Don't Mess With Taxes

Even in the best of tax times, folks are impatient when it comes to getting their refunds. They want them yesterday, looking to collect on the forces savings account they created when they intentionally had too much put into their paycheck withholding.

Then comes 2019, where every day it's looking more like parts of the federal government, including the Internal Revenue Service, will be in shutdown mode when the annual tax return filing season starts on Jan. 28.

While the Treasury Department and IRS say they will do what it takes to make this year as normal as possible, many are skeptical.

Some doubt the IRS will be able to meet its usual pledge to deliver most refunds in 21 days or less. Note, too, that this time frame begins on Jan. 28, not with returns filed earlier either via individual tax software programs or the early-opened Free File, and applies to e-filers who opt to have their refunds directly deposited into a financial account.

Note also that some folks' refunds must by law be held until at least Feb. 15. These are the refunds from returns where the Earned Income Tax Credit and/or refundable portion of the child tax credit are claimed.

Shutdown refund effects: On top of these expected delays, there's a new twist in 2019 thanks to the federal funding stalemate on Capitol Hill.

Hundreds of thousands of federal employees are even more anxious about when they'll get their refunds. These are the folks, including IRS personnel, who are working without pay under closure contingency plans, as well as their unpaid colleagues who are furloughed.

Will the perfect storm or usual refund eagerness + financially struggling federal workers + the continuing government shutdown = a resurgence of refund anticipation loans (RALs) and/or their cousins, refund anticipation checks (RACs)?

Probably.

Evolution of refund impatience options: RALs and RACs, as their names imply, are based on the amount of federal tax refund filers expect. They are offered by lenders and typically via tax preparation operations.

RALs were for many years the main tax-time financial product for filers wanting quicker access to their over-withheld income taxes. These loans are made by banks, secured by and repaid directly from the proceeds of the taxpayers' refunds.

After complaints by consumer groups over the fees, sometimes which reached triple digit annual percentage rates, RALs fell out of favor.

The IRS even got in on the act by ending its debt indicator notation, which essentially was a credit check for potential lenders noting whether a taxpayer will get an expected refund in full or whether some or all of the money will be offset by other government obligations, such as student loans or child support. 

But RALs didn't die. They just morphed into advances that are promoted as not charging interest or fees to the consumer for the loan. These new RALs boomed, even though consumer activists worried about the possibility that unscrupulous tax preparers could impose other charges to make up for the cost of the loan.

Financial evolution also came into play, with RACs moving into the vacated refund-related space.

With RACs, a bank opens a temporary account into which the IRS direct-deposits the refund monies. After the refund is deposited, the bank issues the consumer a check or prepaid card, or makes a direct deposit into the consumer’s own bank account, and closes the temporary account. A RAC doesn't speed up refund access, but does allow the consumer to have the tax preparation fees deducted out of the refund.

Potential high cost of early refund cash: A report issued last March by the National Consumer Law Center (NCLC) and the Consumer Federation of America (CFA) found that in 2017 taxpayers took out more than 1.7 million RALs, up from 1.5 million the year before.

Another 20.5 million obtained a RAC, up from nearly 19 million in 2016, according to the NCLD/CFA report.

It's hard to blame people who counted on the refunds to pay the credit card charges they racked up on holiday gifts last month. It's even harder to blame people who are dealing with day-to-day expense issues in the midst of the longest federal government shutdown in U.S. history.

Sometimes, the very messy real life just gets in the way.

Refund advance admonitions: But RALs and RACs do raise some concerns.

What if you estimated incorrectly and you don't get the amount of refund you expected? That's often the case with the aforementioned offsets.

This year things could be worse in the wake of the Tax Cuts and Jobs Act's changes. Some have predicted that millions who didn't adjust their payroll withholding to comply with the new tax laws could owe Uncle Sam instead of getting a refund.

Whatever the reason, if your refund is less-than-expected or nonexistent, it will create additional financial problems.

With a RAL, even if your numbers are close, if you don't pay back the loan back promptly, you could face what are unusually high, some say egregious, interest rates on the unpaid balance.

RACs, even though they are tied to preparer fees, also offer financial dangers. The NCLC/CFA reports points out that if a taxpayer pays $35 to defer payment of a $350 tax preparation fee for three weeks, the annual percentage rate (APR) would be equivalent to 174 percent.

3 refund advance tips: Still, some see refund-based money as the better or only option. If you do opt for an advance based on your expected federal tax refund, at least go into the short-term financial space with eyes open.

Years ago, I wrote a piece for Bankrate on refund advance products and what to consider instead. I've done the same many times here on the ol' blog.

That earlier advice still generally stands. And given the circumstances complicating filing season 2019 and associated refunds, it's a good time to highlight it again. Here are three refund advance things to think about in advance of getting such a financial product.

1. Comparison shop. Don't go to the first preparer offering refund-based services or products. Look at several and take note of potential maximum APRs as well as the tax preparation fees that would be offset by a RAC. Also check with a local bank or credit union, which might be able to provide you a short-term personal loan at a lower rate.

2. Consider a no-interest credit card. Yes, if you're relying on a forced IRS refund savings account, a way to get into more debt might not be the best answer. But a no-interest credit card may be the best way to pay some bills or buy groceries. Again, pay attention to terms. The 0 percent rate is short-term and could take a major jump up once that expires.

3. Talk to your creditors. In unusual circumstances like the current government shutdown, they might be more inclined to work with you to pay your bills.

Here's hoping that the shutdown will be over soon and all this talk of delayed refunds and refund advances will be moot. But if worse comes to worst, be ready so that you don't dig an even deeper financial hole.

You also might find these items of interest:

• Refund loans and the once-a-year rich
• Millennials find tax refund anticipation loans appealing
• Fed shutdown underscores why to adjust payroll withholding

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