Tax-time refund offers to AVOID!
This upcoming tax season beware of two offers that many tax preparation companies offer to many of their clients. One of those offers is the Refund Anticipation Check (RAC) and the other offer is the Refund Anticipation Loan (RAL). Both of these offers should always be avoided.
Refund Anticipation Check (RAC)
The refund anticipation check is a method used by tax preparation companies to have their tax preparation fees paid by their client’s tax refund. Here’s how it works. The customer gets a temporary bank account where the IRS can direct deposit the refund. When the money arrives, the bank issues a check or prepaid debit card, minus the tax preparation fee, and closes the account. Banks typically charge $30-$35 for this service. And that is the problem with this offer. This turns out to be a short-term loan that is very expensive. If you pay $30 to defer a payment of a $200 tax preparation bill for three weeks the APR on that loan is equivalent to 260 percent. This is essentially a legal scam.
There is no advantage in using a RAC. The only advantage is having the tax prep fee deducted from your tax refund. There is no reason that a taxpayer should accept this type of offer. Instead of using a RAC you can simply pay for your fee using a credit card or a prepaid debit card which should be much cheaper. Better yet, you can anticipate the tax prep fee in advance by budgeting and saving and then pay by cash.
Refund Anticipation Loan (RAL)
The other offer that should be avoided is the refund anticipation loan. This arrangement involves a client receiving his tax refund in early by receiving a loan from the tax preparer. This loan is paid off by the client when the tax refund is received. However, the client pays significant interest on the loan. Many of the loans charge interest of between 50-75% APR. I think with this type of interest rate you can afford to wait an additional three to four weeks to receive your refund.