14 July 2015
The process of withholding tax preparation fees from the refund is called a Refund Anticipation Check or RAC. They are a convenient way for many people to pay for their tax preparation service. Despite that, I don't offer them at PIM Tax Services.
The primary reason is that I can't do it without charging a fee of $25 to $35 dollars for it. RACs get processed through a bank, and the bank charges for that service. Ordinarily (no RAC) the IRS will send your refund directly to your bank via direct deposit. There are no fees involved in this transaction.
With a RAC the IRS sends your refund to another bank. That bank sends the fees to the tax preparer, takes their own processing fee, and then sends what's left of your refund to your bank.
The IRS will only send your money to your bank account. In order for the IRS to send the money to the RAC bank you must open an account at that bank. If you've had a RAC in the past, that's what all of that paperwork you signed was for. You opened a bank account at another bank and told the IRS to send your refund there. That bank received your refund, took out the fees and then forwarded the remainder to your regular bank. It added a few days to the time it takes to get your refund and cost you some extra money - neither of which is very efficient.
The second reason I don't like RACs is because very little is known about that middle-man bank. Several years ago the IRS stopped letting tax preparers and banks know in advance whether there was a tax lien against a taxpayer's refund. (Tax liens are typically issued if there are back taxes or child support owed, or if federal student loans are in default.) If there is a tax lien then the IRS doesn't send the refund to the taxpayer, they send it to the creditor the taxpayer owes money to. If that happens to a RAC transaction neither the bank nor the tax preparer get paid because the money never comes from the IRS. This policy change by the IRS ran the most reputable banks out of the RAC business. The banks remaining in the RAC business increased their fees (to compensate for their increased risk) and kept marching on.
What do we know about those banks that offer RACs? Typically very little. If you've had a RAC in the past do you even know the bank's name? (You have an account there!) They are real banks, regulated in the USA, so we could find out about them if we are willing to do some research. (Who has time for research?) Do they have good cyber security in place? You have to send them a lot of information to open a bank account. How are they taking care of it? Do they sell your e-mail address and phone number to marketing firms? There are too many unanswered questions for my taste.
I am not opposed to convenience. If I can find a way to process RACs for free (or nearly free) using a bank I know and trust I'll start offering them. Until then, I prefer to do business like most places in America and take care of the fees at the point of service. Cash, check, credit, or debit - quick, easy, and secure.