When you file with a paid preparer, you may be asked whether you want to "pay your fees out of your refund." Saying yes usually means signing up for a refund transfer, sometimes called a refund processing service. It is one of the most common tax-season bank products, and also one of the least understood. Here is what it is, what it costs you, and when you might not need it.
What a refund transfer is
A refund transfer is an arrangement with a bank that partners with the tax preparer or software company. The bank opens a temporary account in your name for one purpose: to receive your federal (and sometimes state) refund from the government. When the refund arrives, the bank:
- Deducts the tax preparation fee owed to the preparer.
- Deducts its own refund transfer fee and any other agreed charges.
- Sends you what is left by direct deposit, a paper check or a prepaid card, and closes the temporary account.
The key point is that a refund transfer is a payment method, not a faster refund. The IRS issues the refund on its normal timeline whether it goes to your own bank account or to the temporary account.
Refund transfer versus refund advance
The two products are often sold together but they are different:
- A refund transfer moves your own refund through a temporary account so fees can be taken out. No money is lent to you.
- A refund advance is a short-term loan based on your expected refund. It is repaid automatically when the refund arrives. Advances are often advertised with no interest, but they are usually only available if you also buy a refund transfer, so the transfer fee is effectively part of the cost of the "free" advance.
If the IRS reduces your refund, delays it or applies it to a past-due debt, the amount that reaches the temporary account can be smaller than expected. Read the agreement to see what happens to fees in that case.
How the fees really work
A refund transfer has its own fee, separate from the preparation fee. Because nothing is paid up front, it can feel as if filing cost nothing, but you pay for preparation and for the transfer out of money that was already yours. Some agreements also add charges for the delivery method you choose, such as a check printed at the office or a prepaid card with its own fees for withdrawals or inactivity.
Consumer agencies, including the Consumer Financial Protection Bureau, have pointed out that the convenience of deferring fees has a price, and that the total cost is easy to overlook when it is buried in a long agreement signed at the end of an appointment.
Questions to ask before you sign
- What is the total preparation fee, and what is the separate refund transfer fee?
- Can I pay the preparation fee another way, by card or cash, and skip the transfer?
- Is the transfer required for the refund advance being offered?
- How will I receive the remaining money, and does that method have its own fees?
- What happens if my refund is smaller than estimated or is delayed?
- Will my information be shared with the bank for marketing? (Preparers generally need your written consent to use or disclose return information.)
Lower-cost alternatives
Direct deposit straight from the IRS
If you have a bank or credit-union account, or a prepaid card that accepts direct deposits, you can have the IRS send the refund there directly. E-filed returns with direct deposit are generally the fastest way to receive a refund; the IRS says most are issued in less than 21 days.
Paying the preparer directly
If you can cover the preparation fee when you file, you avoid the transfer fee entirely. Some preparers will explain this option only if you ask.
Free preparation
IRS-sponsored Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites prepare returns at no cost for eligible taxpayers, and IRS Free File offers guided software to many filers. With no preparation fee, there is nothing to deduct from the refund.
When a refund transfer can make sense
For someone without a bank account who has no other way to pay a preparer, a refund transfer can be a practical tool. The aim is not to avoid it at all costs, but to choose it knowingly, compare the full price, and consider whether a free option or a simple direct deposit would leave more of the refund in your pocket.
This article is general information, not tax, legal or financial advice. TaxRefund4Cash is not a lender, bank or tax preparer. Check current details on IRS.gov and in any agreement you are asked to sign.