Q: I have completed my income tax filing and anticipate a large refund. I need the money quickly and am considering a tax refund anticipation loan. Do you have advice on this type loan?
A: A refund anticipation loan (RAL) is a loan that is offered by many tax preparation companies to people against their income tax return. A tax refund anticipation loan can be approved quickly and money accessible within a day or two. The loan may be for the full amount of the tax refund or a partial amount.
When the IRS refund check arrives at the tax preparer's office, the loan is paid in full. As a consumer, you must understand that these instant refund programs are actually loans. The fees and interest associated with this type loan typically exceed 40 percent, and many rates go over 200 percent.
The Consumer Federation of America reports that in 2008 8.4 million RAL's were made to taxpayers. The fees associated with these loans were about $800 million.
The best advice we may offer to you is to wait for your tax refund from the IRS. Please consider the following points:
1. File your taxes electronically and the refund will be available to you in less than two weeks.
2. Use free tax sites to prepare your tax return. Volunteer Income Tax Assistance programs and AARP's TaxAide offer free tax preparation for low-income taxpayers. The local IRS office offers free tax filing assistance; visit www.IRS.gov to view locations. You may also telephone 423-855-6460 in Chattanooga or 404-338-7962 in Dalton, Ga.
3. Be aware and advised that the Internal Revenue Service has issued a statement this year saying it no longer will provide consumer information to the refund processing companies for loan purposes. Information about tax liens against an individual will not be available. The IRS states that providing this information to these companies is infringing on the privacy of the taxpayer.
4. Consider other options for the two-week short term; request a loan from family members, or use a credit card to pay immediate expenses. The interest rate on a credit card will be lower than unregulated RAL's.
5. If you rely on the money from a tax refund, you should consider adjusting the withholding taxes on your earnings. With the right exemptions you will have more money each paycheck.
6. Lastly, read all forms that your tax preparer gives you and watch out for anything that gives permission for your preparer to share your tax information. Protect your privacy at all times.
Get answers to your questions each Friday from Jim Winsett, president and CEO of the Better Business Bureau Inc., which serves Southeast Tennessee and Northwest Georgia. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.