Getting a Quick Tax Refund

By Dr. John L. Stancil
Tax Analyst, WebTaxCenter.com

In 1971, Fred Smith had an idea. He was going to start a company that delivered packages overnight anywhere in the United States. Reaction was generally negative, and the feeling was that the company could not succeed. Thirty-six years later, FedEx is a $34 billion company, indicating that Fred Smith was right. In looking back over those years, it has become apparent that FedEx tapped into a desire by the American public to get things done quickly. We now have global overnight service, instant messaging, immediate access via our cell phones, faster and faster internet connections, drive through and curbside restaurant service, and “buy it now” on eBay for those who don’t want to wait for the end of the auction. In short, we want it, and we want it now.

This need for speed is also present in our tax refunds. Before 1986, if you were getting a tax refund, you mailed in your return and waited six or eight weeks for the check to arrive in the mail. But in 1986, electronic filing or e-file of your 1040 was born and income tax filing would never be the same. Soon it became possible to e-file and have your refund electronically deposited into your account, making the process even faster.

Today, over half of the American individual taxpayers file their returns electronically and receive their refunds by direct deposit. This process can take between one and two weeks to get the refund. Pretty quick, at least by pre-1986 standards. But that is apparently not fast enough for a large segment of the population. Over 12 million taxpayers want to receive their refunds even faster. Enter the “Refund Anticipation Loan“, or RAL. These loans promise to get your refund in a day or less. Unfortunately, the cost of these loans is extremely high.

Paying for your Own Money

Imagine that you loan someone $200 a month, and you do it for a year. At the end of the year you request your money. He tells you that he will have it for you in two weeks, but if you want it sooner, he can accommodate your if you will pay him $150. And, by the way, he is not paying you interest on the loan either. Sound ridiculous? Of course it does, but that is what millions of taxpayers do each year. They overpay their taxes so they will get a refund at the end of the year, then they pay exorbitant fees to get their own money a week or two sooner. These are called refund anticipation loans.

A refund anticipation loan is a loan from a bank, usually arranged by your return preparer, based on the refund you are to receive. Since the return is being filed electronically and the refund is being direct deposited, the average length of these loans is 10 days. To get your money nine or 10 days sooner, you will have to pay a fee that ranges from $30 to $90 or more. This is in addition to the fee you pay to have your return prepared and electronically filed. The annual interest rate on these loans can be anywhere from 180% to over 2000%. Just to get your own money back!

In addition to the fees that are charged for RALs there is another aspect of these loans that can create significant problems. If your refund is denied, delayed, or reduced you still owe the full amount of the RAL. If this occurs, you must repay the loan rather quickly or pay additional fees or interest. Failure to do so can damage your credit rating.

Low Cost Methods do the Same Thing

There are a couple of approaches you can take that will get your money to you without paying these huge fees. The first, and probably most obvious solution, is to reduce your withholding. Quit giving Uncle Sam a free loan every year. File a new W-4 with your employer, reducing the amount that is taken out of your check each pay period. If you are having too much withheld as a means of forced savings, consider opening a saving account and have an amount automatically deducted from your check each period and placed in the savings account.

Even if you do not want to open a savings account and deposit money into it periodically, you can still avoid the RAL trap and get your money quickly. If you file your return electronically you can have the refund direct deposited into your checking or savings account. The only cost to you will be the fee for preparation of the return and perhaps a small e-file fee. The money will be in your account in as little a seven days.

If you qualify, you may even be able to get your return filed for free. The IRS has a free file program in association with a number of companies. If your adjusted gross income is less than $52,000 you may qualify to prepare and file your return free online. Your refund can be direct deposited using this program.

All of us work hard for our money and we don’t like to spend it needlessly. By following the steps outlined in this article you can avoid the high cost of refund anticipation loans. For more tax information go to www.irs.gov or to www.webtaxcenter.com.

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Dr. John L. Stancil, a tax analyst for WebTaxCenter.com, has been a member of the Florida Southern College faculty since 1998. He received his bachelors degree from Mars Hill College and holds a M.B.A. from the University of Georgia. He later earned his doctorate in accounting from the University of Memphis. He holds four professional certifications, including CPA, CMA, CFM and CIA. Stancil has received the Florida Institute of CPAs 2005 Outstanding CPA in Public Service Award. (This award is given annually to a Florida CPA who has demonstrated significant contributions through community and civic activities.) He has also been recognized as the Expert of the Month on several occasions by allexperts.com.

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