I.R.S. announced a policy shift that could combat the use of refund anticipation loans, the short-term loans that give taxpayers quick access to cash flow but usually at a significant cost.
In a notice, the IRS indicated that starting in the 2011 tax-filing season, it will no longer provide tax preparers as well as financial firms with a key debt indicator banks use to facilitate the refund loans.
We no longer see a requirement for the loan indicator in a world where we can process a tax return and deliver a refund in 10 days with e-file as well as direct deposit, these taxpayers now have other ways to promptly access their cash.
The IRS move is seen as part of a bigger effort by the Obama administration to crackdown on unconventional loans as in pay day loans often aimed at low-to-moderate income households. The announcement also comes just months after the IRS proclaimed plans to control tax-preparation firms such as H&R Block Inc. and Jackson Hewitt Tax Service Inc. for the first time.
H&R Block expressed disappointment by the IRS decision. The move, mostly likely, can only increase the price tag on refund loans for millions of taxpayers.
The real concern is how an increased borrowing risk will potentially hurt consumers with considerably lower loan approval rates and higher fees for the most susceptible taxpayers. It is unfortunate that those impacted through this decision are often persons devoid of bank accounts and have no central organization to represent them.
Tax-preparers such as H&R Block have marketed the loans as a way to get funds quickly and easily. These short term loans, which are secured by a taxpayer's anticipated tax refund, are often targeted at lower-income taxpayers.
On occasion, consumers will have the loans in up to 15 days. In other cases, consumers can choose instant refunds, which supplies them access to loans within minutes.
Traditionally, the IRS has supplied lenders with a debt indicator, which the lenders then make use of as an underwriting instrument because it indicates how much of the refund the taxpayer will actually see after accounting for any tax liabilities and other obligations.
Consumer groups have advised consumers to avoid payday loans, also known as refund anticipation loans, often labeled RALs, because they sometimes come with high fees and interest rates.
News of the IRS shift was welcomed from the Consumer Federation of America and the National Consumer Law Center, organizations that have been working to kill use of the debt indicator for several years. Those groups state that by giving debt information to banking companies and tax preparers, the IRS was only helping banks make high cost loans to the working poor.
From a joint proclamation from the aforementioned groups, they indicated that refund anticipation loans skimmed $738 million from the refunds of 8.4 million American taxpayers in 2008. They said the loans can bear fees which translate into Annual Percentage Rates of 50% to nearly 500%.
This change will adversely impact the ability for people to obtain short-term personal loans when they are waiting to get their tax returns.
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