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Taxpayers lucky enough to expect a tax refund may not have to wait for Uncle Sam to write the check. That's because some tax preparers and banks will loan taxpayers a cash advance on their expected return in as little as two days after filing.
But these so-called refund anticipation loans don't come cheap. The loan-processing fees can vary between $42.95 and $92.95. Tack on fees for tax preparation, electronic filing and any other fees the issuing bank may require and the bill could run as high as $140.
Bobbie Hunt, a spokeswoman for the industry group the National Association of Enrolled Agents, said some taxpayers take the loans if they're in a bind, "but it's probably worth it in the long run to file your return electronically" and wait for the Internal Revenue Service to mail the refund check.
Even so, millions of taxpayers apply for the loans every year. According to Beneficial National Bank, which handles refund loans for giant H&R Block, 2.96 million applied for the loans during the 1996 tax season, netting the bank a profit of $72.9 million.
Refund loans cost average of $72 in 1997
Linda McDougall, a spokeswoman H&R Block, said refund loans average a minimum of $200 up to $4,000, and that last year filers paid an average of $72 a pop to get a refund loan ¡ª fees she said are justified.
"There is a great deal of risk associated with this type of loan because the Internal Revenue Service may not issue the full amount (of the refund), or the person may owe back alimony or may have not paid off a student loan," McDougall said.
Applying for the loans is fairly simple, said Robert Wade, spokesman for Beneficial National Bank based, Wilmington, Del., and loan approval is mostly done by computer.
Applicants will need two pieces of identification, of which at least one must be a picture ID.
Once all documents are submitted, the tax return is electronically filed and sent to the IRS and the application is sent to the participating bank, which will issue the refund loan.
Lenders look for right 'template'
Wade said, "We take a look at certain material on the application and the computer will make some decisions whether the person fits into a certain template."
Wade said the bank uses credit reports and other sources to recognize inconsistencies or lifestyle changes of an applicant, such as the addition of a child or a divorce.
"This way, we can determine if it's a fraudulent case, and if so, we will deny the application," he said.
"A significant majority are approved," said Wade, but he did not disclose how many loans were approved last tax season or how many are expected this year.
Business has been booming however, thanks to an uptick in the number of refunds. As of Feb.13, the IRS had approved refunds totaling $22.7 billion, up 12 percent from $20.31 billion the same period last year.
Read the fine print
A bank typically takes between 24 and 48 hours to make a decision on a refund loan. Filers can call the bank or their tax preparer to check a loan's approval status.
Applicants who are rejected can write to the bank for an explanation, but are still expected to pay filing fees and other charges associated with the tax preparation.
Taxpayers that receive the loans are required to pay the loans in full once they receive their refund checks from the IRS, or hefty interest rates may apply to the loan balance.
And if the refund loan is received, but the filer doesn't get the expected refund from the IRS he or she is still responsible for paying the obligation off.
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