Taxpayers who don’t feel like waiting around to get their refunds can often get their money immediately in the form of a Refund Anticipation Loan (RAL) that allows filers to borrow money against their income tax refunds. RALs can usually give taxpayers their money within 48 hours, depending upon the fees that they pay and whether there are any issues with their tax accounts, such as unpaid child support or back taxes (which will disqualify the filer from using this service). In some cases, filers can even get at least some of their refund on the spot when they file. But the fees that rapid refund loans charge are usually nothing short of astronomical.
The APY for rapid refund loans can run anywhere from 50% to a ridiculous 500%, and a RAL for a refund of several thousand dollars can equal hundreds of dollars. Furthermore, many tax preparers charge an additional substantial fee to the filer for this service that goes directly into their own pockets-and this has constituted a major source of revenue in the tax preparation industry for many years.
At first, only traditional storefront tax preparation franchises like H&R Block and Jackson-Hewitt offered rapid refund options for taxpayers eager to get their money back from Uncle Sam as fast as possible. But many smaller firms also offer this service, and even a number of online tax preparation programs such as TaxAct also contain this feature. Of course, only those who are financially ignorant will use this service, but the AARP stated in an article on their website that about 7 million people used this service in 2009-and paid a whopping $650 million in fees as a result.
A Thing of the Past?
Perhaps the most unfortunate aspect of this racket is that it is probably the least necessary type of loan available. In prior decades when paper tax returns were the norm, filers often had to wait for months to get their money back, which made the rapid refund option an attractive alternative for those who needed their money as soon as possible.
But the dramatic increase in the efficiency of the IRS in recent years has rendered this a thing of the past. Those who file electronically and elect to have their funds directly deposited into their bank accounts can now expect to receive their refunds in one to two weeks, unless there is some sort of problem with the return (such as if it’s flagged for an audit or contains incorrect information such as a Social Security number with some of the digits transposed).
In the next few years, we can probably expect to see our refunds arrive in less than a week. The reduction of this waiting period has effectively rendered rapid refund loans unnecessary for the vast majority of filers.