Income Tax Refund Loans and Back Taxes

Introduction

If you file your taxes electronically and allow the government to deposit your refund directly into your checking account, the Internal Revenue Service promises to refund your money within 21 days. Before 2012, you could get the money sooner through a refund anticipation loan offered by most tax preparers.

Major lenders don’t offer RALs anymore.

Any loan you take out to get your refund money early is based on your credit history and income, not your income tax refund. Past due state taxes will only affect the decision on your loan to the extent that the back taxes appear as a collections item on your credit report.

Back Taxes

If you owe back taxes, any refund you’re due from this year’s tax return automatically goes toward paying your back taxes.

If you owe state back taxes, the state can put a lien on your federal refund. If you owe federal back taxes, the IRS can put a lien on your state refund. The government also can place a lien on your tax refund if you’re past due on student loans or if you’re behind on child support payments.

Refund Anticipation Loans

Prior to 2012, you could get a refund anticipation loan through your tax preparer and receive the funds in about a day. When the tax preparer received your refund, it paid off the loan and distributed any remaining balance to you. However, the government determined that RAL practices violated federal lending regulations and state laws, and the IRS changed its policy and refused to tell lenders whether a taxpayer had a lien on his current-year refund. Only one lender offered RALs in 2012, and RALs weren’t offered by any lender in 2013.

Getting Your Money Earlier

Some companies market short-term “payday loans” to consumers as a replacement for RALs.

Consumers might not realize that the loans don’t consider the size of your refund or whether you owe back taxes. Lenders follow standard lending practices and consider your credit history and your annual income. To get approved for a loan, some lenders require that you have your paycheck direct deposited into your account. The company makes the loan due on a day you get paid, and it electronically debits your account for the balance of the loan before the bank even opens its doors for business.

Refund Anticipation Check

Some tax preparers charge a fee for a program called a refund anticipation check. A tax preparer charges a tax preparation fee to prepare and file your taxes. When you’re due a refund, the preparer loans you the money for the tax preparation fee until you receive your refund. You don’t have to pay anything out-of-pocket until the government sends your refund. A refund anticipation check doesn’t provide you with money any sooner than when the government provides it to you. It simply defers your tax preparation fee until you receive your refund.

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