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Subscribe to RSSYou plan on getting a tax refund, but you don’t have the money to pay for the tax-preparation service. No problem, just sign up for a Refund Anticipation Check (RAC) and that charge will be deducted from your refund when you get it.
On its website, H & R Block describes a RAC as “a quick and convenient way to get all the money you deserve without having to pay upfront.”
Here’s how it works. The customer gets a temporary bank account where the IRS can direct deposit the refund. When the money arrives, the bank issues a check or prepaid debit card, minus the tax preparation charge, and closes the account.
Banks typically charge about $30 to $35 for this service. And for consumer advocates, that’s the rub.
“With a RAC you pay a fee to finance the expense of tax preparation, and we don’t think that’s a smart idea,” said Tom Feltner, director or financial services for the Consumer Federation of America. “We always warn people to be wary of financial products that are sold alongside tax preparation.”
That short-term loan turns out to be fairly expensive. If you pay $30 to defer payment of a $200 tax preparation bill for 3 weeks, the APR on that loan is equivalent to 260 percent.
Most importantly, there is no speed advantage to a RAC.
“It’s not any faster than filing your return electronically and getting a direct deposit into your own bank account or into a prepaid debit card that you already have,” said Chi Chi Wu, staff attorney at the National Consumer Law Center (NCLC). “The only advantage is that you have the tax preparation fee deducted from your refund.”
Related: Are you struggling in the suburbs? We want to hear from you.
RACs have been around for years, but they’re growing in popularity. NCLC estimates that about 18.4 million taxpayers received a RAC in 2011, up from 14.6 million the year before and 12.9 in 2009.
The Refund Anticipation Check has replaced the Refund Anticipation Loan (RAL) as the add-on product pitched to taxpayers squeezed for cash or who do not have a bank account for direct deposit.
RALs, which give the customer an immediate refund, have been widely criticized by consumer advocates because of the high cost. Most banks no longer offer them. RALs should be nearly gone from the marketplace by the end of this year.
Arkansas Attorney General Dustin McDaniel recently issued a Consumer Alert about the pitfalls of both RALs and RACs.
"We would encourage consumers to think twice before paying the excessive fees and interest associated with borrowing money that already belongs to them, anyway," he said.
Watch out for add-on fees
If after know all this, you do opt for a RAC, be on guard for extra fees added by the tax preparer. These fees are in addition to the bank charge ($30 to $35) and the cost of tax preparation.
“They can be expensive,” warned NCLC’s Chi Chi Wu. “We’ve done some secret shopper tests and found that some of these junk fees can be anywhere from $25 to several hundred dollars.”
Wu told me they’ve heard about people getting signed up for Refund Anticipation Checks unknowingly. The preparer either adds it automatically or refers to it as “direct deposit” instead of a RAC, which can be confusing.
“If the preparer asks how you would like your refund delivered, specifically ask about the fees associated with various methods,” Wu advised.
Why pay for tax preparation when you may be able to get free?
The IRS offers free preparation programs run by volunteers for low-income and elderly taxpayers. The Volunteer Income Tax Assistance (VITA) program is for those who earn $51,000 a year or less. The Tax Counseling for the Elderly (TCE) program is open to anyone, with priority given to those 60 and older.
The AARP Foundation Tax- Aide program provides free tax preparation for low-to moderate-income taxpayers (especially those 60 and older) at nearly 6,000 locations nationwide.
The IRS Free File program is available to any taxpayer who has an adjusted gross income of less than $57,000. You can prepare your return and file it online for free, giving you the quickest refund possible.
The bottom line
You’d be smart to avoid Refund Anticipation products of any kind.
If you have a bank account and you can afford to pay for the tax preparation out of pocket, have your refund directly deposited into that bank account. You’ll get the money just as quickly without paying any kind of service fee.
If you qualify for free tax preparation or filing, it would be silly not to go that route.
Finally, if you don’t have a bank account and are expecting a refund, now would be a good time to open a savings account and start building a nest egg.
More information
National Consumer Law Center: Avoid Tax-Time Refund Products
Consumer Reports: Don't be tempted by tax refund anticipation loans or checks
Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.
Leave a Comment:
They prey on the lower income families who cant afford the money to pay for the tax preparation. If the IRS could pay the preparer out of the tax return it would stop this issue. 1500 return with 100 prep fee IRS direct deposits 100 in the preparers account and 1400 in the account for the tax payer problem solved.
You are reading too much of the news. I used to work for another large chain. I didn't like the Refund Anticipation Loans (RAL) which are now over. I did my best NOT to sell anyone one of those, but the taxpayer want them. No one is "preying" on them. You can't stop them even you try and try. But these are attractive to crooked taypayers who buy false W2's and SS cards on kids. Once they have the money, the go down the street to get another one using more stolen ID's. The best product is an assisted refund because here again the taxpayer doesn't pay anything upfront, but must wait up to 2 weeks. By then the IRS can cross-track on stolen ID's and stop the check from arriving. The greed is in the national tax chains who pushed us to sell them. But I wouldn't because the interest rate was way high. The bank lost money to thieves. But you are wrong about preying on low income unless you know specifically of one tax office that does this. The people WANT the dang thing and no amount of talking them out of it. I'm glad those RAL's are gone, but seems now they have some other replacement. Don't blame the preparers. Blame the corporate greed of these tax companies as they look to make more money off people with convenience products like these. Sadly they just don't listen.
Low income families don't need a tax specialist. Their income returns are filled easily by anybody with half a brain... but I guess that's the problem with low income families... catch 22.
I always did my taxes for free with the TurboTax website; I have a pretty simple return. This year, my husband and I are going to H&R Block (where he always used to go; we got married last spring so this is our first time filing together) and they just take their fee out of the balance of your refund. I never understood why people make such a big deal out of tax season. It's really not that complicated for most people.
My situation is very much like yours, but I continue to use TurboTax. It's easy, they walk you through every step!!
H&R Block now offers a similar program online like TurboTax does.
I've already done our taxes, and the IRS has already accepted it.
You can do more than just basic returns with turbotax, and it's ease of use really makes it so any moron could do their taxes, as long as you know how to read.
There is no reason for most people to get a refund. Unless unforseen circumstances happened during the tax year that increased credits or deductions, witholding should be adjusted to match year-end tax liabilities (in fact, it can be up to $500 less without any penalty). These cheap (or 'free') tax preparation services never tell the customer that fact, so year in and year out they get a refund, and think it is found money. It is money they paid to the IRS throughout the year and didn't need to be paid.
Nothing, nothing is ever free. That is the first thing suckers should learn.
These are low income families... they don't know how to do math.
If you are getting a refund you are LOANING the government your money.
Adjust your W-4 withholding each year to avoid loaning a deadbeat money that you may not get back!
To many many people, they WANT a large refund and will not adjust withholdings, but the IRS would love them if they did because they don't have to pay the large refund. They think like you. But people are funny about that. They cry foul if they don't get big refunds and don't understand the withholding process. They want their "fun money" and besides the IRS holding it is like a mini-savings account. When it's with them, people know it's being held to the end of the year, untouched and they'll get it back. Lots of people would not have anything left because they are not savers, their spenders. But now it's on basics, like food and rent.
I wonder for those commenting on how great Turbo Tax is to use, I wonder how many of the returns are correct? How would you know unless you really knew the tax code, and know how to dig for every thing that is possible on your tax return? Yeah they make it easy software, but how much could you have gotten had you gone to someone trained in the field? The tax preparer is a specialist in the tax field. Unless you work there, you would not know enough about tax law.
Most tax preparers aren't trained in the tax law any better than Turbo Tax.
If you suspect that Turbo Tax isn't enough to do your taxes properly, you need an actual tax attorney, not a tax professional.
When does a "do-it-yourself" tax program you use once a year ever, ever better than having someone whose job is all about taxes, preparing taxes and studying taxes do your tax return for you? I'm not talking national tax chains because I think they give all tax preparers a bad name! But I could not do a doctor's job so why would you trust it to someone who doesn't know anything about taxes like the do-it-yourselfer? And it also seems the IRS keeps warning people not to miss this credit or that credit if they are eligible because they always do. They do that because too many idiots do it themselves and don't know what they are doing!! (Ahhhh but the software is easy. Yeah right. It's sure easy losing your money due to human error and not knowing what you are eligible for. Tax preparers have to recertify every year with tax study and testing. Baloney to Turbo Tax and any do it yourself program. And remember when those large tax companies like Block tell you it's free----believe me, it's never free! Don't be a sucker. If you want free, you can go to IRS and pick from 25 different tax software and efile for free. Certain restrictions apply. But don't count out the knowledge of a good tax preparer!!! The can save you some real money. And when you make a mistake, do you know how to amend the return you did with the do it yourself program? Probably not, and now you HAVE to go to the preparer to fix your dumb mistakes!
Being poor is expensive...