Rapid refunds offered by paid tax preparation firms can be costly!
During tax time, paid tax preparation firms aggressively market rapid refund products to low-income consumers who need fast cash to pay bills or meet immediate needs.
But the interest and fees that are charged take a big bite out of the expected refund.
One of the costliest rapid refund methods that charged as much as several hundred percent in interest – the refund anticipation loan, or RAL – is becoming extinct because of recent changes by the IRS and regulators. But a new product that many paid tax firms are now offering in its place has a big bite of its own.
The refund anticipation check (RAC) costs around $30-$32, but some tax preparers charge “add on” fees, which can range from $25 to several hundred dollars. Since their purpose is to defer payment of the tax preparation fee until the refund arrives, RACs may represent a high-cost loan of that fee.
Direct deposit to a savings account, in contrast, is totally free.
RAC Facts
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With a Refund Anticipation Check (RAC), a paid tax firm uses a financial institution to open a temporary account into which the IRS direct deposits the refund. After the refund is deposited, the consumer receives a paper check or prepaid debit card with the RAC proceeds and the temporary account is closed.
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But consumers need to be cautious when selecting a prepaid card. As with any financial product, they should compare costs and consumer protections. Filers needn’t pay ANY fees by using e-file and direct deposit into his or her own account, or to an existing payroll or prepaid card the filer already has. Filers who use their own account or prepaid card avoid paying check cashing fees.
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RACs, like RALs, siphon away the tax benefit low-income filers should receive by claiming the Earned Income Tax Credit (EITC).
Source: National Consumer Law Center, http://www.nclc.org/images/pdf/pr-reports/ral-pr-2012.pdf
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