So, let’s say you get your taxes done at one of the many tax preparation stores: how should you take your refund? There are usually a few options*:
- Pay tax preparers directly, receive your refund when it comes: This is the best value overall. Usually there’s no extra charge for efiling your refund, so you pay the tax preparation fee and no others. Your refund comes when the treasury issues it, which is usually about two weeks for direct deposit.
- Assisted refund, your tax preparation charges are withheld from you anticipated refund: This is usually the next best deal. There are additional fees for this service. The tax preparation firm will efile your taxes, and have your refund direct deposited to their account. The preparers will then deduct their preparation charges and fees, and issue you a check or direct deposit the remaining amount to your account. If your refund fails to come through as expected, you will still owe the tax preparation firm their fees.
- Refund anticipation loans, a bank loans you the amount of your anticipated refund, less fees and interest: This is, generally, the most expensive way to get money from filing your tax return. Please be aware that the money you get is not your refund, it is a loan on your expected refund! That means there’s interest, fees, penalties to be paid from your refund. If your refund fails to come through, then you will nevertheless owe the bank for fees, penalties, and (substantial) interest. Think of this as a desperation loan.
Now, refund anticipation loans have a bad reputation, reasonably so. They’re tremendously expensive, and if the refund is withheld by the IRS, then the loan isn’t paid as the customer expects. Despite this, my personal opinion is that they shouldn’t be eliminated. This is simply because, when I worked at a tax preparation franchise, I met a lot of people who were in a situation where they needed the money immediately for rent or heating bills. I also met people who wanted a refund anticipation loan so they could get a video game system and big screen TV more quickly. I believe that, so long as the customer knows what they’re signing up for, it’s their responsibility to make their choice.
*These are some general categories, based on my experience as a franchise tax preparer. Your mileage may vary.