People can now file their 2020 taxes, but it will be weeks before the refund money reaches many bank accounts. In addition to processing the returns, the Internal Revenue Service must first also comply with a law that says it cannot release refunds before half. -February for returns claiming two popular tax credits targeting lower-income households.
It will be the first week of March when the IRS begins issuing refunds on returns claiming these credits, the Earned Income Tax Credit and the Additional Child Tax Credit. That’s a long wait, especially since the pandemic has been especially tough on children’s finances. -Income households, many of the same taxpayers who are claiming these credits. People who missed stimulus checks last year can claim those payments on their 2020 tax returns. A refund advance from a tax preparer or bank may seem especially tempting this year. But consumers should keep their eyes peeled, according to consumer advocates. “These are really expensive products,” said Michael Best, an attorney on the staff of the National Center for Consumer Law. Best, along with other members of the consumer advocacy organization, recently released a report on the fees and costs low-income taxpayers face during tax season, including potentially high refund anticipation loans. Best understands why people in distress can see refund advances, but wants them to understand the varying terms and structures of the products. First, advances are structured in two different ways through a “repayment anticipation check” and a “repayment anticipation loan.” The former doesn’t make you money faster, according to the Better Business Bureau. It’s basically about paying the setup fee on the backend, which is deducted from the refund amount. Here, the preparer creates a temporary bank account where taxpayers can access their refund once it has been processed, minus the preparation fees. Although they are not interest-bearing loans, an administration fee can cost up to $ 35 or even more, the Center for Responsible Lending noted. “No charge” advances use the taxpayer’s incoming refund as collateral. Taxpayers withdrew 1.65 million of these advances in 2018, compared to 356,000 interest-bearing repayment anticipation loans, according to IRS data cited by the National Center for Consumer Law. 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, certified public accountant and tax expert at TurboTax INTU, + 1.26%. The taxpayer must receive at least a $ 500 refund, he noted. Once the return is accepted by the IRS, one step ahead of processing, the advance money goes into a Visa V debit card account, -0.33%. After the IRS has processed the return, the refund, subtracting the advance and filing costs, is sent to the card. For TurboTax, there are no hidden fees, Greene-Lewis said. The report from the National Center for Consumer Law said that, in general, a “no-charge” offer could carry a higher tax preparation cost “in the form of additional fees.” Even if these advances are made without additional dollar costs, Best said these products could draw consumers’ attention to interest-bearing loans that tend to offer larger amounts. Finally, there are costly interest-bearing repayment anticipation loans. The interest rates of some of these loans can approach 36% and 40% APR. In Best’s opinion, a short-term loan rate should not exceed 36% APR. There has been long-standing support from consumer advocates for that short-term APR threshold, though deregulation means real rates may go higher, he said. For example, the tax preparation chain Liberty Tax, through a bank, will offer pre-arranged 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 finance charge of $ 41.03, he noted. That would mean that the loan recipient would have a bill of $ 1,341.03 due once they receive their refund. Liberty Tax did not respond to a request for comment. Another repayment anticipation loan comes from Santa Barbara Tax Products Group, a company owned by Green Dot GDOT, -0.15%, a bank and fintech holding company. The Fast Cash Advance loan has an APR of 39.55%, according to the website. So if a beneficiary gets a loan of $ 2,000 to pay in 30 days, the person who gets the loan will have to pay back $ 2,065.67, the website explained. Those kinds of additional interest costs may seem small, Best said. But for someone for whom “every dollar counts, it could be significant.” Most prepayment loans stick to a fixed interest rate regardless of the principal amount, according to the report from the National Center for Consumer Law. When interest rates remain the same despite smaller principal amounts, it results in “higher borrowing costs for many taxpayers who select lower loan amounts and may have qualified for a lower-cost product in previous years.” A Green Dot spokesperson said the company makes “every effort to responsibly and fully disclose any terms to the taxpayer in advance,” adding that only a small number of consumers use the Fast Cash Advance. These advances have no recourse to the taxpayer, which means that if for some reason their repayment is not made and the advance is not repaid, repayment is not sought from other sources – “something that is rare in any form of loan and a great benefit for the taxpayer ”, he added.