What Is a Tax Refund Anticipation Loan?

Definition

A tax refund anticipation loan is a loan issued by a tax preparation service or other lender that’s secured by the refund you’re expecting from the IRS. The amount of your loan is your estimated refund, minus any fees that the lender charges.

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Key Takeaways

  • A tax refund anticipation loan is an advance on the tax refund you’re expecting from the IRS.
  • Your refund will be paid to the lender instead of you.
  • Theoretically, your refund should cover the loan amount as well as any fees or interest the lender charges, so you wouldn’t need to make any additional payments.
  • Various fees and very high interest can apply, depending on the lender.

How Tax Refund Anticipation Loans Work

It takes less than 21 days for the IRS to issue most tax refunds, but this can be 21 days too long for taxpayers who badly need or want the money. There are lenders who will front you the money, then collect the refund to pay off the loan. The IRS is directed to forward refunds to the lender, not to you, when these loans are in place. However, assuming the lender’s estimate of the refund is correct, you won’t have to make payments toward the balance you owe.

Note

A tax refund anticipation loan may appear to be interest-free, but the upfront interest may be disguised as other fees.

The cost of preparing your tax return will most likely be deducted from the amount you receive if you get the loan through a tax preparation service. Other service and administrative fees may be added on as well.

Note

Some lenders do charge exorbitant interest and fees, which are often 200% or even higher in some cases, according to the North Carolina Consumers Council.

There’s generally no credit check involved because the lender will have a dedicated account set up to receive your refund from the IRS and pay off the loan. Your loan is paid off when the refund is received.

Note

Tax refund anticipation loans loans are most often used by low- and moderate-income taxpayers.

Example of a Tax Refund Anticipation Loan

Let’s say you sign up with XYZ Tax Service to prepare your tax return. The completed return indicates that the IRS owes you a $1,200 refund. XYZ charges you $100 for preparation of the return and $100 in administrative fees for the loan. XYZ will pay you $1,000, which is the amount your anticipated refund is worth after subtracting the tax service’s fees. You can spend the money as you see fit.

The refund itself will never come into your possession. The IRS will send it to the lender rather than to you. Theoretically, you shouldn’t have to make any payments on the loan or do anything else.

If your refund is less than $1,200, you will have to make additional payments. For example, if the IRS determines your refund is actually $800, you’ll need to pay the lender $400.

Types of Tax Refund Anticipation Loans

Tax refund anticipation loans have changed slightly over the years due to legislation. The most common types as of 2022 include:

  • Refund anticipation checks
  • Refund anticipation loans

Refund Anticipation Checks (RACs)

The federal government tightened up the rules regarding tax refund anticipation loans just before the 2013 filing season, which prompted banks to stop issuing these loans.

Tax preparation companies began issuing refund anticipation “checks” instead. These are the most common types of “loans” in 2022. They are interest-free, but the amount is determined by your refund, and you’ll have to pay tax prep fees.

Refund anticipation checks can be convenient if you don’t have a bank account. Your refund would be deposited into a dedicated bank account when it arrives from the IRS, and the lender would send you a check you can cash or a prepaid credit card for the amount of your refund, less any fees.

Refund Anticipation Loans (RALs)

The term refund anticipation “loan” is sometimes used interchangeably with the term refund anticipation “check.” A refund anticipation loan is usually from a tax preparation service working in conjunction with a non-bank lender to front you the refund money before the IRS actually sends your refund.

Disadvantages of Tax Refund Anticipation Loans

Refund anticipation loans can be very risky. You’ll need to repay the difference if your refund doesn’t turn out to be as much as your tax preparer calculated.

Numerous federal and state agencies have the right and ability to garnish your refund for various debts and obligations you might owe. These are referred to as tax offsets and they can include:

  • Delinquent federal student loans
  • Unpaid child support
  • Unpaid federal tax debts
  • Unpaid state tax debts

The IRS used to provide tax preparers with a tool to estimate which, if any, of these obligations might affect a taxpayer’s refund, but stopped in 2010. After that, banks began to stop issuing these loans.

Your tax preparation service will have no knowledge of these debts without this tool, so it will calculate your refund without taking them into consideration. You could end up with no refund at all, but you would still owe the preparation service the loan amount and any accumulated interest or fees.

Note

You could end up paying an exorbitant amount of interest if the tax prep service works with a lender that issues payday loans. Rates charged by these lenders are often three times the cost of interest on a traditional loan.

Junk Fees

Look into the loan terms carefully, scrutinizing any contract you receive for “junk fees” in addition to the usual tax preparation and administrative fees. You might come across charges like:

  • Data storage fees
  • Document storage fees
  • Service bureau fees
  • Software fees
  • Technology fees
  • Transmission fees

You might want to move on and look for another service if you come upon any of these terms in your loan paperwork.

Alternatives to a Tax Refund Anticipation Loan

Many experts recommend taking out a refund anticipation loan or check only as a last resort. You might consider these alternatives if you can’t wait 21 days for your tax refund.

Speed Up the Process

It will take up to 21 days for most taxpayers to receive their tax refund. That means you may be able to get your tax refund in less time. You can usually speed up the process a little by e-filing and having your refund directly deposited to your own bank account. You might be able to shorten the wait time to as little as 10 days if you take these steps.

Free Tax Prep Services

Some taxpayers resort to anticipation loans and checks because they can’t afford to pay someone to prepare their returns for them, and this cost is rolled into the RAL or RAC.

You might qualify for a free tax service. Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) are programs offered by the IRS that may be able to help you with your tax preparation. Income limits and other rules apply. You can look for locations in your area by searching by your zip code online.

Take Out a Personal Loan

You might take out another type of loan, instead, or use a credit card, since it typically has a lower interest rate. You can pay it off as soon as your refund arrives. But if your refund wasn’t as much as you anticipated, you might end up owing money that you can’t afford to pay.

Frequently Asked Questions (FAQs)

Where do you get a tax refund anticipation loan?

These loans have not been widely available from banks since 2010. They’ve been provided exclusively by tax preparation services and payday loan lenders since the 2013 tax filing season. Be sure to use a reputable service if you decide to take this type of loan. The Better Business Bureau warns that anyone can hang out their tax preparation shingle without a bit of training or expertise in most states, so make sure any tax preparer you work with is properly credentialed.

Who offers tax refund anticipation loans online?

Many tax preparers offer tax refund anticipation loans online. However, you are likely better off taking out a personal loan or charging your bills to a credit card. If you need a tax preparation service but can’t afford to pay, look and see if you qualify for free tax assistance from the IRS.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “What To Expect for Refunds This Year.”

  2. Get It Back Campaign. “Refund Anticipation Loans and Checks.”

  3. FINRA. “5 Things You Should Know About Tax Refund Loans.”

  4. North Carolina Consumers Council. “Think Again if You’re Thinking About Getting an Advance on Your Income Tax Refund This Year.”

  5. National Consumer Law Center. “Refund Anticipation Loans and Checks.”

  6. NASDAQ. “Refund Anticipation Loans Live on in New Disguises.”

  7. Michigan Legal Help. “The High Cost of Refund Anticipation Loans and Checks.”

  8. Consumer Financial Protection Bureau. “Tax Refund Tips: Understanding Refund Advance Loans and Checks.”

  9. Bureau of the Fiscal Service. “Tax Refund Offset.”

  10. IRS. “Free Tax Return Preparation for Qualifying Taxpayers.”

  11. Better Business Bureau. “BBB Tips on Tax Refund Advances: What You Should Know.”

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