Internal Revenue Service to stop cooperating with RAL lenders

Thursday, September 18th, 2014 By

Form 1040

E-file that 1040, and with direct deposit you may not need a Refund loan. Image from Wikimedia Commons.

The Internal Revenue Service has announced that it will no longer provide certain information to tax preparers issuing refund anticipation loans. More than once has the product been decried. Opponents have contended that they can be worse than payday loans. An RAL, or Refund Anticipation Loan, is a loan product that depends on the tax return of a borrower. A portion of the total is deducted, and the filer is given a check that day. The only hitch is that this short term loan is not that simple should the return not get accepted.

Even the IRS thinks refund loans are bad

Internal Revenue Service Commissioner Doug Schulman announced in a press release on Aug. 5 that the IRS would no longer provide a “debt indicator” figure to tax preparers for the purposes of administering a refund anticipation loan. He also stated that it no longer seemed prudent to do so. The Internal Revenue Service allows people with adjusted gross incomes (AGI) less than $57,000 to e-file for free and have their returns wired via direct deposit within 10 days.

Electronic filing has become the rule

More than 70 percent of all tax returns are filed electronically. According to Bloomberg, H&R Block reports its average RAL loan to be about $3,000, and the average fees are $62. The term is just less than two weeks, which is about the average term of a payday loan or small personal loan. An RAL with the preparation fee and interest carries a fee of $187 on average. H&R Block, one of the largest tax preparation services in America, lent more than 2 million of these loans last year. The change in policy will affect the 2011 tax season.

Expensive way to get some cash

Refund anticipation loans carry more risk than your average cash advance. If a tax return is accepted, the transaction is closed and a person has just accepted a little less than they would get for instant cash. If a return is not accepted, the principle plus fees and penalties must be paid, which is a hard dollar for people that are already hard up. The usual RAL borrower, according to the Washington Post, has an AGI of $35,000 or less.

Further Reading

Statement from the IRS

Bloomberg

Washington Post

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