BEWARE OF RAPID REFUND LOANS

For years, as January 31 approaches, some excited taxpayers were eager to find a tax preparation office in the hopes of getting their taxes done early because they knew they were getting a refund and they knew they could get it within 24-48 hours.   How were they able to get their refunds back so quickly when the Internal Revenue Service needed at least a week to turn their refund around?  They were able to do this via clever financial products like refund anticipation loans (i.e. Rapid Refunds) - the operative word here being “anticipation”.  These rapid refunds are actually loans based on the calculated refund on the taxpayer’s return and underwritten by only two banks in the United States.  These loans carry high costs for application through the banks offering the loan and even higher interest rates if, for some reason, the IRS does not pay the refund or withholds it, and the loan becomes payable anyway by the taxpayer.  However, the repayment issue was generally not an issue because the IRS was gracious enough to provide notice to the bank on the likelihood that the refund would be paid through a debt indicator it issued upon receipt of the electronically filed tax return.  A favorable debt indicator almost guaranteed a refund anticipation loan (RAL) was approved while an unfavorable one was likely denied.  Now RALs are going to be much harder to get because the IRS recently announced that they are NO LONGER sending debt indicators once a return is filed.

The removal of the debt indicator will significantly impact providers of financial products and those taxpayers who seek to use them.  Without the debt indicator from the IRS the loan underwriters will have no idea whether a refund calculated on a tax return will actually be paid.  This means underwriting will likely carry stricter guidelines (along the lines of traditional personal loan applications) including review of credit history and other items documenting the taxpayers ability to repay the loan should the refund not be paid by the IRS as anticipated. And guess what? You are still out any costs associated with applying and underwriting the loan – whether you are approved or not!

Removal of the debt indicators implies the IRS’ discouragement of the use of such financial products and we agree with them.  Our suggestion to you and all of our clients is to forget about these fiscally irresponsible rapid refund loans.  Follow these steps:

• Make your tax appointment early with a reputable tax preparer 
• Have your return e-filed, if possible
• Have your refund direct deposited to your bank account or cash card.

You will receive your refund in about 7-10 days and you will not have paid any additional costs to do it outside of your preparation fees. 

New Genesis Financial provides tax preparation services for individuals and businesses.  Based in Central Florida, we handle local, statewide and out of state returns.  For information on tax preparation services offered by New Genesis Financial please visit us at http://www.newgenesisfinancial.com/taxpreparation. Our expertise is your peace of mind.