Tax refund cards will help the unbanked get their money faster

Tax refund checks and refund anticipation loans could be rendered obsolete by tax refund debit cards from the IRS. substack/Flickr photo.

Tax refunds for people without bank accounts are becoming a problem in the era of electronic banking and tax filing. The Treasury Department thinks tax refund debit cards could be the solution. People without bank accounts, the so-called “unbanked” or “underbanked,” don’t benefit from the electronic funds transfer of a tax refund to a bank account from the IRS. Tax refund checks can take weeks to arrive. Unbanked people often resort to costly “refund anticipation loans” to get their money quickly. Plus, the overhead of printing and mailing checks costs millions of taxpayer dollars.

Tax refund debit cards bring speedy returns

The biggest advantage offered by tax refund debit cards is speed. The Associated Press reports that while direct deposits show up in bank accounts in eight to 15 days, tax refund checks can take six weeks to arrive in the mail. People without bank accounts are likely to borrow against their tax refunds, paying steep fees for a refund anticipation loan. Starting next year, a pilot tax refund debit card program will be offered to several hundred thousand taxpayers. The tax refund debit cards will work like checking accounts — without the checks or the bank. The cards will be insured like bank deposits and will include consumer protections from unauthorized purchases if they are lost or stolen. The cards may also be able to store other income and include bill-paying services.

Taxpayers encouraged to get bank accounts

The Center for Economic Progress estimates up to 26 million taxpayers could benefit from tax refund debit cards. That number was reached by subtracting direct deposit refunds from the 2010 tax season– 70.3 million — from total tax refunds of 96.3 million. Automated Trader reports that the Obama administration is exploring ways to encourage more people to get bank accounts. A $50 million request has been submitted to Congress for the 2011 budget to create “Bank on USA,” a program to help support state and local efforts to get more low-to-moderate income taxpayers into mainstream banking. An FDIC 2009 survey showed roughly 9 million households were without bank accounts.

Nipping refund anticipation loans in the bud

The tax refund debit card initiative is part of a broader program by the Obama administration to curtail federal policies that lead to risky financial decisions and provide people with better financial alternatives. The Wall Street Journal reports that the most recent policy change was announced last month. beginning in the 2011 tax season, the IRS will no longer provide tax return companies with “debt indicators” used by banks to process refund anticipation loans. The move makes it harder for banks to make the short-term loans, which come with high fees that pencil out to annual percentage rates from 50 percent up to 500 percent.