TV and radio commercials for tax preparation are bombarding the airwaves as the filing deadline approaches. For many taxpayers expecting a refund, impatience or lack of understanding will prove to be very costly. If you have yet to file, tune out the ads promising a bigger or quicker refund in exchange for exorbitant fees and expenses, and pocket more of your hard-earned money.
Once upon a time, tax preparation companies with well-known national brand names offered so-called tax anticipation loans providing early access to expected refunds. These arrangements were punitively expensive to borrowers, carrying effective annual percentage rates of 100 percent or more for short-term loans. Borrowers unable to repay at maturity often rolled over at the same or higher rates and incurred additional fees. The products we so abusive that the FDIC eventually prohibited member banks from backing the loans, and the big tax firms no longer offer them.
That does not mean they are dead. Tax anticipation loans are still being hawked by payday lenders, check cashing firms, and consumer lenders outside the regulatory framework of the FDIC. If you encounter an offer to get your refund early, you should probably walk away. In most cases, the IRS can deliver your full refund electronically in about three weeks with no cost or fees. Patience is a virtue.
A more common pitch involves the refund anticipation check. This is a mechanism whereby the tax preparer creates a temporary bank account to accept your refund electronically. Once the account is funded by the IRS, funds are disbursed to the taxpayer via transfer to an existing bank account or the issuance of a prepaid debit card.
The catch here is much the same as the refund load: high fees that consume part of your refund unnecessarily. Expect to give up anywhere from $30 to over $100 in fees depending on whether you have a bank account and if you request a paper check.
The tax preparation companies want you to hire them, typically charging $100 or more to prepare your taxes. Many filers, however, live check to check and cannot afford the out-of-pocket expense. Not surprisingly, the cost can be deducted from your eventual refund (less a processing fee of course). The refund anticipation check can end up being just as costly as a refund loan. Perhaps most importantly, you cannot get your refund any sooner than if you filed the return yourself, so the benefits are even more dubious.
Most people who work hard and earn at or below the average wage can easily find help in claiming their refund for little or no cost. The IRS offers its freefile tax program to families earning $60,000 or less, and provides free online form filling to all taxpayers regardless of income. Many communities also sponsor free or inexpensive tax filing assistance through local agencies, and AARP provides volunteer tax services to low to moderate income taxpayers, with an emphasis on seniors. And most of the commercial tax software vendors offer a free version for simple 1040EZ forms (covering the majority of lower-income filers) and very low-cost options for more complex forms.
It is important to seek qualified expertise in filing complex tax returns or in unusual situations like divorce, death of a spouse, or multiple properties and investments. However, for the average worker with wage income and nothing particularly unusual, there are plenty of resources available to help get you your tax refund as soon as possible, without sharing. Don't let the flashy commercials promising a bigger refund entice you to burn precious dollars.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co., in Chattanooga.