The IRS might not have killed off tax refund anticipation loans, but the agency's decision to no longer provide a free credit check mechanism is likely to make more lenders think twice about offering the costly short-term loans.
IRS Commissioner Douglas Shulman has announced that with the 2011 tax-filing season, his agency will no longer provide a "debt indicator" on taxpayers.
The debt indicator tells banks and the tax preparers who funnel potential refund loan clients to them whether all or a portion of a taxpayer's federal refund will be claimed to pay government debts, such as student loans or child support. Lenders had used the indicator as a way to gauge which individuals to approve for tax refund anticipation loans, or RALs.
RALs are short-term loans that can be quite costly, thanks to fees that some consumer advocate studies say translate into annual percentage rates in the triple digits. If a RAL recipient doesn't pay back the loan as soon as the tax refund arrives, or it's smaller than expected thanks to the offset, the taxpayer's debt burden rapidly escalates.
"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 Shulman.
In fact, with e-file and direct deposit many taxpayers get their tax cash in less than a week. So far this year, the IRS has received more than 95 million tax electronically filed returns; that's more than 70 percent of tax returns.
As expected, consumer watchdog groups are elated with the IRS decision. The National Consumer Law Center and Consumer Federation of America have been urging the IRS to end the debt indicator since 2005.
"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 CFA director of financial services Jean Ann Fox.
The banking crisis had already put a dent in these loans, with some institutions cutting back on the number of RALs this last filing season. Tax preparation giant H&R Block, while still offering the loans, didn't advertise them as aggressively this year, opting, according to company officials, to focus on their core business of filing returns.
Will the loss of the debt indicator mean that RALs will soon be dead? We can only hope.