People can now file their 2020 taxes, but it will be weeks before refund money hits many bank accounts.
In addition to processing the returns, the Internal Revenue Service first must also abide by a law saying it can’t release refunds any sooner than mid-February for returns claiming two popular tax credits geared towards lower income households.
It will be the first week of March when the IRS starts releasing refunds on returns claiming these credits, the Earned Income Tax Credit and the Additional Child Tax Credit.
That’s a long wait — especially because the pandemic has been especially tough on the finances of lower-income households, many of the same taxpayers who are claiming these credits. People who missed out on stimulus checks last year can claim those payments in their 2020 tax returns.
A refund advance from a tax preparer or a bank may seem especially tempting this year. But consumers should keep their eyes wide open, according to consumer advocates.
“These are really expensive products,” said Michael Best, a staff attorney at the National Consumer Law Center. Best, with others at the consumer advocacy organization, recently released a report on the fees and costs that lower-income taxpayers face during tax time, including potentially high-interest refund advance loans.
Best understands why people in a squeeze might eye refund advances, but he wants them to understand the varying terms and structures of the products.
First off, the advances are structured in two different ways through a “refund anticipation check” and “refund anticipation loan.”
The former doesn’t get you money any quicker, according to the Better Business Bureau. It’s essentially putting payment on the preparation fee at the backend, taken from the refund amount. Here, the preparer creates a temporary bank account where taxpayers can access their refund once it has been processed, minus preparation fees. Although they aren’t interest-bearing loans, an administrative fee can cost up to $ 35 or even higher, the Center for Responsible Lending noted.
“No-fee” advances use the taxpayer’s incoming refund as collateral. Taxpayers took out 1.65 million of these advances in 2018, compared to 356,000 interest-bearing refund anticipation loans, according to IRS data cited by the National Consumer Law Center.
TurboTax has its own refund advance based on this model. It’s not a loan, so there’s no interest rate, said Lisa Greene-Lewis, a certified public accountant and tax expert for TurboTax INTU.
The taxpayer needs to have at least a $ 500 refund coming, she noted. Once the IRS accepts the return — a step ahead of the processing — the advanced money goes on to a Visa V debit card account. After the IRS processed the return, the refund, subtracting the advance and filing costs, go to the card.
For TurboTax, there are no hidden fees, Greene-Lewis said. The National Consumer Law Center report said generally, a “no fee” offer might come with larger tax preparation cost “in the form of add-on junk fees.” Even if these advances are without extra dollar costs, Best said these products could bring consumers’ attention to interest-bearing loans that tend to offer larger sums.
Finally, there are expensive interest-bearing refund anticipation loans. Interest rates on some of these loans can approach 36% and 40% APR.
A short-term loan rate shouldn’t go above 36% APR, in Best’s view. There’s been longstanding consumer advocate support for that short-term APR threshold though deregulation means actual rates can go higher, he said.
For example, the tax preparation chain Liberty Tax, through a bank, will offer pre-set loan amounts between $ 500 and $ 6,250. That comes with a 35.99% APR, which Liberty Tax discloses on the website. For example, a $ 1,300 loan has a $ 41.03 finance charge, it noted. That would mean the loan recipient would have a $ 1,341.03 bill due once getting their refund. Liberty Tax did not respond to a request for comment.
Another refund anticipation loan comes from Santa Barbara Tax Products Group, a company owned by Green Dot GDOT, a fintech and bank holding company. The Fast Cash Advance loan has a 39.55% APR, according to the website. So if a recipient gets a $ 2,000 loan for repayment in 30 days, person getting the loan will have to pay back $ 2,065.67, the website explained.
Those sorts of added interest costs might sound small, Best said. But for someone for whom “every dollar counts, it could be significant.”
More refund advance loans are sticking with a set interest rate regardless of the principal amount, according to the National Consumer Law Center report.
When interest rates stay the same despite smaller principal amounts, it results in “larger loan costs for many taxpayers who select lower loan amounts and might have qualified for a lower cost product in previous years.”
A Green Dot spokesman said the company makes “every effort to responsibly and comprehensively disclose any terms to the taxpayer up front,” adding that only a small number of consumers use the Fast Cash Advance.
These advances have no recourse to the taxpayer, meaning that if for any reason their refund doesn’t go through and the advance is not repaid, repayment is not sought from other sources — “something that is uncommon in any form of lending and a great benefit to the taxpayer,” he added.