Tax season has just begun, and it’s time to start figuring out what you’re going to do with your tax refund. And if you’re one of the 18% of tax filers receiving a refund which is looking to get it early, you may be considering a refund anticipation check (RAC) or refund anticipation loan (RAL.)
In 2017, the IRS issued a regulation that tax refunds tied to the Earned Income Tax Credit and/or Additional Child Tax Credit would be held until February 15. While you may file your tax return before this time, your refund is under a mandatory delay to verify your income and qualifying children. After factoring in other processing delays like weekends and holidays like President’s Day, the earliest most people can expect to see their tax refund is the very end of February this year. Subsequently, finding ways to get your tax refund earlier since it can now take longer to arrive has become more urgent. Applying for a RAL is the option that many taxpayers go for since the money can be in your hands in as soon as a few minutes to 48 hours.
But you may find that your loan application has been denied after fastidiously gathering all of your information and even had no problems getting one in previous years. Here are some of the common reasons why your RAL application didn’t go through and what you can do about it.
Your Credit Score Needs Improvement
RALs are still loans that require some degree of creditworthiness. This leaves you on the hook to pay the entire amount of the loan, even if your refund winds being less than you initially thought it would be. The loan balance also accounts for the application and origination fees, interest, as well as tax preparation and card fees (if applicable.) The IRS also no longer informs RAL lenders in advance if there is a “debt indicator” on your account that indicates if any of your tax refund has been marked for an offset (which is when the IRS takes your refund as a result of past tax debts or other delinquencies.) With less of a guarantee of your tax refund balance and overall bottom line compared to the past, RAL lenders now rely on credit checks more than they used to.
You Earned Too Much (Or Too Little)
If you earned too much money to qualify for the Earned Income Tax Credit and/or other large refundable credits that would result in a big tax refund, your refund would be considered insufficient to make offering you a loan worth it. This is especially true after accounting for tax preparation and loan origination fees.
On the other hand, the same is true if you didn’t make enough money or the right type of income. If the tax refund just isn’t there, the lender won’t find it worth the time to process the loan.
You Were a Victim of Identity Theft Recently
Even if you have excellent credit, you could fail the lender’s credit check if you froze your credit and/or still have fraudulent accounts in your name affecting your score. Freezing your accounts will affect access to current credit information, so if you’ve had your identity compromised and you need a RAL, it’s definitely going to impact your ability to get one.
Your Account is Delinquent
Your account may be what’s known as “subject to offset”, referring to the Treasury Offset Program. This happens with delinquent accounts like unpaid past tax bills you were contacted about several times already.
It applies to other federal debts like defaulted student loans and debts where states are eligible for IRS interception like child support in arrears.
The debt indicator used to be able to inform lenders of how much of your tax refund could be seized to satisfy these debts. With that debt indicator no longer in place, this leaves the lender to do more guesswork without a credit check. If they suspect too much of your refund is subject to offset, it’s easier for them to reject your loan application.
Staying on top of your debts (namely debts where your tax refund could be seized to pay them off) and improving your credit while being eligible for large refundable credits like EITC are the most likely to get your RAL approved if you have circumstances where you can’t wait until the end of February to get your refund.