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The end of tax refund loans?

The IRS stops aiding and abetting tax preparers in making high-interest loans to those who can least afford them.

By Stacy Johnson Aug 9, 2010 10:14AM

This post comes from Michael Koretzky at partner site Money Talks News.


The IRS has announced that, starting in 2011, it's going to make it more difficult for tax preparation companies to provide refund anticipation loans -- expensive, short-term loans for consumers who want their refund "instantly" rather than waiting a couple of weeks. These loans, often aimed at the working poor, typically come with fees that translate into annual percentage rates of 50% to 500%.


Many consumer advocates have long criticized these loans. After all, why would you pay major fees to borrow what's essentially your own money -- your tax refund? (To learn more about why we hate these loans, see this post:
"Difference between a loan shark and a tax refund loan? Not much.")

Historically the IRS provided tax preparation services with something called a "debt indicator" for each taxpayer, letting the preparation company know if a taxpayer's refund was going to be seized by Uncle Sam for things like back taxes, child support or delinquent student loans. If the taxpayer's debt indicator showed that the taxpayer wasn't getting a refund, the preparer wouldn't lend that person money in the form of a refund anticipation loan.


Although the debt indicator was never intended to be used for this purpose -- the IRS was simply informing the taxpayer by providing it -- the IRS was essentially prescreening potential loan customers for tax preparation services.

Here's the way it used to work:
  • The taxpayer goes to a tax preparer and gets his taxes done.
  • The IRS receives the electronic tax return and essentially tells the preparer whether or not the customer is actually going to receive a refund, or if it's going to be held to satisfy outstanding government debt.
  • If a refund is forthcoming, the tax preparer offers the taxpayer a refund loan. If it's not, they don't, since the taxpayer won't have the money to repay it.
Here's how it will work next year, and why these loans may be dead -- or at least harder to get:
  • The taxpayer goes to a tax preparer and gets his taxes done.
  • The IRS receives the electronic tax return but tells the preparer nothing.
  • The tax preparer has no idea whether the taxpayer is actually getting the refund, so without more information, they're not about to offer a refund anticipation loan.

"The federal government should not be sharing taxpayers' personal information for the profit of banks and tax preparers by operating what is essentially a free credit-reporting service for them," Jean Ann Fox, director of financial services for the Consumer Federation of America, said in a press release. "We are glad the IRS finally stopped letting tax preparers and banks pry into taxpayers' records about what they owe the government."


The Consumer Federation of America says that in 2008, RALs skimmed $738 million from the refunds of 8.4 million American taxpayers.


The IRS agrees that the information it was providing was used to hurt poorer Americans.


"Refund anticipation loans are often targeted at lower-income taxpayers," IRS Commissioner Doug Shulman said in a press release. "With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash."

As one might expect, the tax preparation industry isn't so happy. Here's what Harry W. Buckley, president and chief executive officer of Jackson Hewitt, had to say:

This form of credit, especially important to middle and low income, often unbanked, taxpayers, may well continue to be available in our industry. However, from the taxpayers' perspective, it will likely become harder to receive credit approval, will cost more and the amount of credit available may be limited -- all negative impacts on taxpayers during this difficult economic environment, and all a direct result of the unilateral action taken by the IRS today.

Refund anticipation loans aren't the only type of short-term, high-interest loans that are teetering on the brink of extinction. Check out our recent story: "Payday lenders dropping like flies."


And when debt does become a problem, there will most likely be fewer debt-settlement companies around to "help." See this recent story: "New rules could erase debt-settlement industry."


There's no question that the lending landscape is changing in America. Some say it's about time. Others say government regulators have no place disrupting free enterprise, no matter the form. 


What do you say? 


More from Money Talks News and MSN Money:

Dec 29, 2010 8:33PM

Having previously worked for HR Block it don't make sense for HR Block not to have RAL if Liberty, Jackson still has them.

In Ohio the refund takes 4 to 6 days if the IRS would increase the refund speed it would drive all RAL's out.

Also make it so the average refund is lower by making it easier to get the money during the year by aeic or requiring decreased withholding.

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