As many Pennsylvanians prepare to file their tax returns, they should use caution and consider all their options when considering tax refund-related financial products, such as refund anticipation loans.
What is a refund anticipation loan?
A refund anticipation loan, or RAL, is a loan made by a lender or business to a taxpayer in anticipation of a taxpayer's state or federal income tax refund. These loans may also be referred to as "refund anticipation checks" or "advances," but they are ultimately loans secured by a taxpayer in anticipation of their tax refund.
"You may see promotions for 'fast' and 'easy' offers that guarantee you'll receive your tax refund on the same day you file your return," Revenue Secretary Dan Hassell said. "On the surface, these types of loans or advances may be enticing, but everyone needs to make sure they understand how they work and that their total refund will most likely be reduced."
What should you look for?
RALs are often advertised as a quicker option for taxpayers to get their money, but they often reduce taxpayers' refunds because of high interest rates and substantial service fees charged by the lender. RALs are not always the quickest way to receive a tax refund, and the full amount of the loan may be required to be repaid even if the refund is not granted or is lower than the anticipated amount.
RALs are typically offered around the start of tax filing season through the filing deadline to submit tax returns, which is April 15, 2020. They are often obtained through tax preparation businesses that prepare personal income tax returns. However, car dealerships, check cashing services and other businesses have been known to offer RALs.
What tips should you know?
The Department of Revenue reminds taxpayers that lenders of RALs are required to:
- Advise taxpayers of all fees, interest and other known deductions paid from their refunds, as well as the remaining amount the taxpayers will actually receive.
- Ensure taxpayers understand they will not receive their refunds from the Department of Revenue or the IRS. Instead, the refund will be sent directly to the lender.
- Advise taxpayers they may be liable to the lender for additional interest and other fees if the lender does not receive the refund within the expected timeframe.
- Secure the taxpayer's written consent to disclose tax information to the lending financial institution in connection with an application for a refund-related financial product.
- Adhere to advertising standards and fee restrictions. Lenders are not permitted to base fees on a percentage of the refund amount or compute fees using any figure from tax returns.
Review the fine print and consider alternatives
The Department of Revenue is encouraging taxpayers who are considering a refund anticipation loan to read the fine print and ask questions to identify what fees are being charged, the interest rate and what happens if the refund is less than anticipated before signing off on the loan. Often, tax preparers are charged a fee by a lender for each RAL they approve, which may cause some preparers to inflate tax preparations costs to recoup the fee from the taxpayer.
As an alternative, the department is urging taxpayers to consider filing their Pennsylvania personal income tax returns electronically and opting for electronic deposit of their refunds. Filing electronically will help reduce potential errors and assist the department with processing returns as quickly as possible. Visit the Department of Revenue's website for more information on electronic filing options, including filing for free through PAdirectfile.