Tax season opens Monday, January 27, 2020. The beginning of tax season can be a busy and anxious time for taxpayers – especially those who are waiting for tax refunds. Sometimes, taxpayers who are waiting for refunds turn to refund anticipation loans (RALs). Here’s what you should know about how they work and why you might not qualify for one.
An RAL is a loan that is offered by some tax preparers to taxpayers who are expecting a tax refund. The word loan is important: an RAL must be repaid.
Since an RAL is a loan, it is controlled by contract. You make an agreement with the lender (typically, a bank) to receive an advance based on your anticipated tax refund in exchange for a promise to repay the loan. The appeal of an RAL is that you usually receive cash quickly even if your tax refund won’t be paid out for a few weeks.
Even though tax season opens on Monday, you might not be eligible to receive your tax refund right away. That’s because the law requires the Internal Revenue Service (IRS) to wait until mid-February to issue refunds to taxpayers who claim the earned-income tax credit (EITC) or the additional child tax credit (ACTC). In addition to normal processing times for banks, factoring in weekends and the President’s Day holiday, the earliest EITC and ACTC-related refunds are expected to be available this year on February 28, 2020; that’s assuming direct deposit and no other issues. February 28, 2020, is the last weekday of February; it’s worth noting that the recording on the IRS phone line says to expect those EITC and ACTC refunds beginning the first week of March 2020.
(You can see my predictions about when you might expect your tax refund in 2020 here.)
The IRS is not directly involved in the RAL process. The IRS does not provide information to lenders and does not guarantee tax refund amounts to taxpayers. As a result, each year, I get a slew of questions about RALs. Here’s a quick rundown of some of the most common, together with my answers:
Q. If I was denied an RAL, does that mean I won’t get my tax refund?
A. No. The RAL application should be separate from the preparation of your tax return even if they are coordinated or completed at the same location.
Your eligibility for a tax refund is not be affected by being turned down for the RAL: your tax refund is still payable to you even if you were not advanced any money from the lender. That said, you may still be on the hook for loan application fees, credit check fees, and “junk” fees. This is one of the reasons you need to be cautious when seeking out an RAL: some providers make their money mainly from these fees and have an incentive to encourage you to apply for RALs that they do not have any intention of giving you.
Q. Why would I be turned down for an RAL?
There are a few reasons why you might be turned down for an RAL. The most common reason tends to be that the lender decides that you aren’t a good risk. Remember, an RAL must be repaid 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, or you’ll have to dip into your pocket to pay the overage.
Additionally, tax law changes and offsets (where the government dings your refund for money that you owe, such as child support or student loans) may affect your bottom line. The IRS no longer provides tax preparers, banks, or lenders with a “debt indicator” which tips off the lender in advance whether any part of your refund is earmarked for offset. That makes it more difficult for the lender to know what your bottom line might be and it also makes it more likely that they’re look at other criteria, like your credit history or salary, to determine whether to issue you a loan.
For more information on why you might have been turned down for an RAL, click here.
Q. My refund anticipation loan says your application has been received but has not been accepted at this time. What does that mean?
A. Since an RAL is a loan, it is subject to whatever due diligence the lender requires. For some lenders, that could be a quick credit check. For others, it may be a more involved process, especially if the amounts involved are significant. If it’s been more than a few days, there may be a question or a problem with your application. I would ask the lender (or tax preparer who offered the loan) for an update.
Q. I was turned down for an RAL, but now my tax preparer won’t give me my tax papers. What can I do?
A. It’s not clear from the question whether you’re referring to your tax information forms (like your W-2 and 1099) or a copy of your tax return. In either case, your papers should be returned to you; the only difference is the timing. It’s possible that your tax preparer assembles returns and prepares copies of tax returns to send out on a schedule and just hasn’t gotten around to sending yours just yet. If that’s the case, give him or her a little time and follow-up. However, you are entitled to the immediate return of your information forms if the tax preparer didn’t prepare the return; I would politely but firmly request that those be returned. For more on dealing with an uncooperative preparer, click here.
All of that said, I fear that the bit that’s missing in your question has to do with payment. Reading between the lines, I’m guessing that there were fees tied to the RAL that you don’t feel you have to pay since you were turned down for the loan. I’m also guessing that the preparer is refusing to release the forms due because he or she wants to be paid. Neither one of these positions is acceptable. You need to pay any reasonable fees related to the RAL, even if the loan wasn’t granted, and your tax preparer needs to return your paperwork.
Q. So if I’m denied an RAL at H&R Block but accepted by somewhere else, where will my refund go when released?
A. It depends on where you are in the process. If you were denied an RAL a tax preparer but allowed them to prepare your tax return anyway, your tax refund should be delivered according to the regular IRS schedule. If you didn’t allow the tax preparer to prepare your tax return, and you signed a contract with a second tax preparer in conjunction with your RAL, then the refund will be delivered according to the terms of that agreement.
However, if you filed with one tax preparer like H&R Block and then filed again with another preparer who gave you an RAL based on that tax return, you have a problem. You should receive a tax refund for the first return, but the second return will likely be bounced. You’ll be responsible for paying back the loan at the second preparer, plus any related loan and prep fees. This is why it’s so important to understand the terms of the RAL application and preparation process before you begin. Be sure to ask in advance about fees, timing and what happens if you’re turned down.
Q. I filed my taxes with a tax preparer, but I do not have my tax refund yet. I checked my bank account, and it shows the fee from RAL, but I don’t know when I will get my refund. The tax preparer says he can’t help me. What can I do?
A. I’m assuming that you already have the RAL in hand, and you’re looking to repay the loan, but haven’t yet received your tax refund. If so, your tax preparer is right to say that he can’t help you since he has no more information about the payment of your tax refund than you do. Try checking the “Where’s My Refund?” tool on the IRS website, but remember that the “Where’s My Refund?” tool will only update your actual tax refund status and not the status of your RAL.
Q. I owe child support. Can I still get an RAL?
A. Maybe. Remember that RALs are typically based on credit-worthiness, so that’s going to play a factor. If your child support is the subject of a lien or other public record, it may show up on a credit report which would affect whether you would be eligible for an RAL. The lender typically won’t have notice of any offset (like those from student loans or child support) if you don’t speak up. But here’s the tricky part. Let’s say you get the RAL for your anticipated tax refund without figuring in the child support arrears, but it’s likely that your tax refund could still be offset. You’ll have to repay the entire loan even if your refund check is offset for child support; that could set you up for more significant financial problems down the road.
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. Some taxpayers lie about their tax situation to get a tax refund early with the idea that they will simply file an amended return and fix their “mistake” later. This is not a good idea. Remember that you sign your tax return under penalty of perjury so if you willfully file a false return, you could get into trouble. But even if you don’t get into trouble, you may have to pay an additional fee to file your amended tax return. Most importantly, this scheme could open you up to extra scrutiny from the IRS, especially if you do it every year.
(If you have a tax question, here’s how to ask me.)