Now is the season for tax ads. The national chains, independent preparers, software companies and online filers are trying to get the attention of taxpayers who are waiting on their W-2s and other tax documents. And many are dangling money to attract clients. After all, they’re trying to make money and they need warm bodies in the door or at the computer. That means it’s up to the clients to make sure they understand all the rules of these enticements.
It doesn’t matter what a company calls their program, if they discuss getting money in fewer than 21 days, it’s a loan not just your refund. The IRS isn’t giving tax pros a refund chart as they have in previous years. Their talking point is that most refunds are issued within 21 days. This gives them a little room for checking some returns more closely if the need arises. For a tax preparer to suggest that they can get it faster probably means they have a loan program.
Refund Anticipation Loans (RAL) have been around since electronic filing began. They were a carrot to tempt taxpayers to try e-filing. Getting a refund in 3 to 4 days when everyone else had to wait 6 to 8 weeks was a great idea for many taxpayers. As more people e-filed, the IRS got faster at processing returns and the wait time went down. (Despite the IRS’s generous 21 days wait, I won’t be surprised to see most direct deposit refund to take only 8 to 10 days.) But these loans have fallen out of favor (regulators don’t like them) and are mostly gone on a national level.
But that doesn’t mean that a taxpayer can’t find someone to loan them some money based on their projected refund. Finance companies have gone after this market. Some team with tax preparers or their own employees use computer software. And some preparers have their own bank. But the taxpayer must be careful they understand what is happening. They have to ask questions.
- Who is the lender and what relationship is there with the tax preparer?
- Are they preparing a return or just using W-2s or pay stubs for loan info and the taxpayers will still have to prepare a return?
- If they’re preparing and filing a return, does the tax preparer have a PTIN (preparer id number)? If they don’t, consider another tax preparer.
- How is the loan paid back? Is it coming out of the refund or does the taxpayer have to pay it back directly.
- When is the loan due back? What are the fees if it’s not paid back on time?
- What are the fees? Make sure the tax preparer gives you all the add-on fees and not just the “basic” charges. And I’d get it in writing.
- Will you get a full copy of the tax return and a copy of anything you signed if they are filing a return? (IRS requirements) Check these papers and make sure numbers match and when a refund is issued, check them against the refund.
There are a lot of great tax preparers out there who won’t mind answering these questions. However, the tax business has attracted a lot of fly-by-night groups who are trying to make a fast buck off trusting taxpayers. Last year, the Justice Department issued injunctions against the owners of Instant Tax Service and several of their franchisees. They used refund loans to get taxpayers in the office and them took huge fees and changed returns to increase refunds which went into their pocket. Taxpayers need to check out who they do business with and ask these questions to protect themselves.