Posted by Mike Smith :: February 25, 2008 @ 5:09 am

It is certainly wise to work with particular people and businesses based on their respective strengths and skill sets. Yet even though you probably wouldn’t buy a car from an accountant, you might be tempted to have a car dealer do your taxes.

My recent overview and data posts described the practice of refund anticipation loans in detail, but they did not mention a side-industry that has sprung up as well: businesses that offer to prepare your taxes as long as you use your anticipated tax refund to make a purchase from them. This practice is most frequently used by car dealerships, but I’ve also seen furniture stores trying to employ it as well.

Car dealer-prepared tax returns have some of the same problems as refund anticipation loans. In fact, they actually are refund anticipation loans at their core, with the proceeds going towards your down payment. If your return is prepared inaccurately, or if you receive a smaller return than expected or no return at all, you are still responsible for the amount that the car dealer credited you with. So if the dealer uses your anticipated refund to reduce the cost of a car by $3,000, for example, you’ll be responsible for paying the difference if your refund comes up short. Another problem is that it’s difficult to judge the cost of these loans. Even if they do provide this service “for free,” can you really be sure that the actual costs of the service aren’t hidden in the price that you’re paying for the car?

Clearly you’d be much better off waiting to receive your actual refund and then using it as payment towards a car. Unlike traditional refund anticipation loans, which can be used for pressing financial needs (though given the high costs, we wouldn’t recommend it), in many cases you can wait to purchase a car until your receive your actual return. Using the methods described in the aforementioned refund anticipated loan posts, you probably won’t even have to wait very long.

Realize that a car dealership offering to file your tax return is just another way to get you, a potential customer, in the door. Using some common sense in such situations will help you to quickly realize where these businesses’ true interests lie. If you’d like to purchase a car without the high cost of financing through the dealership, whether through their traditional financing or tax return “discount,” or if you need help coming up with a down payment in order to leverage the dealer’s financing offer, consider a low-interest person-to-person loan from Lending Club as a more affordable alternative.