Contact: Catherine Dehdashti, U of M Extension, (612) 625-0237, ced@umn.edu

Instant tax refund costs fees, interest

ST. PAUL, Minn. (1/5/2010) — Tax season is just around the corner and many people are already planning how to spend their refund. Much of this planned spending will be for current expenses and overdue bills.

According to Shirley Anderson-Porisch, a family resource management educator with University of Minnesota Extension, difficult financial situations too often lead people to take out a tax refund loan to get “instant” money.

In recent years, U.S. taxpayers have taken out more than 30 million dollars in tax refund loans, also called a refund anticipation loan (RAL). “Unfortunately, a large part of that money went as finance fees to loan companies—money that could have been in the pockets of taxpayers if they had just waited a few more days for their tax return from the government,” said Anderson-Porisch.

Some tax preparation companies suggest the people take out a RAL after completing their tax forms. The company will usually charge a fee for tax preparation and then offer an RAL from an affiliated bank. Fees are charged for the loan and the loan application. Annual percentage rates for these loans are reportedly between 80 percent and 190 percent.   

Anderson-Porisch asks those who are considering taking out an instant tax refund loan to consider these facts:

• An instant tax refund loan is nothing more than a high interest loan. Loans are made before tax returns are filed. If state or federal government denies the refund, loan recipients will still have to pay back the loan. The longer the loan terms, the higher the fees.
• If the loan is not paid back, it will likely be turned over to a collection company.
• With a tax refund loan, the recipient always gets less of the tax refund. The tax preparer and bank will deduct loan fees from the tax refund. 
• Taxpayers who file electronically do not need an instant refund loan. Electronic tax filing speeds the process of filing forms and receiving a tax refund. 

Tips from University of Minnesota Extension include:

Avoid letting anyone “rush” you into a loan decision. Taxpayers who have signed their name to a RAL application have usually created a difficult financial situation for themselves. 

Ask questions about fees and interest rates. Ask if your name will be shared with other companies. Some tax preparation companies may ask you to sign forms allowing them to share your personal information with other companies. Know your rights—you have the right to receive information, and the right to say no to these requests.

Make sure you know about the people who are filing your taxes. If you use a tax preparer, find out if they are a reputable business by contacting the Better Business Bureau at 1-800-646-6222 or Consumer Division of the Minnesota Attorney General’s Office 1-800-657-3787.

File your taxes electronically. The Internal Revenue Service says that if you file taxes electronically, it will take less than two weeks to process the return, and send you the refund.

“Be a wise money manager and protect your tax refund,” said Anderson-Porisch. “Avoid the instant tax refund loan.”

For more helpful tips on making wise financial decisions, visit University of Minnesota Extension’s Resource Management for Daily Life program website at http://www.extension.umn.edu/ResourceManagement/.

Source: Shirley J. Anderson-Porisch, family resource management educator with University of Minnesota Extension

URL: http:// www.extension.umn.edu/extensionnews/2009/instant-tax-refund.html  This page was updated Jan. 5, 2010 .
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