Rapid refunds work very differently than they once did. When first created, rapid refunds were refund-anticipation loans, with emphasis on the word loans. Tax preparers or a bank working with them would give customers their tax refund on the spot, but they had to pay a hefty fee to get it.
In 2010, consumer protection and regulatory agencies cracked down on refund anticipation loans and the practice of offering them went away. Today, you can get a rapid refund without paying any interest or fees. Rather than making money off the loans themselves, tax preparers use them as a way to lure customers and get them in the door.
When you receive a rapid refund, the tax preparer gives you your tax refund amount in advance without any interest charges or strings attached. Your actual refund goes to the tax preparer, who will write off any loss as a marketing expense.
How They Used to Work
When rapid refunds first came on the scene, they provided tax preparers with a source of income. You would take your taxes to the preparer and have them done. Instead of filing the taxes and waiting for the IRS to send your money, you could instead get the money on the spot. For a fee, the tax preparers would pay your tax refund themselves.
Technically, this arrangement was a short-term loan. When your tax refund came, it was sent to your tax preparer rather than you, thereby repaying your loan. If the tax refund you received was less than anticipated, you would have to pay the difference to the tax preparer.
The fee that you paid to access your funds early was interest paid on your refund anticipation loan. When doing the math, however, it became apparent that the annual interest rate on these loans was anywhere from 80-to-180 percent. Preparers were charging exorbitant fees, making people pay to get money that was already theirs. In 2010, regulatory agencies stepped in to prevent tax preparers from making loans at such egregious rates, and rapid refunds disappeared for a time.
How Rapid Refunds Work Now
Rapid refunds have come back on the scene but are now used as a marketing tool rather than a money-maker. Free online tax preparation software is now readily available, making it easier for people to prepare and file their taxes themselves. As a result, tax preparation services are noticing a marked decrease in business. Offering rapid refunds is a good way to get more customers in the door.
Now, customers get rapid refunds for free, with no interest or strings attached. If their refund is less than anticipated when it arrives, the tax preparers are simply writing off the loss as a marketing expense. While this strategy is risky enough that some investors have balked, the change is good for consumers and has been generating more walk-in business.
What to Watch For
Getting a rapid refund may now come with little to no inherent risk, but don't let your guard down too quickly. Tax preparation services are using the fast cash to get you in the door. Once you're there, the plan is to upsell you as much as possible.
First, ask how much the tax preparation fee is. Many companies have substantially increased their fees to cover the cost and potential losses of the new rapid refund structure. Once you determine that the preparation fee is acceptable, stay wary. Don't agree to sign up for unnecessary services and add-ons, as these will only serve to increase your costs.
One preparer, for instance, offers to give you a debit card secured by your refund. This card comes with a 36-percent interest rate and an annual fee. The same company offers to set up a short-term bank account for customers who can't afford to pay their tax preparation fees. When your refund gets deposited into this account, the money pays for the tax preparation, and the remaining balance is yours. Like all services, this one comes at a cost, and you'll keep more of your money if you file your taxes yourself or secure a rapid refund without utilizing any additional services.