Anticipating Your IRS Refund Can Cost You Plenty

While accountants are reaching for aspirin, millions of Americans are reaching for some fast cash this tax season. Unfortunately, those who reach for fast cash in the form of a "refund anticipation loan" are getting hit with interest rates and fees that are out of this world.

The tempting ads are plastered in newspapers and on television for "fast cash refunds", "express refunds", or "instant refunds." The ads offer to get your refund in a day or two, or in some cases even instantly.

What is a "refund anticipation loan"? It's a loan that borrows against your anticipated tax refund from the IRS. Refund anticipation loans, or RAL's as they are known in the tax industry, carry annual percentage rates (APR's) of about 60% to over 700%, a fact that many consumers either don't realize or simply overlook.

RAL's are marketed to people who need money the most such as low and moderate income workers. A report by the National Consumer Law Center notes that "about 40% of the 12 million refund loan customers in 2000, were families who received the Earned Income Tax Credit, the largest federal poverty assistance program." And since the RAL's often use the term "refund" in their ads, many of those who take the bait don't realize that they're receiving a loan and not their actual refund from the IRS.

The fees associated with RAL's are expensive. For example, let's say the IRS owes you a refund of $2,000. In order to get a RAL you pay the following: RAL loan fee = $75, Electronic filing fee = $40, tax preparer's fee = $100. Total fees associated with your RAL = $215 which is more than 10 percent of your estimated refund. The APR on your refund loan equals a whopping 142 percent!

Many low and moderate income workers are without bank accounts and wind up paying an additional fee to set up a one-time-use account so that their IRS refund can be direct deposited.

Before giving in to the temptations of refund anticipation loans, ask yourself if you really need your money that quickly. If you can wait just a bit longer for your refund you'll line your own pockets with extra cash rather than forking it over to a RAL lender.

A great way to save money at tax time is to go to a Volunteer Income Tax Assistance (VITA) site. VITA sites provide free tax preparation to low and moderate income taxpayers and are sponsored by the IRS. They can be found in libraries, community centers and other locations during the tax season. To find a VITA site call the IRS general help line at 1-800-TAX-1040 or visit www.tax-coalition.org.

About The Author

James H. Dimmitt

James is editor of "TO YOUR CREDIT", a weekly free newsletter with personal finance news and tips. You can subscribe to the newsletter by visiting http://www.yourfreecreditreportnow.com. He is also author of "Identity Theft - How to Avoid Becoming the Next Victim!" available at http://tinyurl.com/bc45

jimdim815@aol.com

In The News:

pen paper and inkwell


cat break through


Tax Time Tune Up

Excerpted from the new book, "How to Do Space Age... Read More

Donating Cars To Charity - New Tax Rules

On June 3, 2005, the IRS released guidance on charitable... Read More

Slash Tax when Buying a Business

When buying a business, how the "purchase price" is made... Read More

Military Reservists, Enlistees May Get Deferral of Back Taxes

Reservists called to active duty and enlistees in the armed... Read More

To Tax or Not to Tax - This is the Question

To tax or not to tax - this question could... Read More

Alas! In E-Commerce Taxland

In trying to comply with tax laws for your e-business,... Read More

Tax Trap #3 -- IRS Penalties, Interest and Love Letters

As a small business owner or self-employed person, one of... Read More

Income Tax Returns Your Accountant Should Not File

You've been feeling uneasy (perhaps even guilty) because you've failed... Read More

Know A Tax Cheat? Get Paid To Tell The IRS

According to the IRS, taxpayers underpay their taxes by some... Read More

Tax Audits: What Signs Make You More Likely to be Audited by the IRS?

It's a major fear for most Americans: A notice from... Read More

A Taxing Investment

April 15 - The most dreaded day of the year... Read More

1031 Exchange Rules and Requirements

Following is a reproduction of the IRS's rules and requirements... Read More

Tax Investigation - What You Need To Do

The knock on the door from a Tax Inspector is... Read More

Employment Taxes ? Depositing With The IRS

If your business has employees, you must pay employment taxes.... Read More

Access to E-records by Taxing Authorities: A Case for Pakistan (Part II)

All tax authorities to e-commerce transactions should investigate the record... Read More

IRS Offer-in-Compromise, Hype or Hope?

"Settle for Pennies on the Dollar! IRS debts settled for... Read More

What Is Tax Law?

The federal tax code is complex. This complexity generally arises... Read More

SFR Substitute for Returns: IRS Action on Non-Filers

In the latest Star Wars episode, the evil empire executes... Read More

10 Tax Tips to Reduce Costs and Increase Income

No one likes paying tax. Everyone understands that tax is... Read More

Small Business Tax Deduction - Write-Off Bad Debts

Practically every small business has receivables that it cannot obtain... Read More

How To Set Up A Tax-Saving Bookkeeping System

One of the most important, but least understood or appreciated... Read More

Organizing Your Taxes

Does this scene sound familiar? It's April 7. You haven't... Read More

Marriage or Divorce ? Check Your Social Security Number

Newlyweds and the recently divorced should make sure that names... Read More

Save Money on Taxes - Let Uncle Sam Pay for Your Fun!

"Deducting Meals and Entertainment"O.K. You've been working really hard on... Read More

E-commerce Taxation

The means and types of businesses have transformed with advent... Read More

IRS Statute of Limitations: Do Taxes Ever Expire?

Many Americans believe that an IRS debt is a debt... Read More

Tax Reduction Tips

In the rush to get tax returns prepared and filed... Read More

How to Reduce the Estate Tax Using the A-B Revocable Living Trust

In a past article I relayed the plight of the... Read More

What to Do If You Can?t Pay Your Taxes

The end of tax filing extensions is quickly approaching. What... Read More

Amending Procedural Laws for Collection of E-taxation

The electronic transaction ordinance defines the certificated copies in which... Read More

About Income Taxes; Tidbits

1812The first attempt to impose an income tax on America... Read More

Business Tax Loophole: Leasing Assets To Your Corporation

While there are many equally valid reasons to incorporate, saving... Read More

Tax Reform, My Way

We need real tax reform and we need it now.... Read More