Calculating numbers for income tax return with pen and calculator © Stockbrokerxtra Images, Photolibrary

Ding-dong! The refund anticipation loan is dead.

These tax-time advances had a witchy way of making big chunks of your refund disappear. Unfortunately, tax-preparation firms still have ways to cash in on your impatience, so you need to keep your guard up.

You should be especially concerned about:

Refund anticipation checks, a popular product that doesn't necessarily shorten your wait time but does cost you money.

"Phantom" refund anticipation loans offered by shady tax preparers who use them as a bait-and-switch tactic to get people in the door.

Getting duped into paid tax preparation when you could get it for free, with the idea that you'll get your refund faster.

In their day, refund anticipation loans were pretty popular, especially among low-income young adults. An analysis of tax loan data by the Urban Institute for the Treasury Department found refund anticipation borrowers "are disproportionally younger, lower income and from impoverished communities" and more likely to have children and be single heads of household.

The less education a person had, the more likely that he or she would apply for a refund anticipation loan. An analysis in 2010 found that 11.2% of those who had not graduated from high school had received a refund anticipation loan in the preceding five years, compared with just 2.7% of college graduates.

Liz Weston

These borrowers paid through the nose to get their refunds just a few days earlier. Refund anticipation loans promised your money, minus tax preparation and loan fees, within one to three days. Since refunds are typically available within one to two weeks using electronic filing and direct deposit, the fees translated into annual interest rates of more than 100% -- and sometimes more than 500%.

You had to be pretty hard up for cash, not very savvy about money, or both, to get a refund anticipation loan. Still, about 12 million people a year did so when such loans were at their peak.

The popularity of refund anticipation loans was already declining by 2011, when the Internal Revenue Service announced it would stop cooperating with banks that made these loans. (The banks relied on signals from the IRS that a refund wouldn't be held up because of unpaid child support or other problems.)

Several big players that funded the loans were already getting out of the market, including JP Morgan Chase, Santa Barbara Bank & Trust and HSBC, which was ordered out of the business by its regulator.

The growing scarcity of lenders led some less-than-scrupulous tax preparers to pretend to offer loans they couldn't actually make, just to lure people into their offices, according to the National Consumer Law Center.

The product tax preparers started pushing instead was the refund anticipation check. In 2010, nearly 15 million taxpayers got these checks, according to an analysis by the National Consumer Law Center, compared with the 5 million taxpayers who got refund anticipation loans.

On the face of it, refund anticipation checks seem cheaper: typically $30 to $35 to get your money, compared with the $70 or more preparers charged for refund anticipation loans.

But here's the rub:

  • You don't get your money any faster. The lender opens a temporary bank account into which the IRS direct-deposits your refund. Only then does the bank issue you a check or a prepaid debit card, minus the check fee and the tax-preparation fee.
  • You don't need an intermediary. If you have a bank account, you could just get your refund direct-deposited there. If you don't have a bank account, you can get your refund deposited to a reloadable prepaid card (although you'll need to be wary of high fees on that). Or you could simply wait for a paper check to arrive from the IRS, which can take six to eight weeks, compared with eight to 15 days for a direct-deposited refund.
  • You may be paying too much for tax preparation. Since the tax preparer's fees typically are deducted from your refund, you may not realize that you're overpaying for this service -- which you very likely could get for free elsewhere. Plus, you're essentially paying the fee to borrow the tax-preparation costs. If you were charged $189, a $30 fee represents an annualized interest rate of more than 400%, the National Consumer Law Center noted.

The law center sent out secret shoppers and found that some tax preparers were automatically signing up customers for refund anticipation checks without asking. Others asked if customers wanted direct deposit, and then gave them refund anticipation checks instead.

"Consumers aren't getting enough information to realize they're paying fees for a refund anticipation check," said center staff attorney Chi Chi Wu, "or that there's a free way to get a refund just as fast."

Everyone can file federal tax returns for free using the IRS Free File site. The site has free tax-preparation software you can use if your adjusted gross income is under $57,000, and forms if your income is higher.

If you need more help, the IRS' Volunteer Income Tax Assistance program offers free assistance to people with incomes of $51,000 or less, while the Tax Counseling for the Elderly program provides help to those 60 and older. You can find locations on the AARP Foundation's Tax-Aide page.

Want to get your refund as fast as possible, without paying excessively for the privilege? File now, before the early April rush.

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Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.


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