Banks and Alternatives 101: Tax Refund Fees

So, we've been talking a lot lately about the types of financial services that are typically provided by banks and credit unions, but that can also be provided by other types of companies. Today I want to stick close to that theme and talk about a couple of financial services that often carry very heavy fees and high interest, and some alternatives to those costly services. The first service I want to talk about is the Refund Anticipation Check, which is a temporary bank account that a tax-preparation service can set up for the tax-payer (that's you) so that the IRS can direct deposit a tax refund. These are popular both as a way to get a refund faster than a paper check for folks without a bank account, and as a way to pay for tax preparation service when you don't have the money up-front. The fee for the account setup is typically around $30 on top of the fees - usually around $200 - charged for preparing the taxes. Unfortunately, studies show that there are often other hidden or unexpected fees that tax preparers add-on, as well, for things such as e-filing or document processing. If you were to think of the fees associated with a Refund Anticipation Check in terms of a loan, you would be looking at an Annual Percentage Rate equivalent to 260%. What's more, according to the National Consumer Law Center, whose mission is to work for consumer justice and economic security for low-income and other disadvantaged people, getting a Refund Anticipation Check will not get you your tax refund any faster than having the money direct deposited into your own regular bank or credit union account or onto a prepaid card. The other service is like the Refund Anticipation Check, but potentially even more costly. Refund Anticipation loans, which are short-term loans that are meant to be paid back when the borrower receives her tax refund, often have triple-digit interest rates and can leave the borrower owing more money than the refund if the refund doesn't show up as quickly as the lender suggested it would. While the Federal Deposit Insurance Corporation has prohibited banks from making Refund Anticipation Loans because of questionable legality, many alternative financial service providers, like check cashing stores and payday lenders are able to issue these loans. Over 80% of Americans receive a tax refund each spring. Tax payers who receive large refunds, including those eligible for the Earned Income Tax Credit, or EITC, are often the target of heavy advertising by all sorts of businesses, from appliance, furniture and car dealers to tax preparers and payday lenders. The best alternative to expensive Refund Anticipation Checks and Loans is to prepare your taxes yourself for free online and have the money direct deposited into your own account at a bank or credit union. The IRS has a website to walk you through the whole process at http://freefile.irs.gov. If you don't have a computer with internet connection, you can always use one at the local library. Many churches and community centers have volunteers who are able to help you file your own taxes as well.