Last year, the Internal Revenue Service (IRS) announced that some taxpayers would have their tax refunds delayed at the open of the 2017 tax season. A new law requires the IRS to hold refunds tied to the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until February 15. There may be additional delays: factoring in weekends and the President’s Day holiday, the IRS cautions that many affected taxpayers may not have actual access to their refunds until the week of February 27.
(You can read more about the delays and the new law here.)
Many taxpayers count on receiving their tax refund check early each year. IRS Commissioner Koskinen noted in January that “[f]or many people, this is the biggest check they see all year.” The pushback to February 15 before checks are even released have spurred more taxpayers to consider Refund Anticipation Loans (RALs). As of this week, I’ve received more questions about RALs than any other tax season topic. Rather than break them down into individual “Ask The Taxgirl” posts, I’m tackling a number of them all at once. Here are a few answers to questions I’ve received so far:
Q: How can I check the status of my RAL?
A: It’s important to understand that the IRS has nothing to do with RALs. The “Where’s My Refund?” tool will only update you with respect to your actual refund and not your RAL. Likewise, depending on the product, your tax professional may not know when to expect your RAL. RALs are controlled by contract: they are an agreement between you and the lender (typically, a bank) where the lender agrees to give you an advance based on your anticipated refund. The lure of the RAL is that you typically receive cash right away. However, the lender controls the timeline for the loan so if you have questions about when you will receive your money – and when you have to pay it back – you should check with your lender first.
Q. I applied for the free advance loan at X tax service. It normally takes 24 hours to get approved, and you should get a text letting you know if you were approved or not. Well, I got denied and never had this problem before. I just want to know why I was denied.
A. There are a couple of things that could be going on. One is that the lender decided that you weren’t credit-worthy: remember, an RAL is a loan. You have to repay the entire amount of the loan even if you receive a smaller tax refund than you anticipated. That means that you have to hope that your tax refund is large enough after you take out interest rates and fees – as well as any tax prep fees – to pay off the loan. All kinds of things could reduce the amount you actually receive, including tax law changes and offsets (where the government dings your refund for the money that you owe, such as child support or student loans). The IRS no longer provides tax preparers, banks, or lenders with a “debt indicator” which advises the lender in advance whether any part of your refund is earmarked for offset. That makes it more difficult to know what your bottom line might be and it also makes it more likely that the lender could rely on other criteria to turn you down. Unfortunately, even if you’re turned down for RAL, you could be stuck with application fees, credit check fees and “junk” fees. This is one of the reasons you need to be cautious: some providers make their money largely from these fees and have an incentive to encourage you to apply for RALs that they do not have any intention of giving you. That is one of the allegations made against the owner of Instant Tax Services, Fesum Ogbazion (Ogbazion was later charged with crimes related to RALs at his business).
Q. If I was denied an RAL because my husband has an offset but the offset is only $400 and our refund check is over $9000, can I still possibly get it if I notify them of the offset?
A. You can notify your lender about the offset, but the chances are that you were denied for some other reason. Remember, the lender typically doesn’t have notice of the offset from the debt indicator. They’re possibly getting their information from some other source, like a lien or other public record. Or, it may have nothing to do with the offset at all. I would encourage you to call and ask.
(Real quick: In case you think that filing as an injured spouse might make sense under these circumstances, it’s worth noting that doing so would preserve your portion of the refund but won’t get it to you any faster and will likely not affect your RAL at this point.)
Q. My husband will not qualify for an RAL. I was told to file my taxes separately so I can get mine. Will that help?
A. Not if your refund is based on the EITC: you can’t claim EITC if your filing status is married filing separately.
Q. I am a tax preparer. If I prepare this person’s taxes and he owes child support, will I still get paid?
A. I’m assuming that you’re planning on getting paid by taking your fees out of the taxpayer’s refund check once it’s been made available. In that way, you’re acting like a lender because you’re advancing your fee based on the idea that the refund will be large enough to cover them. However, as you know, if the taxpayer owes back child support, the tax refund could well be offset. The problem is, of course, that you don’t know how much, making this a risky proposition. This is one of the reasons why RALs can be risky for tax preparers as well as taxpayers and one of the reasons the practice is discouraged.
Q. Next year, instead of getting an RAL, can’t I just get my EITC in my paycheck?
A. I’ve seen this suggested a few times, but unfortunately, that’s old news. You used to be able to take some of your EITC in advance through your paycheck. However, a 2010 law repealed the Advanced Earned Income Tax Credit so that this has not been an option for taxpayers since December 31, 2010.
Q. Instead of taking an RAL, I filed my taxes early and got a refund. Now, I need to file an amended return. Will I get in trouble?
A. I get this question every year but this year, I’ve received even more of them. Because of the delay, some taxpayers are lying about their tax situation to get a small refund in their hands now with the idea that they will simply file an amended return later. This is not a good idea. For one, you sign your tax return under penalty of perjury, so if you willfully file a false return, yes, you could get into trouble. Two, even if you don’t get into trouble, you may have to pay an additional fee to file your amended tax return. Three, filing an amended return could open you up to additional scrutiny from IRS (meaning an audit) especially if you do it every year. Finally, an amended return takes much longer to process, up to 6-8 weeks in some cases. Filing immediately to get a small loan doesn’t make sense because the piece that I’m guessing you cared the most about (the portion of the refund attributable to the EITC, which is likely larger than the rest of your refund) could be delayed over two months instead of 2-3 weeks.
If you’re considering applying for an RAL or other loan secured by a tax refund, consider these strategies:
1. Adjust your withholding. If you’re getting a big refund at the end of the year, that can mean that you’re having too much money withheld from your paycheck. You’d do better to take a little bit out as you go by adjusting your withholding rather than waiting for a lump sum at the end of the year (after all, the IRS isn’t going to pay you interest for keeping your money). You can ask your tax pro for recommendations or if you’re not sure where to start, grab a copy of your last tax return and your most recent pay stub and head over to the IRS withholding calculator. You’ll make any changes on a federal form W-4. In most cases, if the change is for the current year, your employer must put those changes into effect no later than the start of the first payroll period ending on or after the 30th day after the day you turn in the form. However, since it’s now 2017, the change would not affect your 2016 tax year but would affect your 2017 tax year.
2. Consider a loan not tied to your tax refund. You may not be in a position to get another loan – but there’s no harm in looking, right? If you are able to refinance your home, you get the advantage of being able to claim home mortgage interest as a deduction on your taxes. Alternatively, it may be that you would qualify for a short-term loan that you could pay back with your tax refund without shelling out extra fees – especially those tied to tax preparation. The IRS offers free tax prep services through its FreeFile partnership for more than 70% of taxpayers. If you e-file and rely on direct deposit, you can get your refund back in as little as 8-10 days after filing (with no fees or interest) which you can use to repay another loan.
3. Open a savings account. One of the explanations that I often hear from taxpayers about waiting for a big refund check in January or February is that a refund check acts as a forced savings account. If that’s the case, why not adjust your withholding (see again #1) and open a savings account? Check around with banks and credit unions: you may be able to open a savings account with a low minimum balance. And with direct deposit, you can route funds directly from your paycheck to your savings account (if it’s not in your hands, you won’t be as tempted to spend it). Figuring the amount to save is simple. Look at your last few refund checks. Take the average – let’s say $1,500 as an example – and divide it by the frequency of your pay (if you’re paid weekly, that would be 52). In our example, that works out to $28.85 per week: that’s the amount you’ll want to sock away each paycheck to save the same amount as you would have received as a tax refund. Bonus? You’ll earn interest (the IRS sure isn’t giving you any) instead of paying it.
4. Don’t cheat yourself out of deductions and credits. In the rush to get a tax refund quickly, many taxpayers speed through their tax returns or rely on unskilled or unsavory tax preparers. You shouldn’t underestimate the value of using the services of a good tax professional. Also, if you use the same tax professional from year to year, it makes it easier to make recommendations and find deductions and credits that you might be missing. Spending the time to find a qualified tax preparer – especially one without an incentive to sell you extra services – may yield you bigger tax savings in the long run.
Remember, while some tax refunds may be delayed this year, the IRS still anticipates issuing more than nine out of 10 refunds in less than 21 days. Taxpayers can check out Where’s My Refund? on IRS.gov or the IRS2Go phone app for projected deposit dates after February 15.
If you have a tax question, click here to find out how to ask me.
Excellent! Another gem from you. Thanks.