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“Instant” Tax Refunds: Quick Cash for Whom?

“If you’re expecting a tax refund from the IRS, do you want the refund now or later?”

If the question were really that simple, of course it’s an obvious answer.

Unfortunately it’s not that simple, and here’s the real question: “If you’re expecting a tax refund from the IRS, do you want the refund now or later, knowing that you’ll likely pay high fees for receiving a refund only a few days or weeks early?”

Some tax preparation services offer you the option of receiving an “instant” advance tax refund, which may be in the form of a check or prepaid card. Tax preparers may even tell you their advance refund service is free. But make no mistake—somehow you’ll pay for what is essentially a short-term, high-interest or high-fee loan.

Preparers might use different names for fees they charge, including processing, application, technology, document, or administration fees. Perhaps the advance tax refund fees are hidden—the preparation service simply adds the cost to its overall price of preparing and filing your tax return. The law forbids preparers from basing fees on a percentage of the refund amount, or computing their fees using any figure from a tax return.

Several years ago, the Internal Revenue Service and federal regulators cracked down on “refund anticipation loans,” or RALs. RALs were costly short-term, high-interest loans based on taxpayers’ anticipated income tax refunds. While newer products may use names like “refund anticipation checks,” “instant” refunds or “quick” refund cash, the old saying that “there’s no such thing as a free lunch” very much applies.

Before agreeing to an instant refund, consider this:

  • According to the Internal Revenue Service, the IRS should issue your refund within three weeks if you file your return electronically (e-file), and faster when you choose direct deposit. Here you get your full refund, and you won’t pay listed or hidden fees for getting an expected refund a little more quickly.
  • Understand that you are responsible for paying the loan or “instant” refund amount if your tax return is less than anticipated or you do not get a refund.
  • If you seek cash quickly so you have money to buy something now, think about options other than advance tax refunds. Are there any credit or promotional options that you can take advantage of?
  • If you are determined to seek an advance tax refund, check with several tax preparers and get an estimate regarding your tax preparation and advance refund costs—including clear explanations about their fees. Check on a tax preparer’s credentials, including the preparer’s educational background and professional experience, and make sure your preparer is registered with the IRS. Conduct an internet search on tax preparers you are thinking of doing business with to see if there are complaints.
  • Be wary of getting an advance refund through a prepaid card. These cards often cost you money through transaction fees each time you withdraw cash, and may set maximum per-transaction withdrawal amounts.
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