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.
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.Related posts:
- RAL realities
- Refund loans and the once-a-year 'rich'
- Finessing Free File
- Block going back to the basics
- Anti-RAL efforts continue
- Refund anticipation loans under the IRS gun again
- Refund loans on the ropes?
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