U.S. taxpayers who obtain "rapid" refund products, such as refund anticipation checks (RACs), often end up paying a large portion of their return to the tax preparer or financial institution. These products are little more than short-term loans secured by an anticipated tax refund, and they come with high fees that may be taken directly from refund proceeds. This means that consumers are essentially borrowing and paying interest on their own money.
Arkansas Attorney General Dustin McDaniel issued a consumer alert Jan. 15, warning consumers about the disadvantages of refund anticipation products. "Everyone wants the money that's due to them as quickly as possible, but often consumers can avoid the high fees associated with products if they are patient enough to wait just a few days," McDaniel said. He pointed out that taxpayers who file electronically with the IRS and choose to receive their refunds with direct deposit can usually get them in one or two weeks.
About 18 million taxpayers received RACs in 2011, according to the National Consumer Law Center. The nonprofit also estimated that Americans paid a total of $748 million in fees for these products. Taxpayers usually pay about $30 for RACs, but add-on costs may reach $100 or more, in addition to tax-preparation fees.
Consumers can avoid the high costs of refund anticipation products by using the IRS Free File program starting Jan. 17. Filers who earned less than $57,000 in adjusted gross income can file for free using brand-name tax software. Other organizations offer tax-preparation help to senior citizens or those who otherwise cannot afford assistance.