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IRS debt indicator decision could doom tax refund anticipation loans

Next tax filing season, the IRS is going to make it more difficult for lenders to issue loans based on expected taxpayer refunds.

Beginning in 2011, the the federal tax agency will no longer provide tax preparers and associated financial institutions with the "debt indicator."

This information from the IRS indicates whether a taxpayer will get an expected refund in full or whether some or all of the federal tax money will be used to pay government debts, such as student loans or child support.

Thus, a debt indicator is essentially a credit check mechanism, allowing lenders to determine whether a taxpayer would make a good refund anticipation loan (RAL) candidate.

RALs are short-term loans, made by banks but typically facilitated by commercial tax preparers, that are secured by a taxpayer's expected refund.

DES PLAINES, IL - APRIL 13: A neon sign that reads 'Fa$t Refund$ 3 Day$' is seen in a window of a tax preparation office late-night April 13, 2006 in Des Plaines, Illinois. Some tax payers are waiting for the last minute before filing their income taxes before the April 17 deadline, extended two days because the official deadline date of April 15 falls on a Saturday this year. (Photo by Tim Boyle/Getty Images)

RALs can be very costly, with with some lenders charging fees that translate into annual percentage rates ranging, according to some studies, from 50 percent to nearly 500 percent.

If a taxpayer doesn't repay the loan promptly, the debt quickly grows to often unmanageable amounts.

An end to RALs? "As we prepare for tax season every year, we look at past practices and consider whether they still make sense. We no longer see a need for the debt indicator in a world where we can process a tax return and deliver a refund in 10 days," said IRS Commissioner Doug Shulman on Thursday afternoon in announcing the new IRS policy. 

"Refund anticipation loans are often targeted at lower-income taxpayers," Shulman added. "With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash."

The IRS debt indicator decision comes as the agency has been reviewing refund settlement products, such as RALs and similar refund anticipation checks (RACs).

Cheering ensued: The IRS announcement was greeted with cheers from professional tax preparer groups -- The Latino Tax Professionals Association e-mailed announced "IRS Debt Indicator has been removed!" -- and consumer advocates.

"We are pleased that IRS has decided to stop aiding and abetting high-cost RALs that siphon off hundreds of millions in taxpayers' hard-earned money and federal benefits meant to lift the working poor out of poverty," said Chi Chi Wu, staff attorney for the National Consumer Law Center (NCLC).

"The federal government should not be sharing taxpayers' personal information for the profit of banks and tax preparers by operating what is essentially a free credit reporting service for them," said Jean Ann Fox, director of financial services for the Consumer Federation of America (CFA) which also applauded the IRS move.

I join in the cheering of the end of the debt indicator. Here's hoping that its demise also means that RALs and RACs will one day be history, too.

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online loans

exactly. Lets give the consumers what they want.

Bob Shair

I'm a Block tax preparer. While I try to steer clients to direct deposit (we'll even open an account for the unbanked), I see a significant minority choose RAL's with their eyes open. Often they don't come in to have their taxes prepared until they need the money urgently.

Most of the ones I see are not 1040EZs, which tend not to have large refunds, but 1040As. Often there is significant lack of clarity on just who is a dependent; clearing that up is the most significant service we provide.


Joe, thanks for your concerns that RALs will be even more costly in the wake of the IRS decision. You might be interested in reading my subsequent post on this topic at http://dontmesswithtaxes.typepad.com/dont_mess_with_taxes/2010/08/when-real-life-meets-tax-refund-loans.html


Consumer groups win!!! People loose!!! ... or paymore for less. How is that two frumpy consumer group types heavily funded by the Ann E Casey Foundation got away with all the distortion of truth they spread and pressured IRS, Treasury, OCC and the FDIC into screwing consumers - the same consumers they are purporting to help. Chi Chi Wu and Jean Ann Fox have lied repeatedly to state AGs, state and federal law makers and the regulatory agencies. Despite the real facts (or even trying to get the real facts), the government rolled over and the poorest of poor got screwed. Before ACORN (and NCLC and CFA), it was OK in America to make your own choices based upon your own circumstances. Now big sister(s) know better. And before the regulated RAL industry there was illegal refund discounting - which will come back to life. The need for these people doesn't go away because of these idiot's blunder. All they've done is have the government put blinders on now. Great victory - weee! Someone should investigate these two rather then give them awards.


The Rapid refund (ral) will survive but the fees will be substantially higher.IRS will hurt the very people the intent to help.These people will pay higher fess as long as the get their money fast.

chris n

we'll there goes another million plus jobs. If the consumer wants it, let them have it..


All RAL clients probably can still get a RAC (refund anticipation check) and wait the 10 days. Even without the DI, these are fairly low risk since there is not a $3,000 refund loan at risk, just the $200 tax prep fee.


For the record, I think the RALs live on the moral edge. They are something I would never engage in personally.

However, I tend to wonder about what happens next with the specific sub-set of people for whom the RALs represented both instant cash and an easy way to be complaint with the law.

Direct deposit isn't an option if you don't have or trust a bank or don't have enough impulse control/financial understanding to keep an account open. Even assuming a bank account exists, 10 days just isn't fast enough to people with a certain mindset. In general, we're talking about people who also patronize payroll loan services, meaning they can't make it a whole week or 2 between pay days.

In terms of compliance, I understand that most of the people to whom RALs appeal are only required to do 1040EZs. But again, we come back to those people for whom the RALs appeal tend to have little investment in "the system" and little savvy within it. Without the cash to get someone else to do it for them and no immediate return on "investment", there might be folks that end up skipping filing altogether. (To what %, I have no idea.)

Again, I'm glad the IRS is moving forward on the RALs. We need to address the issues above more directly than what is occurring now. Just not ready to cheer until issues underneath the RALs have a more definite solution. *grin*

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