Sometimes it’s hard to wait for a thousand dollars, isn’t it?
At no time during the year is this evident than tax season, that stressful period of days between January and April when Americans are doing their best to maximize their refunds.
For those of us who can’t wait, the holy grail came along a few years ago when tax preparers like H&R Block, Liberty Tax, and Jackson Hewitt offered no-interest tax refund advances.
The idea is simple: Once they know how much you’re going to get from your tax return, they pay you that amount up-front for free. When the return is processed and the return money is ready, the IRS sends it to the tax person/company you worked with.
Easy enough, right? You win because you get your tax return without having to wait, and companies like H&R Block and Liberty Tax win because they get your business.
We were curious about how this system works, so we talked with a few people in the tax industry and did some comparisons among well-known tax companies. We also did a little research on the history of tax refund advances.
What we found during our research is what’s included in this article. Over the next few minutes, we’re going to walk you through:
- Why tax refund advances exist
- What H&R Block, Liberty Tax & Jackson Hewitt offer
- Why we believe tax refund advances are a bad idea
Along the way, we’ll include some quotes from Brian Ashcraft, director of tax compliance at Liberty Tax, as well as insight from a tax-industry professional.
Since When Did Tax Refund Advances Become a Thing?
This year, more than ever, I’ve noticed advertisements all over the place promoting tax refund advances. It struck me as odd that so many seemed to be popping up so quickly.
To get answers on why these deals seemed to be springing up out of nowhere, I reached out to Brian Ashcraft. He explained that this isn’t the first time that refund advances were popular.
The Recession Killed Off Refund Advances
Back in the 2000s, they were relatively common. But when the financial crisis hit, Brian said, new regulations came about that made these tax refunds more difficult to process.
“In the late 2000s is when some of the banking laws moved them out of favor, so they became burdensome and everybody stopped doing them,” Brian said.
PATH Act Brought Advances Back from the Dead
Over the past few years, though, tax companies have become more comfortable offering the advances. More importantly, banks have been willing to front the cash to make them possible.
This is an important distinction to make. The tax companies offering refund advances are working with a partner bank to get the funds to you. This isn’t a good or bad thing, necessarily, but it’s good to know how it all works.
The PATH Act
The main motivation to bring advances back, Brian said, came when Congress passed the PATH Act, a piece of legislation that, among other things, said that taxpayers getting an Earned Income Tax Credit had to wait until at least Feb. 15 to get their refund no matter how early they filed.
The Earned Income Tax Credit (EITC) is typically handed out to low- and moderate-income families. So, you can see why a delay in tax-return money could cause some serious issues for people living paycheck-to-paycheck.
Liberty Tax’s own research reveals that half of the taxpayers spend their entire refund within weeks of receiving it, while 11% spend it within hours, indicating an immediate need.
“We also noted that consumers spend the money on groceries, rent, and bills current and past due,” Brian said. “When you’re dealing with that, time is of the essence.”
To make up for that time lost, companies like Liberty Tax, H&R Block, TurboTax and Jackson Hewitt resurrected tax refund advances.
Though Brian offered the following quote in respect to Liberty Tax, we think it applies to the entire industry:
“The PATH Act created a difficulty for people who were used to getting refund earlier and rely on it. We realized we needed a solution to our customers because there’s a void. We worked with our banking partners to provide a no-cost way of getting customers that money.”
What a Tax Refund Advance Looks Like: H&R Block, Liberty Tax & Jackson Hewitt
When it comes to tax refund advances, you’ll notice that these three companies only allow you to do them in their retail offices, not online. All three companies charge you for these in-person appointments.
Also, know that these companies only offer tax refund advances for a limited time, which makes sense considering they were created for people who wanted their tax returns before Feb. 15.
Pro tip: If your refund is more than the amount you were advanced, you get the difference.
H&R Block’s tax refund advance program is called Refund Advance, and the advance is disbursed to you on an H&R Block Emerald Prepaid MasterCard in amounts of $500, $700 or $1250.
I made a call to H&R Block’s customer service line to find out how much an office visit would be.
They asked me three questions. The first two questions were feelers for whether or not I had assets (home, rental properties, stock) or if I was self-employed. If I answered yes to either of those questions, I would’ve been quoted a higher price for my office visit.
However, I answered no because I wanted to see how much it would cost for an average person with one W-2.
I was asked if I was claiming any dependents and I said yes, as would someone who is getting the Earned Income Tax Credit. Their quote to process my return? $120. Think that’s expensive? Wait until you hear what I was quoted at Liberty Tax.
Liberty Tax calls their tax refund advance the Easy Advance, and they can give you up to $1,300. Unlike H&R Block, they’ll give you your return via direct deposit, a prepaid card or by a check you can pick up from the office.
I called a local Liberty Tax just like I did when I dug up pricing for H&R Block. The representative on the phone also asked a series of questions: Was I self-employed? Did I have just one W-2? Did I have dependents?
After answering yes to the W-2 and dependents questions, I was told that, for someone without dependents and just one W-2, the cost to do my taxes would be $215. If I was claiming the Earned Income Tax Credit and I had dependents, I would be charged around $400.
Jackson Hewitt’s Express Refund Advance program will advance you up to $1,300. You have the choice of putting your advance on an American Express Serve prepaid card ($200, $400, $750 or $1,300), or you can have the advance deposited directly into a checking account.
Like the other two tax companies, they require you to do your return in store to get the advance.
We called a Jackson Hewitt office to get an estimate on tax returns. For someone with one W-2 and a child, we were quoted a cost of $300-$400, mainly because there were added charges for the additional paperwork the EITC required.
When we asked how long it would take to get the money on the AmEx card, they said within the day. When I asked about the direct deposit, they said up to five days, a direct contradiction of the Jackson Hewitt website, which says the direct deposit is processed within one business day.
Why We Believe Tax Refund Advances Are a Bad Idea
I could not believe what I was hearing when Liberty Tax and Jackson Hewitt quoted me between $300 and $400 for my tax return. Those prices are, quite frankly, absurd.
Someone with a single W-2 can do their taxes for free on any of the four major tax software websites. You can even do it for free on H&R Block’s website.
That’s right; what these tax companies are charging more than $100 for can be done by anyone with a computer and 15 minutes of free time.
So, why the outrageous prices? It’s simple; these three tax companies won’t give you your advance unless you do your return in the store. By forcing you to come in the store, they gouge you.
They claim that their tax refund advance programs are free, but they fail to tell you that they’re charging you hundreds of dollars for a service you could do on your own in about the time it takes to bake a frozen pizza.
In our opinion, what’s happening here is just crazy, especially considering these advances were designed for EITC taxpayers who tend to be in financial need.
However, when we talked with Liberty Tax about the tax refund advance program, they gave a rosier picture of how they’re running it for “free”.
Liberty Tax’s Explanation of How They Can Offer Their Advances for “Free”
When we asked Liberty Tax’s Brian Ashcraft how the company could offer such a great service for free, he said the company moved some money around to free up cash to pay for the fees their bank was charging them for the advances.
“The bank charges us and we pay that fee,” Brian told us. “We had to reallocate some of our marketing spendings to make this product available and to promote this product.”
I came away from our interview believing there was some way that Liberty Tax, H&R Block, and Jackson Hewitt were making money off this program, but it was early in my research and I didn’t have answers.
When I talked with Kyle Walters, a CPF with Atlas Tax Advisors, he too expressed his skepticism about the tax refund advance programs.
“The biggest thing to think about is reading the fine print,” Kyle said. “Is someone going to give you free money? People don’t do that for no reason.”
During our conversation, I was unaware of Jackson Hewitt, Liberty Tax, and H&R Block’s pricing. So, when Kyle talked about the dangers of not being able to see how a company wins when they offer free advances, his words were pretty prophetic.
“They’re saying they want to give you a tax refund advance for free, but it doesn’t make sense how they win,” he said. “If you don’t see any way the company could potentially win, then you’re missing something.”
Our Conclusion About Tax Refund Advances
In 2015, HighYa Senior Editor Derek Lakin wrote an article about payday loans, a financial service designed to keep poor borrowers in debt for as long as possible.
He talked about the APR’s you could expect for payday loans, pointing out how much higher they were than what you’d pay on a credit card.
Borrowers go into the transaction thinking they’ll pay APR’s lower than 30%, but they come out of it paying much more than that. Sound familiar?
The three tax companies we’ve talked about convince their customers they’re getting free refund advances when they’re actually charging astronomical rates for something that could be easily done for free.
Here’s a quote Derek used from a Georgetown University study on payday loans:
“Over 40% of borrowers believe payday loan rates are less than 30% APR, not much more than a credit card rate. In fact, payday loans rates are typically about 400% APR, over 13 times what these borrowers thought.”
The “APRs” for H&R Block, Jackson Hewitt & Liberty Tax
H&R Block’s APR for a $1,200 refund? 120%. Jackson Hewitt’s APR for a $1,200 refund? 300%-400%. Liberty Tax’s APR for a $1,200 refund? 400%.
Now, you could argue that these companies are offering a service for which they’re getting paid, and that payment isn’t an interest rate.
Normally, we’d agree with you, but the service these tax companies are offering is free outside of their office walls.
As we pointed out, H&R block actually lets you file for free on their website, and should you have to upgrade to handle a more complex return, the most you’ll pay is around $60.
It’s Worth to Wait for Your Tax Refund
Even though we’re pretty opposed to tax refund advances, we know that some people find themselves in really difficult financial positions at this time of the year. They’re coming off big expenses from Christmas and they’re trying really hard to make ends meet.
If you’re absolutely forced to get a tax refund advance, go with H&R Block. Based on what they told us over the phone, you can expect to pay around $120 if you’ve got a single W-2 and dependents.
If you aren’t in dire straits and you just like the idea of getting money up-front for free, run as far away as you can from these companies, go to TurboTax, Tax Slayer or TaxAct and file for free. Then, wait for your return to show up. It’s that easy.