Demise of debt indicators puts hurt on refund anticipation loans

a poster advertising refund anticipation loans from HRblock

When the IRS ended debt indicators, refund anticipation loan facilitators like H&R Block raised objections as their stock price fell. jalefkowit/Flickr photo.

Debt indicators — IRS information about back taxes and other debts taxpayers owe — are going away. The IRS has sent debt indicators to tax preparers to let them know if their customer’s refund might be held to cover back taxes and other debt. Debt indicators are used by refund anticipation loan banks to decide whether to make short-term loans to customers backed by their tax refund.

Debt indicators gone starting with 2011 tax season

Saying they are no longer needed, the IRS announced Aug. 5 that it will stop providing debt indicators starting with the upcoming 2011 tax season. Electronic filing and direct deposit lets taxpayers get their refund in a matter of days. The IRS said that eliminates the necessity for refund anticipation loans. Companies that profit from refund anticipation loans say the elimination of debt indicators limits an essential service they offer to the unbanked and underbanked.

Debt indicators: singling out the delinquents

The debt indicator is a key underwriting tool refund anticipation loan banks use to determine whether they will loan, how much to loan and at what interest rate. Journal of Accountancy reports that until now, when a tax preparer e-filed a client’s tax return, the IRS included a debt indicator in the acknowledgment file if the taxpayer would have any portion of the tax refund offset for delinquent taxes or other debts, including unpaid child support or delinquent federally funded student loans.

IRS criticizes refund anticipation loans

Short-term refund anticipation loans have been criticized by consumer advocates for charging high interest rates and fees in exchange for providing cash just a few days before the tax refund arrives. In 2008, 8.4 million taxpayers paid more than $738 million in fees for refund anticipation loans, according to the National Consumer Law Center. IRS Commissioner Doug Shulman told the Associated Press that refund anticipation loans are often targeted at low-income taxpayers. He said with electronic filing and direct deposit it takes 10 days or less to get a tax refund. He also said:

“I think it’s unfortunate that there’s a lot of hardworking Americans that are in a financial situation where they have to pay a substantial fee to access their refunds a week or two before they can get it from the IRS.”

Refund anticipation lenders unhappy

Companies that facilitate refund anticipation loans argue that debt indicators let taxpayers who are strapped for cash get their money faster. MarketWatch reports that Alan Bennett, president and CEO of H&R Block, said the IRS decision to ax the debt indicator would hurt consumers with significantly lower refund anticipation loan approval rates and higher costs for the most vulnerable taxpayers. He said these consumers are often unbanked or under-banked and will be forced to seek more expensive and unregulated credit. H&R Block said the demise of debt indicators will dent 2011 profits 5 cents a share, sending its shares down 3 percent.

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