up costing them.

Unintended tax security consequences
The IRS actions that could push filers into the arms of refund-related quick cash providers are largely designed to fight tax identity theft and refund fraud.

The agency will use 37 new tax return data checks this filing season to help it confirm that returns and the associated refunds are submitted by legitimate taxpayers.

These under-the-hood changes will largely go unnoticed by most taxpayers, according to the IRS. But National Taxpayer Advocate Nina Olson worries that the tighter security could unduly slow return processing. She even included the possibility as a major problem in her 2015 annual report to Congress. 

On top of that, returns in which the Earned Income Tax Credit or additional child tax credit is claimed are on automatic hold.

In the IRS’ defense, this particular delay wasn't the agency’s idea. Congress included the hold in the Protecting Taxpayers from Tax Hikes (PATH) Act. The law prohibits the IRS from issuing refunds from the tax credit filings until at least Feb. 15.

It gets worse. The IRS warns that its normal refund processing system, along with weekend and Presidents Day holiday work delays, could push release of some tax-credit-affected refunds until the end of February.

Poorer taxpayers disproportionately affected
When members of Congress created the new refund restrictions on these two tax credits, which can get filers cash back from Uncle Sam even if they don’t owe any tax, they argued that the extra time would allow the IRS to double-check the claims’ validity.

For some folks the timing matters, every penny matters. These are working families, most of them have kids, and they expected to have a refund to pay off holiday bills and utility bills.

— Chi Chi Wu
National Consumer Law Center

But these credits typically are used by lower-income taxpayers, who also tend to be early tax return filers who rely on quick refund receipt to cover day-to-day expenses.

“It’s going to create issues,” says Chi Chi Wu, staff attorney for the National Consumer Law Center. “For some folks the timing matters, every penny matters. These are working families, most of them have kids, and they expected to have a refund to pay off holiday bills and utility bills. This [refund delay] is a big deal for these families.”

Consumer advocates are concerned that the refund delay might make no-fee refund products more attractive to many consumers.

These are loans that are secured by a taxpayer’s refund, but the lender does not charge the taxpayer a fee or finance charge. Instead, some lenders charge the preparer a fee.

Concerns about backdoor charges
Consumer watchdogs also worry that the preparer fee might be passed along to clients through other charges.

An NCLC and Consumer Federation of America analysis of challenges facing taxpayers this filing season found that some lenders appeared to actually impose a price for no-fee refund products by charging a higher price for a refund anticipation check, or RAC, if the preparer offered these loans.

With a RAC, the bank opens a temporary bank account into which the IRS direct deposits the refund. After the refund is in the account, the bank issues the consumer a check or prepaid card and closes the temporary account.

RACs do not deliver refund monies any faster than the IRS can, according to the two consumer groups, yet the loans can cost $25 to $60.

Early refund interest
Liberty Tax Service, the third largest tax preparation franchiser in the United States, expects many of its clients will be surprised to learn of the mandated refund hold.

The Virginia-based company also expects its no-fee Easy Advance, offered by Republic Bank & Trust Co., will generate a lot of interest this filing season. Liberty clients can get up to $1,300 through the refund-based product

“While there are a lot of Americans that wouldn’t be affected by a week’s delay in their refund, for many it’s the largest financial transaction of the year,” says Brian Ashcraft, director of tax compliance at Liberty Tax Service. “Oftentimes the refund pays February’s rent or pays the credit card used to purchase holiday gifts.”

While there are a lot of Americans that wouldn’t be affected by a week’s delay in their refund, for many it’s the largest financial transaction of the year.

— Brian Ashcraft
Liberty Tax Service

Liberty gets around half of its business in the early part of tax season, according to Ashcraft. He expects that trend will continue this year. And some of those early filers, he says, will get at least a portion of their anticipated refunds sooner through Easy Advance.

Other major tax prep firms following suit
H&R Block is offering for a limited time a loan based on the taxpayer-expected refund amount after the company’s preparation of the applicant’s federal return. The possible loan amounts are $500, $750 or $1,250, and are deducted from the calculated refund amount. The loans, underwritten by MetaBank, are issued on the H&R Block Emerald Prepaid MasterCard. The company also notes on the loan’s web page that “fees for other optional products or product features may apply.”

MetaBank offers similar refund advance loans to Jackson Hewitt tax return clients. Loans of $200 to $400 are available with a paystub or other acceptable pre-year-end income verification, according to the tax preparation firm’s website. Amounts up to $1,300 are available once the taxpayer files a return. The Jackson Hewitt refund advances are loaded onto an American Express Serve Card.

Be a careful tax prep shopper
Whether refund delays for whatever reason will spur increased interest in advance refund offerings remains to be seen.

But a lot of Americans in this fast-paced world are, in general, impatient. Even those who don’t specifically need their tax refunds to pay bills, want their IRS cash as soon as possible.

If you’re among the group that just can’t wait a few extra weeks for a refund, carefully evaluate any provider who offers an advance refund option.

The fine print at the Liberty refund advance website tells potential customers to check at their local office on the cost and timing of all filing and product options. Consumer advocates second such diligence.

Make sure it is truly no-fee. Unscrupulous tax preparers might charge higher tax preparation fees to cover the charge they incur for the refund product. NCLC and CFA say tax clients should ask how much they will be charged for tax preparation and whether that fee will increase if a refund loan or advance is part of the service.

Most of all remember that under law, certain refunds cannot be issued before Feb. 15. If any tax preparer promises you a refund sooner than that, there’s likely a potentially costly catch.

Earlier coverage: Refund anticipation loans coming to an end, Refund anticipation loans live on in new disguises


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Updated: 10-19-2017

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