‘Tis the season for tax returns…and for many, tax refunds. So, if you’re one of the lucky Americans who is expecting money back from the Internal Revenue Service this year, you may also be aware of refund anticipation loans (also known as RALs). These tax time advances are being offered by some tax-preparation services as part of their seasonal packages. And while getting what’s yours as soon as you can, especially from the IRS in tough economic times, can be appealing, there are various pitfalls to these refund anticipation checks, and reasons the federal government is trying to help you avoid them. So, why all of the warnings?
(1) RALS are essentially high interest cash advances for unwary taxpayers.
Just like the high interest cash advance loans you’re taught to avoid at all (your) cost, you’re also charged high interest for tax refund anticipation checks—simply to get your money sooner. As a result, it’s like giving away your hard earned dollars…twice.
(2) RALS are similar to payday loans…in all the wrong ways.
Like payday loans, tax preparation services tout these early returns for people in emergency situations, needing the money to pay the rent on time or for an unexpected bill. Unfortunately, in return you’re also paying high interest, which can take a significant chunk out of a hefty return that could otherwise come to you in only a matter of weeks.
(3) RALS are like being taxed…twice.
As mentioned, these anticipation loans eat into any return you can expect from the IRS. As a result, you’re paying a privilege to receive money you’ve already earned in the first place. In that sense, you’re being “taxed” twice, for the same amount, and losing the opportunity to accrue value to what you’ve worked hard to hold onto.
(4) RALS are an easy way to create more debt.
In this rough economic era, personal debt is rampant. RALS can add to that personal debt, especially if your return (or simply the size of that return) is in error. By getting the RAL ahead of your actual return, you risk being responsible for repaying a high interest loan without the rightful money to bail you out.
To combat the predatory qualities of refund anticipation loans, in 2011 the U.S. Treasury Department has launched a new campaign that provides alternatives to RALS, especially targeting unbanked Americans who might be vulnerable to the early and easy refund sales pitch. This program includes sending pre-loaded debit cards with refunds for 600,000 Americans selected at random to participate. Some of the cards will allow taxpayers to make purchases or withdraw money from ATMs free of charge, while others will charge small fees to be activated or accepted at certain retailers. Assuming the program is successful, debit card refund distribution could become standard practice with the goal of being a low-cost alternative to the consumer-unfriendly RAL.
And, as always, if you have tax debts or other financial impediments and are considering bankruptcy in 2011 but are also concerned about the tax implications of your filing, (including when to file, whether you can keep your tax refund, and any other factors in your personal portfolio that may require consideration), it’s important to speak with an experienced bankruptcy attorney who can guide you on the right path to the best (and least taxing) result. The bankruptcy experts at the Law Offices of John T. Orcutt offer a totally FREE debt consultation and now, more than ever, it’s time to take them up on their offer. Just call toll free to 1-888-234-4181, or during the off hours, you can make your own appointment right online at www.billsbills.com. Simply click on the yellow “FREE Consultation Now” button.