Tax refund advances are described as interest-free and fee-free loans of up to $3,500 that the major tax preparation companies offer during tax season to customers who are due a refund.

These aren’t the same as the costly tax refund anticipation loans offered a few years ago, until the FDIC forced the banks to quit offering them.

The big draw of these new tax refund loans is that taxpayers who are due refunds can get them in as little as a few hours instead of waiting several weeks for the IRS to process their returns, and for free.

Except that you have to be a customer to get it, and that can be costly.

How Tax Refund Advances Work

Why offer totally free loans to tax prep customers? To get them in the door and collect fees on other services.

With fierce competition, online and in the brick-and-mortar world, tax preparation services need a way to distinguish themselves and gain market share.

Key Takeaways

  • The earlier you file, the faster you'll get your refund. Don't wait for the late crush.
  • E-file your return and request direct deposit of your refund.
  • If necessary, get a short-term loan but pay it back in full as soon as you get your refund.

The loans do not actually come from the tax preparation companies themselves but from banks that work with them. When a customer signs up for one of these loans, the IRS sends the money to the financial institution associated with the tax preparation company, which then disburses the funds to the customer. When the taxpayer’s refund arrives, the tax preparation company collects the loan funds it advanced, and then remits any remaining refund to the customer.

The tax preparation companies are at risk of not getting repaid for their loans if the IRS calculates a lower refund than the tax preparer does, but they say they will not pursue borrowers for loans that can’t be repaid. The companies are picking up the costs of this service and writing them off as marketing expenses. 

That Free Advance Can Be Costly

Perhaps most important, these loans are a way to get consumers to pay for tax preparation services, as they are only available to customers who pay to have their returns professionally prepared.

Other services taxpayers can end up paying for once they’re in the door include refund transfer accounts that allow customers to finance tax preparation fees and the fees associated with prepaid debit cards on which customers can receive their loans and tax refunds.

Alternatives to Tax Refund Loans

While refund loans themselves are free, the tax preparation associated with them can be expensive, and the fees may not be clear up front.

In addition, some consumers may rack up high fees using the prepaid cards on which these funds are delivered, depending on how they use them. Taxpayers who want to save money should consider the following alternatives.

File Early

Whether you use a professional or file your own taxes, the key to getting your refund fast is filing early.

The IRS gets an avalanche of late-filed returns in the month before the deadline, usually April 15. The backup delays processing, and refunds, by weeks.

To get your refund as fast as possible, file as early as possible.

E-File Your Return

Whether you do your own taxes or use a professional, make sure you file your return electronically and request direct deposit of the refund to your bank account or to a low-fee prepaid card.

If you have a low income or are an older American, the IRS has free tax preparation services you can use.

Officially, you should allow 21 days to receive the refund, but direct deposit refunds will usually arrive in two weeks or less. Electronic returns are processed much faster than paper returns, often within 24 hours, and direct deposit gets money into your account faster than a mailed check.

If you request a check, once it arrives, you still have to deposit it in your bank account and wait for it to clear. Checks can also get lost or be stolen.

Paper-File Your Return and Request Direct Deposit

Even if you mail in your return via snail-mail, you should request direct deposit or a prepaid card deposit.

It can take seven weeks for your mailed-in return to be processed and the refund to be sent. It's inexpensive but cumbersome and could be too slow for taxpayers who are relying on their refunds to make ends meet.

You can keep tabs on the status of your refund at https://www.irs.gov/refunds. You’ll need to know your Social Security number, filing status and exact refund amount.

Get a Short-Term Loan

If you need money faster than these options allow, consider borrowing possibilities such as a personal loan or a credit card.

The key is "short-term" loan. If you take this path, you must promise yourself to pay the loan off in full the minute your refund hits your bank account. Personal loans and credit cards come with very high interest rates and you could get into a very deep hole if you pay it off in low monthly installments.

In any case, shop around to find the least expensive choice for your situation. Paying a high annual percentage rate for a week or two may be less expensive than paying to have your taxes professionally prepared, especially if you also have to pay a fee to borrow the tax prep fee.

Alternatives to Paid Tax Prep Services

Low-income taxpayers can get their taxes prepared for free. The services available include:

  • The IRS’s Volunteer Income Tax Assistance Program (VITA) for taxpayers with incomes of $56,000 or less, taxpayers with disabilities and those who speak limited English. If you qualify for the program, you’ll get free basic income tax return preparation from an IRS-certified volunteer.
  • The IRS’s Tax Counseling for the Elderly program uses IRS-certified volunteers who specialize in tax matters related to pensions and retirement issues. There is no age requirement, but the program is generally intended for those who are 60 or older.
  • The IRS’s Free File Software is available to taxpayers whose income is $69,000 or less. (State returns may still incur a small fee.) The IRS free file program lets you choose the software from a number of well-known companies, including TurboTax, H&R Block and TaxAct.

If You Go With a Pro

If you do choose to work with a tax preparation company, ask for a detailed estimate of your final price up front and don’t let anyone pressure you into paying fees you can’t afford.

After getting an estimate, you may wish to see what your other options are for preparing your taxes and borrowing money to tide you over until your refund arrives. Depending on your tax situation, you could save a few hundred dollars.