Tax Refund Anticipation Loans
Those are the words that every taxpayer would love to hear, yes, you’re receiving an income tax refund. For many individual taxpayers those refunds can be obtained through Earned Income credit, a real refund of overpayment of tax, or through an overpayment from previous years. Once you determine you’re receiving a refund, there are several options for actually putting that money in the taxpayer’s hands.
Although this sounds like the perfect end to a wonderful tax year, taxpayers are paying around $2 billion annually in order to receive a loan against their anticipated refund of tax in one day. The interest rates charged by many tax preparers and lending institutions can run as high as 2000 percent, and the taxpayers aren’t even blinking an eye.
Since the advent of the computer age, and the great invention of the internet, the Internal Revenue Service has been fairly quick to react to the benefit of electronic filing. The returns are filed much faster, refunds are made faster, and money due the IRS can be obtained faster. Let’s take a minute to examine the refund anticipation loan, and the advantages and disadvantages of using this method for filing.
For many taxpayers, and families trying to make ends meet on limited incomes, receiving those W-2s can be a very satisfying and thrilling time. Many of these families have struggled all year to make ends meet, borrowing money to sometimes fill in the emergency needs. Now, finally the opportunity to get back a lump sum distribution of needed refund money has arrived. Quick refund anticipation loans, and the tax preparers that offer them, have seemed like a dream come true to many individual tax payers. They tend to overlook the exorbitant fees, and the costs associated with these refund anticipation loans or RALs, and march right into the tax office, seeking their money.
Here’s where the refund anticipation loan can become a problem: if for some reason, your anticipated refund should not arrive as anticipated, and then you, the taxpayer are responsible for repaying the tax preparer, or their lending institution. What if you are once again without any excess money? This can be a problem. For example, if you owe back taxes, back child support, or liens and judgments, you can’t qualify for the refund anticipation loan
Many individual companies, such as check cashing services, payday loan companies, and even rent-to-own centers are partnering with tax professionals to offer the service either in-store, or the opportunity to make it a part of a purchase proposition. The individual companies that are partnering with tax preparers are hoping to gain sales dollars by having the taxpayer in house when they receive their money.
For individuals who choose to go to some of the more established professional tax preparers such as H & R Block or Jackson Hewitt, they will pay even higher fees to get the return filed and receive a refund anticipation loan. The national average was around $250 for the 2004 tax year, and may reach new heights this year.
The sad fact is, that many of the taxpayers who seek professional tax preparers to complete their tax return, could use the VITA service, or Volunteer Income Tax Assistance Centers and receive an electronically filed return for free. The refund is back within two weeks, sooner if you have a checking or savings account, and it doesn’t cost the taxpayer anything.
The rapid refund, that is rapidly replacing the standard paper filing, is an electronic method used for filing your tax return, and allowing you to receive your refund in about 10-14 days. Much faster than the six weeks it used to take. There are usually no excess fees attached to this type of filing, and returns may be filed for free through many local, public access facilities.
Most often, the individuals who apply for and use the refund anticipation loan are recipients of earned income credit, and their refunds are usually well into the thousands of dollars. The refund anticipation loan can be processed in as little as 3 hours, and back in the hand of the tax payer by late afternoon; this is provided everything works exactly as planned. The higher interest rates charged by the bank product providers, and the higher processing fees charged by the tax preparers, equate to less money for the tax payer, but many of these individuals don’t even blink when told how much it will be to process their return, they just want the refund immediately. This is just one more example of the instant gratification upon which our society chooses to operate.
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