Pay by Refund: How It Works and What You Need to Know

Paying for tax preparation services can be a burden, especially if you’re counting on your refund to cover the cost. Some tax preparers offer a solution called “Pay by Refund,” which allows you to deduct their fees directly from your tax refund instead of paying upfront. While convenient, this option comes with important considerations.

How Payment by Refund Works

With Pay by Refund, the tax preparation fee is deducted before you receive your refund. A temporary bank account is set up by the tax preparer’s financial partner to handle the transaction. Instead of the IRS or state tax agency depositing your refund directly into your account, it is first sent to this temporary account. Once the preparer’s fee is withdrawn, the remaining funds are sent to you via direct deposit, check, or prepaid debit card.

This setup eliminates the need for upfront payment but comes with additional service fees, typically ranging from $30 to $50, depending on the tax preparation company and financial institution.

Eligibility for Refund Payment

Your expected refund must be large enough to cover the tax preparation fee and service charges. If it isn’t, your application for this payment method will likely be denied.

Refund delays can also affect eligibility. Returns claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) are subject to extra IRS scrutiny under the PATH Act, which can slow processing. Many tax preparers hesitate to approve Pay by Refund in these cases due to the risk of delayed payment.

Outstanding federal or state debts may also disqualify you. Under the Treasury Offset Program (TOP), refunds can be seized for unpaid obligations like back taxes, student loans, or child support. If your refund is intercepted, there may be nothing left to cover the tax preparer’s fee. Some providers check for known offsets before approving Pay by Refund, but they cannot guarantee protection against unexpected deductions.

Filing Requirements and Effect on Refund

Tax preparers offering Pay by Refund typically require electronic filing since paper returns take longer to process, increasing the risk of payment delays. The IRS generally processes e-filed refunds within 21 days, while paper returns can take six weeks or more.

Errors or missing information on your tax return can also delay your refund. If the IRS detects discrepancies—such as incorrect income reporting or mismatched Social Security numbers—you may receive a notice requiring additional verification. Since Pay by Refund depends on a timely refund, any delay could mean you need to make alternative payment arrangements. Some providers include clauses requiring direct payment if a refund is delayed beyond a certain period.

Fee Arrangements

Using Pay by Refund adds extra costs beyond the standard tax preparation fee. The financial institution managing the temporary account charges a service fee, typically between $30 and $50. Some tax firms bundle this payment option with services like audit protection or refund advance loans, which may be automatically included unless you opt out. These extras can further reduce your final refund amount.

Refund disbursement methods may also affect fees. Direct deposit is often the lowest-cost option, while prepaid debit cards or paper checks may come with additional charges.

Recourse if Refund Is Delayed or Adjusted

If your refund is delayed or adjusted, complications can arise. Since the tax preparer’s fee is deducted before you receive the remaining balance, any reduction in your refund could leave you with an outstanding balance. If the IRS adjusts your refund due to errors, audits, or offsets, the financial institution handling the transaction may not have enough funds to pay the preparer, leading to collection efforts.

To check refund status, use the IRS’s “Where’s My Refund?” tool or your state tax agency’s tracking system. If the delay is due to an IRS review, such as identity verification or an examination of claimed credits, you may need to provide additional documentation. If your refund is reduced after the preparer’s fee has already been deducted, you may need to arrange payment separately. Many tax preparation companies specify in their agreements that you are responsible for unpaid fees, so reviewing terms before opting for Pay by Refund is essential.