IRS Cancels the Debt Indicator: Possibly The End of Refund Anticipation Loans

Count the refund anticipation loan ("the RAL") as something in the past.
Just a few hours ago, the IRS announced that it will not offer the debt indicator for the next tax season.
The debt indicator is an underwriting tool for refund anticipation loans (RALs). The debt indicator tells the banks that make RALs on behalf of a tax prep shop if the tax filer is going to have his or her refund held up. There have been thousands of tax prep shop offering RALS in North Carolina. After today, this is a thing of the past.

More than 470,000 North Carolina households paid for a RAL in 2006 (the last year that data is available.) They spent more than $48 million, by our estimate, to get their refund back a week earlier.

Our most recent analysis of RALs in North Carolina
CRA-NC's press release
More at my blog, BankTalk


What's Next

The IRS said that they will study how to provide the option of the "split refund" for 2012. Let's be clear and acknowledge that this thing isn't entirely settled: the IRS' decision leaves many tax payers with some doubt about how they will pay for their tax prep. It is possible to file for free, but there are always going to be people who want to trust an "expert." In a split refund, the taxpayer sets aside part of his refund to the tax preparer. The tax preparer gets paid, just 9 or 10 days later. The IRS is good for the bill, and the consumer doesn't have to pay a $100 or $200 in fees.

Adam Rust
Read some more, at my blog: Bank Talk.

What's up with this then?

Why is the IRS changing this?

If it's consumer protection, well, the consumer can always choose to file the old fashioned way (paper) or if they have a computer, do it themselves (pay Intuit $50).

So what's this about?

Thanks for bringing this to our attention.

Since I do our taxes I wasn't aware of the "split refund" although it's hard (during tax season) to not hear or see all the ads regarding loans on refunds. I assume the fee or interest is usurious...sorta like pay-day loans...but have never looked into it.

Seems to me that as long as there are unscrupulous people and people hard-up for cash, there's going to be something like this going on. It's sad. I'll bookmark your blog.

Thanks again.

Stan Bozarth

Seems biased

"Too many North Carolinans use expensive loan products" -- starts off highly subjective. Doesn't necessarily get better.

The whole effort smacks of patronization. No one is being forced to use the product and a majority don't. It's not like most lower means economic people have access to computers/internet; are any more capable of understanding taxes than you or me (tho' we pay a 'single use fee' to Intuit of $70 for turbo tax vs a single use fee of a RAL); most don't have credit cards because they're a bad risk, perhaps, just perhaps, the ones getting RALs actually need the money pronto.

Trying to shut down the RAL industry won't help the people seeking these products. As was tried in 1994, the consumers will still keep coming, but the suppliers won't have a way to discern risk, so the prices will get jacked way up. These consumers tax checks are so fat from EIC and other credits that they won't care if they lose $250 in the process instead of $75 of whatever it is now.

For real change, maybe nationalize these companies to eliminate the fees altogether. What is the IRS going to do, open up competing shops in the market place? Remember these people don't have computers and don't feel confident enough to do their own taxes. They want the brick and mortar place.

Free Tax Prep

The IRS already offers a free service to people who cannot afford to pay the fee. In almost every city there are Volunteer Income Tax Assistance (VITA) centers that offer free tax prep to people who may qualify for the EITC. Generally, this is people making under $47,000, and with a bank account they get their refund in about 9 days. The problem is that RAL providers play on the fact that people want their money immediately. Enabling them to add junk fees to increase the cost to the consumer.

The fact that consumers lose about $50 million alone in fees in NC is troubling. Many of those individuals could go to a VITA site for free and much of that lost $50 million can then be used back in the community. Having been involved in running VITA sites in the past I have seen what not paying a fee to get their own money does to people.

a brick and mortar loan shark is still a loan shark

A brick and mortar loan shark is still a loan shark - and we have an obligation to curb predatory practices when possible.

Of course those tax prep firms that engage in irresponsible and anti-social practices are going to attempt to justify them. The usual strategy is to explain how dreadfully stupid and lazy their customers are, which is kind of like a mugger blaming his victim for not being athletic enough to run away.

White collar crime does much more damage to our society, both in lives lost and in economic damage, than blue collar crime. Blue collar crime is taken much more seriously precisely because it is less "successful" - the perpetrators neither have nor gain the social influence that corporate thugs so greatly enjoy.

Simplifying the Argument

We don't know the specifics of these people's situations. Perhaps they don't have a computer or access to the internet. Then they can't leverage any of the IRS services. And with regards to the RALs -- they can choose products which cost less and deliver returns in a longer period of time. Again, no gun to the head. Just don't forget the fact that they *are* getting a service. You'll see, they'll keep coming but now the cost of the product will go up. Why? Because these customers are a bad risk.

Don't get hung up on the "annualized loan percentage". No one coddles me when I pay 75 bucks for a single use Turbo Tax. Intuit is skimming off me, if that's your angle. Can we get a flat tax and make it all go away?

Next thing for you to tackle -- usury charges for popcorn in the theatre (markup of what 1000%) and the regressive lottery, which probably drains an average of $500 - $1000 each year from poor people who play. At least they're getting a value (at the very least a perceived value) from the RAL companies.