How Does a Rapid Refund Work?

The rapid refund is a refund anticipation loan.

The rapid refund is a refund anticipation loan.

You can choose to receive your tax refund more quickly than usual by choosing the rapid refund offered by commercial tax preparers. Although “rapid refund” is a term trademarked by H&R Block, the term is widely used for the practice of offering refund anticipation loans to tax filers. The rapid refund is a loan made to you for the amount of the refund the tax preparer anticipates you will receive. You can wait up to six weeks if you mail your return to the IRS. If you e-file you might wait up to three weeks for a refund. The advantage to the rapid refund is the speed with which you receive your tax refund.

Rapid Refund

You may choose rapid refund when a tax preparer completes and files your tax return electronically. The preparer works with one or more banks that agree to make the refund anticipation loans. A bank lends you an amount of money based on the expected amount of your refund. You pay interest on the loan and also pay administrative fees to the tax preparer and the bank. The bank deducts the interest rate and administrative fees from your loan amount. Tax filers can receive a check or direct deposit of the refund anticipation loan in as little as one day to a week. The IRS then direct deposits your tax refund with the bank that made the loan.

Loan Agreement

Rapid refund requires the signing of loan documents, which makes you legally responsible for repaying the loan and accepting the terms of the loan agreement. The interest rates on the loans can range from 50 to 500 percent, according to the Golden Gate Better Business Bureau in the San Francisco Bay area. You agree that if your tax refund is lower than anticipated you will repay the difference to the lender. Lower refunds occur because of errors or if you owe money to the government. You also agree that you will not receive a refund of interest you paid on the amount of the loan you return.

Considerations

By choosing the rapid refund you are paying to borrow your own money. This can be acceptable to taxpayers who want their refunds in a few days. After you receive and use your refund loan, you could owe the IRS and the lender fines, penalties and fees if mistakes are made on your tax return. Fewer tax preparers offer rapid refunds than in the past. Fewer tax filers have qualified to receive rapid refund loans since the IRS stopped informing tax preparers and lenders which filers might have refunds withheld for government debt.

Other Options

If you file your return electronically and choose direct deposit of your refund, you will wait about 10 days for your refund. Qualified filers can choose to receive a prepaid debit card from the IRS for the deposit of tax refunds. Many tax preparers are choosing not to offer the refund anticipation loan and are instead offering a refund anticipation check, or RAC.

Consumer Protection Warnings

Consumer protection groups and state attorneys general compare rapid refund loans to pay-day loans and describe the practice as predatory because of the high interest rates and the failure of many preparers to fully inform tax filers about the cost and the risks. The Consumer National Law Center reported in 2011 that the rapid refund would soon be unavailable and describes refund anticipation loans as a “rapid rip-off.” The center warns that the refund anticipation check has the potential for high or hidden fees.

About the Author

Gail Sessoms, a grant writer and nonprofit consultant, writes about nonprofit, small business and personal finance issues. She volunteers as a court-appointed child advocate, has a background in social services and writes about issues important to families. Sessoms holds a Bachelor of Arts degree in liberal studies.

Photo Credits

  • Thinkstock/Comstock/Getty Images