Why You Shouldn’t Ask for a Tax Refund Advance Loan

by
Adam Rust

Don’t take the bait. Don’t pick your preparer because they can give you an advance on your refund. Pick your preparer because of the value they can give you in exchange for your hard-earned money.

Many tax preparation firms, including all of biggest preparers, have free tax refund advance products this year.

The preparers advertise these loans as free, but I contend that the preparers hide the real fees inside inflated prices for their preparation of returns.  

Additionally, many people may end up paying for an expensive preparation service but not get the loan that brought them into the preparer’s store in the first place.

Liberty Tax, one of the largest tax prep firms in the US, acknowledges the role that financial products have in drawing consumers into their stores:

We offer these products because we believe that a substantial portion of our prospective customer base places significant value on the ability to monetize their expected income tax refund more quickly than they would be able to do if they were to file their tax return without utilizing the services of a paid tax preparer.

(Liberty Tax 2017 annual report

The banks behind the tax preparers are all conducting some underwriting before making any advances. The fact that some people will be turned down for a loan is an essential thing to understand. People hate to be rejected. However, in a situation where the loan drives the appeal for the preparation service, being turned down may lead to many instances where a filer feels duped.  

As a result, lots of people get rejected for a loan. Many others will be approved, but for a loan that is much smaller than they were hoping to get.

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For years, II have written about refund anticipation loans on my BankTalk blog. My site continues to attract comments from individuals who have used these services. Here are a few comments from readers during this filing season:

“So, last year they told us we were denied because our refund amount was great enough. I'm thinking that the amount shouldn't have anything to do with it. We are getting a refund. It's money from the IRS. That is guaranteed money. The only reasonable explanation must be that they think if you have anything that has gone to a collection agency, there is a risk of that agency swooping in and grabbing it. That is still a stupid reason. I have never had a debtor take my tax refund. At any rate, they should make it clear that the only people who will get the advance loan are people who don’t desperately need it! Thanks for absolutely nothing”.

“I scheduled an appointment and went in and sat half the day and wasn't even seen the place was so packed people were sitting on the floor and more coming in phone ringing off the hook nobody called back and no one left. I went back two days later had to wait a couple of hours and got an email [that] I was denied. It's been over two weeks and never received a letter on why I was denied. It was a waste of my time, and they were going to charge me over $400 to do it. I was only getting back $1,000. Rip off.”

“Even if I had just used their stupid software I could've filed my own taxes for less than $100. Except I couldn't get the advance unless I went in office. And of course, they apply for the advance after you approve them to file for you. So, I had to pay $423.00 just to file and find out they denied the advance. What a ripoff!! I'd have just done it myself. if they can't prequalify you then they should not be allowed to do it at all. Cost someone that Much just to find out if they are approved?”

Suffice to say, these are not the opinions of satisfied customers.

Are a lot of people being turned down for advances? 

If people do not receive a loan, then many will end up using a refund transfer service. A refund transfer speeds up the delivery of a refund, but not nearly as quickly as a loan. At the national preparers, refund transfers can cost as much as fifty dollars. According to Liberty Tax, 47.6 percent of the filers it served during the previous tax season got a refund transfer. Why would so many pay to get a slower service when the immediate (24-48) loan was “free?”

The answer could clear up a mystery for everyone. We do not have a public number to say how difficult it is to get a loan. Still, Liberty’s refund transfer statistic points to a high rate of turn-downs.

Net-net, the filer pays high prep fees but doesn’t get the loan that drove them to choose that preparer.

In my opinion, the preparers who market these loans tend to charge high fees for their tax preparation services. For example, in a report describing its operations during its most recent fiscal year, Liberty Tax said that the average preparation fee charged to a client was $233. Given that so many of Liberty’s customers file simple returns, they could not take very long to fill out. Many people may end up paying more than $50 per hour and possibly even $200 per hour to have their return filed. That exceeds the hourly rate of most Certified Public Accounts working at top-tier accounting firms. To that point, consider that in a 2015 report entitled “Tax Return Preparation Fee Averages,” the National Society of Accountants (“NSA”) wrote that the average fee charged by its members to file a non-itemized 1040 was $159. 

These averages support my contention that these loans are not free. These tax loans bear a sticker price of $0, but rest assured that businesses do not exist to provide free services. In fact, the banks charge the preparers a fee to make the loans. The preparers have to recover the cost somewhere. That is why it can cost more than $200 to have an unlicensed preparer file a simple return.

Relevant rules state that recipients of loans cannot pay more for their preparation than those filers who do not get loans. As a result, the overall cost for refund advances is shared across all of a preparer’s customers.  It is not just the “borrowers” who are paying more for their tax prep – everyone is paying more.

In short, while marketed as free, these loans are anything but free.

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