Thursday, January 28, 2010

Rapid Refund - Good or Bad

A rapid refund or Refund Anticipation Loan (RAL) is money borrowed by a taxpayer from a lender or tax preparer agency based on the taxpayer’s anticipated tax refund. You are applying for a loan in exchange for getting your tax refund faster or borrowing against your own money for a fee. Rapid refunds are similar to payday loans. A RAL is advertised to taxpayers as the easiest and quickest way to get your tax refund.

You may get your tax refund faster if you file electronically which is much cheaper than getting a RAL. Many tax preparation companies market RAL's to taxpayers that qualify for the Earned Income Tax Credit (EITC) because the EITC ensures that an eligible taxpayer will receive a refund from the federal government.

H&R Block generated 2.9 million refund anticipation loans in 2009.

Rapid Refund agencies must:
1. Disclose that taxpayer is receiving a loan from the agency, and the taxpayer's IRS refund will be sent to the RAL or lending agency

2. Disclose that a RAL accumulates interest

3. Disclose all fees associated with filing a tax refund and for the RAL

4. Obtain a written consent, along with an application for the RAL

5. Disclose that if the tax refund is not received by the agency in a certain amount of time or by a specific date, the taxpayer may be charged additional fees

6. Refer to the RAL product as a loan and not a refund.

7. Not advertise that individual income tax returns may be filed electronically prior to the receipt of W-2 or 1099 Forms or that pay stubs can be used to file tax returns.

Here are 10 things to consider before applying for a rapid refund:
1. A rapid refund may require paying bank fees, loan fees, and a tax preparation fee

2. Ask for a disclosure of all fees you will be charged before signing the loan agreement

3. Beware of RAL scams

4. Find out if the company is licensed and qualified to prepare taxes

5. Ask how many customers have been audited

6. Ask what process is in place to help customers have been audited

7. If you feel you are being rushed or have a gut feeling that you should not get the RAL then walk away

8. Do you homework before going to get your taxes prepared

9. Be cautious about several deductions that you are eligible for that you never heard of. Ask them to write down all the deductions you are eligible for, find out if they are valid, then you can go back to the tax preparer office and proceed with filing the RAL

10. If you get audited, your rapid refund is denied and you will immediately have to pay back your tax refund or be charged interest and penalty fees by the IRS for the amount owed

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