I make a post similar to this each year, so apologies to those of you who have heard this from me previously.
I'll start by offering that if the "big refund" approach works for some people, and they understand (at least generally) that it's theoretically sub-optimal, but they are happy anyway, then great... whatever works for you and makes you happy.
That said, I do think it's worth painting the whole picture. The whole argument about "interest free loan" vs "interest rates are low now" is a very tired argument, and only looks at the issue in a very superficial manner.
First, the question of low interest rates. If you're only looking at the 0.2-0.5% you're getting from a basic savings account at your local bank, then sure, they're low. If you start considering other investment vehicles, like decent mutual funds, then one can still realize higher returns (yes, with increased risk, of course).
Apart from just interest, however, it's worth a quick look at inflation and the purchasing power of the money. Keeping in mind that tax overages are held by the government an average of 8 months from payment until refund (remember that those taxes paid in the first check of the year are held for about 14 months, and by the end of the year, about 2 months), the purchasing power of those same dollars declines by as much as 2%.
Though it's different for everyone, the situation may be further exasperated if there are debts, like a car loan--or worse yet a higher interest credit card-- that could be paid off sooner, or would be paid off by the refund anyway. Then we are not only talking about foregone interest earnings, but also unnecessary interest paid, which may be 10% or even higher in some cases.
One other issue I like to point out, is that there is no guarantee of exactly when one will get the big "lump sum" back from the government. The
ability to file, or more importantly, to have a refund processed, is often delayed by any number of circumstances. Without fail, every year, these very boards see a handful of people freaking out that their refund is taking longer than expected. In the worst cases, that's accompanied by a comment about how they were "counting on" that money for whatever purpose. State taxes are even more frequently at risk in this same manner (although there is often less flexibility with withholdings at the state level).
Okay, now that I've gotten all of that out of my system, I'll say again that really, there is nothing wrong with anyone doing what works for them and makes them happy. I also realize that frequently income and circumstances change in an unexpected way that can't easily be planned for. I get that, and find myself in that boat often. My only gripe is that the "interest rates are so low it doesn't matter" line of thought is often short sighted, and is far from a conclusive evaluation of the issue.