Refund Anticipation Loans: Goodbye and Good Riddance
“Get your tax refund sooner!” advertise some tax preparers come tax season. Take out your glasses and read the fine print, though, because this way of receiving your tax refund is actually a loan, and one that carries a heavy price. Thanks to a policy change made by the IRS, these refund anticipation loans (also known as RALs) may be a relic of the past.
Here’s how it worked: RALs were secured by the tax filer’s expected refund, which was then assigned to a bank partnering with the tax preparation firm. A temporary account was set up at that bank to receive the refund from the government. The loan was paid to the tax filer within a day or two, and the refund arrived at the bank within a week or two.
For this convenience, filers pay high costs. The National Consumer Law Center and Consumer Federation of America found that effective annual interest rates for RALs ranged from about 40% to over 700%. Tax preparation agencies typically targeted low income filers who might not have bank accounts and therefore couldn’t get their refund check electronically deposited.
The IRS announced that it will stop providing “debt indicator” information to preparers, which indicates whether filers have any outstanding debts to the IRS that might eat up their refunds. Without this information, preparers will have a harder time knowing whether a filer will be getting a refund, and therefore a harder time knowing whether they could make a loan to that filer. The IRS acknowledges the change was made in part due to concerns that the debt indicator was used to facilitate RALs. The IRS statement is here.
The Wisconsin Budget Project has long warned of the high costs associated with refund anticipation loans, and we welcome this change by the IRS. We would do better to work to increase access to e-filing, volunteer tax preparation, and access to bank accounts among low-income filers. Wisconsin Budget Project to RALs: Don’t let the door hit you on the way out.