tax refund loansEach year millions of taxpayers opt to receive their tax refund early through their preparer. For example, popular tax preparation companies such as H&R Block, offer clients the opportunity to receive cash in hand (or on a debit card) the same day their taxes are prepared. In fact, 40% of H&R Block clients opt for this alternative versus waiting a few days or weeks for a refund check. What many of these individuals do not realize is they are actually agreeing to a tax refund loan. This year, this option may not be available to as many individuals as it has in the past. Here we look at tax refund loan programs and what is happening within the industry to limit this option in 2011.

What is a tax refund loan?

More commonly referred to as a Refund Anticipation Loan (RAL), tax refund loans occur when taxpayers receive money from their tax preparer or another company as credit until their tax refund is processed by the IRS. A common misconception among taxpayers is the money they receive in hand is their actual refund. This is not the case. The money received by the taxpayer is provided by the tax preparer (via a bank) and consequently owed to the tax preparer should there be issues with your tax return/refund. If you have ever opted for an early return by participating in a tax refund loan program, you might not have thought twice about the “small” fee you paid in order to access your cash in a short period of time. If you had, you would have noticed that the amount of the fee is actually very high when you consider how long it takes for the tax preparer to receive payment in the form of your tax refund via the IRS. That being said, in 2011, there may be fewer instances of tax refund loans compared to previous years, essentially eliminating this option for many taxpayers.

New IRS rules Regarding Refund Loans

The IRS recently announced that they will no longer be notifying tax preparers like H&R Block as to whether or not taxpayers will be receiving their refund in full. There are situations where tax refunds are reduced due to tax debt or child support. In these scenarios, the anticipated tax refund may not reflect the actual amount of money the taxpayer will receive. Due to this change, banks backing the tax refund loan programs (HSBC for H&R Block) are nervous to pay out money for tax refund loan programs without knowing for certain they will receive full payment in the form of tax refunds issued by the IRS. This change may make it difficult or impossible for taxpayers to get their tax refund early. Despite the fact that many individuals insist they “need” that money early, the IRS really doesn’t take that long to get refunds out to individuals once their taxes have been filed. Most taxpayers can receive their tax refund from the IRS with no strings attached within 7-14 days. This wait may even be shorter this year as the IRS intends to get tax refunds out to taxpayers within a week of the filing date. It is a waiting period that many Americans may simply have to get used to with other options not readily available.