Refund Advances in Plain English: How They Work and What to Ask

In January, a lot of people need their refund before the IRS can send it. Tax offices offer two products that sound similar but work very differently: the refund advance and the refund transfer. Here's what each one is, in plain English.

What a refund advance is

A refund advance is a loan from a bank, based on the refund you expect. The bank lends you part of it, usually within a day or so of the IRS accepting your return. When the IRS sends your refund, it goes to the bank, which keeps the loan amount and sends you the rest.

Things to know:

• It's a loan, and it needs approval. The bank decides. Being approved last year doesn't mean you'll be approved this year.
• The amount is set by the bank, within the ranges it offers that season. It's often less than your full refund.
• If your refund comes in lower than expected, for example because the IRS adjusts a credit or takes it to pay a past-due debt, the advance still has to be repaid from what arrives. Ask the bank's terms for what happens then.
• Terms vary by bank and by season. Read the disclosure. Some advances are offered with no interest or loan fee; others have a cost. Don't assume.

What a refund transfer is

A refund transfer isn't a loan. A bank opens a temporary account for your refund. The IRS sends the refund there, the bank takes out the preparation fee (and the transfer fee), and sends you what's left by direct deposit, check or card.

It doesn't make your refund faster. The IRS still sends it on its normal timeline. What it does is let you pay for tax preparation out of the refund instead of out of pocket. That convenience has a fee, so ask what it is.

When refunds actually arrive

The IRS says most refunds from e-filed returns with direct deposit are issued in less than 21 days. But by law, if you claim the Earned Income Tax Credit or the Additional Child Tax Credit, the IRS can't issue your refund before mid-February. That rule is the reason refund advances exist. We explain the timing in why your refund is late.

The secret: before you sign anything, ask the office one question: "If I don't take any bank product at all, what do I pay, and when?" Some people take a refund transfer only because they didn't know they could pay the prep fee another way, and the transfer fee is a cost they didn't need. If you can pay the fee up front, you keep the transfer fee. If you can't, the transfer may be worth it, and now it's a choice instead of a default.

Five questions to ask

1. Is this a loan (advance) or a temporary account (transfer)?
2. What does it cost me in total, in dollars?
3. If I'm not approved for the advance, what happens to my return?
4. If my refund is smaller than expected, what do I owe?
5. How will I get the money: direct deposit, card or check?

A good office answers all five without hesitating.

Watch for

• Anyone who promises an exact refund amount or a date before your return is done
• Anyone who wants to base your refund on your last pay stub instead of your W-2
• Fees that aren't explained in writing

Those are signs to walk away. More in how to tell a real IRS letter from a fake.

An example in dollars

Here's how the two products compare for one taxpayer (the fee amounts are made up for illustration; real ones vary by bank and office).

Maria expects a $4,000 refund, including the EITC. Her preparation fee is $250.

Option 1: no bank product. She pays the $250 fee at the office. Her $4,000 refund arrives by direct deposit when the IRS sends it, after mid-February because of the EITC rule.

Option 2: refund transfer. She pays nothing up front. When the refund arrives, the bank deducts the $250 prep fee and its transfer fee, and sends her the rest. Same timing as Option 1, minus the transfer fee.

Option 3: refund advance plus refund transfer. If approved, she gets an advance shortly after the IRS accepts her return, perhaps $1,000 or whatever the bank offers. When the refund arrives in February, the bank keeps the $1,000, the prep fee and the transfer fee, and sends her the rest.

None of these is wrong. They're choices, and Maria should see the dollars for each before she picks.

What a refund advance can't do

• It can't make the IRS process your return faster
• It can't increase your refund
• It doesn't replace the IRS review if your return is selected for one

If your advance is denied

Your return isn't affected. It goes to the IRS as normal, and your refund comes on the normal schedule, through the refund transfer if you chose one.

Find a TaxWallet office

TaxWallet offices explain every bank product option before you choose. Get an estimate first.

FAQ

Is a refund advance a loan?

Yes. It's a loan from a bank against your expected refund, and it needs approval.

Does a refund transfer make my refund faster?

No. The IRS sends it on its normal schedule. The transfer lets you pay prep fees from the refund.

Why can't I get my EITC refund in January?

The law requires the IRS to hold refunds that include the EITC or the Additional Child Tax Credit until mid-February.

Can I be denied a refund advance?

Yes. The bank makes the decision each season.

General information, not financial or tax advice. Read the bank's disclosure before you sign.