The beginning of tax season can be a busy and anxious time for taxpayers – especially those who are waiting for their tax refunds. This is a particularly stressful year for some taxpayers: the combination of new tax rules and the delays tied to the shutdown have taxpayers on edge about when they might see their checks. While they wait, some taxpayers turn to refund anticipation loans (RALs). Here’s what you need to know.
An RAL is a loan that is offered by some tax preparers to taxpayers who are expecting a refund. The word loan is key: while the loan is calculated based on your anticipated tax refund, an RAL must be repaid. RALs are offered by private lenders and are not associated with or coordinated with the Internal Revenue Service (IRS).
RALs are controlled by contract: they are an agreement between you and the lender (typically, a bank). The lure of the RAL is that you usually receive cash quickly even if your tax refund isn’t paid for a few weeks.
Timing is why most taxpayers find RALs appealing. That’s especially true when factoring in tax season delays. The law now requires the IRS to wait until mid-February to issue refunds to taxpayers who claim the earned-income tax credit (EITC) and the additional child tax credit (ACTC). In addition to normal processing times for banks, factoring in weekends and the President’s Day holiday, the earliest EITC and ACTC-related refunds are expected to be available on February 27, 2019; that’s assuming direct deposit and no other issues. If you’re looking for more information, the “Where’s My Refund?” tool will be updated with projected deposit dates for affected filers after February 23, 2019. Remember that the “Where’s My Refund?” tool will only update your actual refund status and not the status of your RAL.
With that background, I’ve received more questions about RALs this year than any other tax season topic. Rather than break them down into individual “Ask The Taxgirl” posts, I’m tackling a number of them all at once. Here are a few answers to questions I’ve received so far:
Q. If I was denied for a refund advance loan, does that mean I won’t get my tax refund back?
A. The RAL application is separate from the preparation of your tax return. Your tax refund should not be affected by being turned down for the RAL; the refund should still be payable to you even if you were not advanced any money. That said, you may still be on the hook for application fees, credit check fees, and “junk” fees. This is one of the reasons you need to be cautious: some providers make their money mainly from these fees and have an incentive to encourage you to apply for RALs that they do not have any intention of giving you.
Q. Why would I not be approved for an RAL?
There are a couple of reasons why you might be turned down for an RAL. A lender may decide that you aren’t credit-worthy: remember, an RAL is a loan, and you have to repay the entire amount of the loan even if you receive a smaller tax refund than you anticipated. That means that you have to hope that your tax refund is large enough after you take out interest rates and fees – as well as any tax prep fees – to pay off the loan. Many things could reduce the amount you receive, including tax law changes and offsets (where the government dings your refund for money that you owe, such as child support or student loans). The IRS no longer provides tax preparers, banks, or lenders with a “debt indicator” which advises the lender in advance whether any part of your refund is earmarked for offset. That makes it more difficult to know what your bottom line might be and it also makes it more likely that the lender could rely on other criteria, like your credit history or salary, to turn you down. For more information on why you might have been turned down for an RAL, click here.
Q. My refund anticipation loan says your application has been received but has not been accepted at this time. What does that mean?
A. Since an RAL is a loan, it’s subject to whatever due diligence the lender requires. For some lenders, that could be a quick credit check. For others, it may be a more involved process, especially if the amounts involved are significant. If it’s been more than a few days, there may be a question or a problem with your application. I would ask the lender (or tax preparer who offered the loan) for an update.
Q. I was turned down for an RAL, but now my tax preparer won’t give me my tax papers. What can I do?
A. It’s not clear from your question whether you’re referring to your information forms (like your W-2) or a copy of your tax return. In either case, your papers should be returned to you; the only difference is the timing. It’s possible that your tax preparer assembles returns and prepares copies of tax returns to send out on a schedule and just hasn’t gotten around to sending yours just yet. If that’s the case, give him or her a little time and follow-up. However, you are entitled to the immediate return of your information forms if the tax preparer didn’t prepare the return; I would politely but firmly request that those be returned. For more on dealing with an uncooperative preparer, click here.
All of that said, I fear that the bit that’s missing in your question has to do with payment. Reading between the lines, I’m guessing that there were fees tied to the RAL and you don’t wish to pay them since you’ve been turned down for the loan. I’m also guessing that the preparer is refusing to release the forms due because he or she wants to be paid. Neither one of these positions is acceptable. You need to pay any reasonable fees related to the RAL, even if the loan wasn’t granted, and your tax preparer needs to return your paperwork.
Q. So if I’m denied an RAL at H&R Block but accepted by somewhere else, where will my refund go when released?
A. It depends on where you are in the process. If you were denied an RAL at H&R Block (or any other preparer) but allowed them to prepare your tax return anyway, your refund should be delivered to you via direct deposit or check according to the regular IRS schedule. If you didn’t allow them to prepare your tax return, and you signed a contract with a second tax preparer in conjunction with your RAL, then the refund will be delivered according to the terms of that agreement.
However, if you filed with H&R Block and then filed again with another preparer who gave you an RAL based on that tax return, you have a clear problem. You should receive a refund from the IRS for the first return, but the second return will likely be bounced. You’ll be responsible for paying back the loan at the second preparer, plus any related loan and prep fees. This is why it’s so important to understand the terms of the RAL application and preparation process before you begin. Be sure to ask in advance about fees, timing and what happens if you’re turned down.
Q. I filed my taxes with a tax preparer, but I do not have my refund yet. I checked my bank account, and it shows the fee from RAL, but I don’t know when I will get my refund. The tax preparer says he can’t help me. What can I do?
A. I’m assuming that you already have the RAL in hand, and you’re looking to repay the loan, but haven’t yet received your tax refund. If so, your tax preparer is right to say that he can’t help you since he has no more information about the payment of your tax refund than you do. Try checking the “Where’s My Refund?” tool on the IRS website, but remember that the “Where’s My Refund?” tool will only update your actual refund status and not the status of your RAL.
Q. I owe child support. Can I still get an RAL?
A. Maybe. Remember that RALs are typically based on credit-worthiness, so that’s going to play a factor. If your child support is the subject of a lien or other public record, it may show up on a credit report which would affect whether you would be eligible for an RAL. The lender typically won’t have notice of any offset (like those from student loans or child support) if you don’t speak up. But here’s the tricky part. Let’s say you get the RAL for your anticipated tax refund without figuring in the child support arrears, but it’s likely that your tax refund could still be offset. You’ll have to repay the entire loan even if your refund check is offset for child support; that could set you up for more significant financial problems down the road.
Q. Instead of taking an RAL, I filed my taxes early and got a refund. Now, I need to file an amended return. Will I get in trouble?
A. I get this question every year. Some taxpayers lie about their tax situation to get a tax refund in their hands now with the idea that they will simply file an amended return and fix their “mistake” later. This is not a good idea. For one, you sign your tax return under penalty of perjury, so if you willfully file a false return, yes, you could get into trouble. Two, even if you don’t get into trouble, you may have to pay an additional fee to file your amended tax return. Most important, this scheme could open you up to extra scrutiny from IRS, especially if you do it every year.
It’s a good idea to mull over other strategies before applying for an RAL. Just make sure they’re appropriate alternatives. Here are a few to consider:
1. Adjust your withholding. If you’re getting a big tax refund, that can mean that you’re having too much money withheld from your paycheck. You might do better to take a little bit out as you go by adjusting your withholding rather than waiting for a lump sum at the end. If you’re not sure where to start, grab a copy of your last tax return and your most recent pay stub and consider making some changes to your form W-4.
2. Consider a loan not tied to your tax refund. Remember that the TCJA limits your ability to deduct interest if you refinance your home, but there may still be a financial benefit to borrowing against your home. Also, you may qualify for a short term loan from your bank or other lender that you could pay back with your tax refund without shelling out extra fees. Depending on the numbers, this could work out in your favor.
3. Open a savings account. Taxpayers often treat refund checks like forced savings accounts. If that’s the case, consider adjusting your withholding (see again #1) and open a savings account. Check around with banks and credit unions for a savings account with a low minimum balance. With direct deposit, you can route funds directly from your paycheck to the account, since if it’s not in your hands, you won’t be as tempted to spend it. Figuring the amount to save is easy. Look at your last few refund checks. Take the average – let’s use $1,500 as an example – and divide it by the frequency of your pay (if you’re paid weekly, that would be 52). In our example, that works out to $28.85 per week: that’s the amount to sock away each paycheck to save the same amount as you would have received as a tax refund. Bonus? You’ll earn interest (the IRS isn’t giving you any).
4. Don’t cheat yourself out of deductions and credits. In the rush to get a tax refund, many taxpayers speed through their returns or rely on unskilled or unsavory tax preparers. Don’t underestimate the value of using the services of a competent tax professional who might be able to make recommendations and find deductions and credits that you might be missing. Spending the time to find a qualified tax preparer – especially one without an incentive to sell you extra services – may yield more tax savings in the long run. For information on choosing a tax preparer, click here.