This tax season, many taxpayers will accept an income tax refund advance. Most of these individuals will not fully understand the exact nature of this refund anticipation loan.
The process is easy; the individual completes and submits their federal and perhaps state tax returns. They then receive a loan from a lender who could be connected with the tax preparation or could be independent. The loan repayment comes out of their refund, which goes to the lender. Unfortunately, many of these taxpayers do not understand the risks they are taking when they accept one of these loans against their refund.
Most income tax refund advance loans are provided by the companies who also prepare the returns, including H&R Block, Jackson Hewitt and Liberty. They have small or temporary offices set up in low income areas filled with working class people who do not understand that what they receive is a loan, not their actual refund.
The risk lies in the possibility that the refund may not come through as hoped from the Internal Revenue Service. The borrower is obligated to repay this loan regardless of what happens when IRS receives and reviews the paperwork. The lender is also going to charge the borrower with interest and fees for the loan whether or not IRS accept it.
The tax filer needs to understand that the tax preparers do not have the final say on the validity of the return. The preparer only fills out the forms and submits them on behalf of the filer. Only IRS has the authority to determine the filing is acceptable and then process it.
The approval by IRS happens after an agency official reviews the return and determines that it is accurate, complete and includes required documentation. The review process takes several days to several weeks depending on whether the return was filed electronically or by mail.
Lenders have no problem with this risk because the odds of getting their loaned money back are excellent. The Internal Revenue Service approves virtually all returns within a week of their submission. Even if a few returns end up being rejected, the amount of income earned on the huge majority that do pass IRS inspection justifies the relatively few losses on return rejections.
If the IRS decides that the return is inaccurate, incomplete or IRS objects to some deductions, the refund could be delayed, reduced or eliminated. IRS may refuse to pay the refund as requested and then the borrower must struggle to repay the income tax refund advance out of their own funds. If they are unable to fulfill the loan conditions, their credit rating, future credit worthiness and credit interest rates could suffer. Some tax services are able to protect their own interests by recovering anticipation loans that were not repaid from tax refunds in future years.
The wisest course for most taxpayers is to avoid the process unless they are in truly desperate need of immediate funds. This eliminates all concern over being able to repay the loan or getting the refund in time to avoid any extra interest or late charges.
The emergency needs to be very immediate, because IRS processes refunds quickly. Those who file electronically and have their refund direct deposited frequently get the refund within a week at no charge from IRS or the bank. Even refunds submitted by mail usually get processed within a month if submitted early in the tax season.
Most important to the tax filer is the knowledge that they are getting every penny of their hard earned money. None of the refund is going to the preparer on top of their charges for preparing the return. The money that was going toward loan interest and fees is instead going into the taxpayer’s pocket. There is really no point in an anticipation loan for most individuals.