Taxes: Death of the Refund Anticipation Loan?

Photo (cc) by pinehurst19475

The IRS just announced that, starting in 2011, it’s going to make it more difficult for tax preparation companies to provide refund anticipation loans: expensive, short-term loans for consumers who want their refund “instantly” rather than waiting a couple of weeks. These loans, often aimed at the working poor, typically come with fees that translate into annual percentage rates of 50 – 500%.

Many consumer advocates, including us, have long criticized these loans: after all, why would you pay major fees to borrow what’s essentially your own money – your tax refund? (To learn more about why we hate these loans, see this post:
Difference Between a Loan Shark and a Tax Refund Loan? Not Much.)

Historically the IRS provided tax preparation services with something called a “debt indicator” for each taxpayer – letting the preparation company know if a taxpayer’s refund was going to be seized by Uncle Sam for things like back taxes, child support or delinquent student loans. If the taxpayer’s “debt indicator” indicated the taxpayer wasn’t getting their refund, the preparer wouldn’t lend them money in the form of a refund anticipation loan.

Although the “debt indicator” was never intended to be used for this purpose – the IRS was simply trying to inform the taxpayer – by providing it the IRS was essentially pre-screening potential loan customers for tax preparation services.

Here’s the way it used to work

  • The taxpayer goes to a tax preparer and gets their taxes done.
  • The IRS receives the electronic tax return and essentially tells the preparer whether or not the customer is actually going to receive their refund, or if it’s going to be held to satisfy outstanding government debt.
  • If a refund is forthcoming, the tax preparer offers the taxpayer a refund loan. If it’s not, they don’t, since the taxpayer won’t have the money to repay it.

Here’s how it will work now, and why these loans may be dead – or at least harder to get

  • The taxpayer goes to a tax preparer and gets their taxes done.
  • The IRS receives the electronic tax return but tells the preparer nothing.
  • The tax preparer has no idea whether the taxpayer is actually getting their refund, so they’re not about to offer them a refund anticipation loan – at least, not without a lot more information.

“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 Consumer Federation of America in this press release. “We are glad the IRS finally stopped letting tax preparers and banks pry into taxpayers’ records about what they owe the government.”

The Consumer Federation of America claims that in 2008, RALs skimmed $738 million from the refunds of 8.4 million American taxpayers.

The IRS agrees that the information it was providing was used to hurt poorer Americans.

“Refund anticipation loans are often targeted at lower-income taxpayers,” IRS Commissioner Doug Shulman said in its press release. “With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”

As one might expect, the tax preparation industry isn’t so happy. Here’s what Harry W. Buckley, president and chief executive officer of Jackson Hewitt, had to say in this press release:

“This form of credit, especially important to middle and low income, often unbanked, taxpayers, may well continue to be available in our industry. However, from the taxpayers’ perspective, it will likely become harder to receive credit approval, will cost more and the amount of credit available may be limited – all negative impacts on taxpayers during this difficult economic environment, and all a direct result of the unilateral action taken by the IRS today.”

Refund anticipation loans aren’t the only type of short-term, high interest loans that are teetering on the brink of the extinction. Check out our recent story Payday Lenders Dropping Like Flies.

And when debt does become a problem, there will most likely be fewer debt settlement companies around to “help”. See our recent story New Rules Could Erase Debt Settlement Industry.

There’s no question that the lending landscape is changing in America. Some say “it’s about time.” Others say government regulators have no place disrupting free enterprise, no matter the form.

What do you say?

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
The Best and Worst States for Raising a Family in 2021
The Best and Worst States for Raising a Family in 2021

These states have big advantages or disadvantages when it comes to choosing a home for your family.

9 Foods You Should Never Buy Again
9 Foods You Should Never Buy Again

Make the wrong food choices, and you can ruin your health — and possibly shorten your life.

3 Ways to Get Paid for Searching the Web
3 Ways to Get Paid for Searching the Web

If you’re already doing it anyway, why not get rewarded for it? Here are three great opportunities.

This Chase Card Is Great for Groceries and Cash Back on Everything
This Chase Card Is Great for Groceries and Cash Back on Everything

You could earn more than $600 cash back in your first year just from grocery shopping.

9 Ways to Get Affordable Vet Care
9 Ways to Get Affordable Vet Care

Medical care for your furry friends can be expensive. Here are some tips to get affordable vet care.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

How to Buy Gas At Costco Without a Membership
How to Buy Gas At Costco Without a Membership

The warehouse club often has some of the cheapest gas in town. Here’s how you can get it as a nonmember.

10 Things to Stop Buying If You Want a Clutter-Free Home
10 Things to Stop Buying If You Want a Clutter-Free Home

If you like to keep things simple, avoid these purchases.

A Simple Way to Silence Robocalls Today
A Simple Way to Silence Robocalls Today

A few steps can keep your phone from ringing when a spammer calls.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

This iconic dinnerware is prized for everyday use as well as reselling for profit.

This Company Makes the Best Tires in America
This Company Makes the Best Tires in America

Driver satisfaction with tires is at an all-time high, but one brand stands out.

7 Home Improvements That Cost a Lot More in 2021
7 Home Improvements That Cost a Lot More in 2021

These projects will take a bigger bite out of your budget than in the recent past.

This Health Issue Can Hint at Dementia Years in Advance
This Health Issue Can Hint at Dementia Years in Advance

One type of pain is especially associated with cognitive decline.

Can I Switch to Spousal Social Security Benefits When My Ex Dies?
Can I Switch to Spousal Social Security Benefits When My Ex Dies?

Knowing when to claim can help you maximize benefits.

Medicare Will Not Cover These 6 Medical Costs
Medicare Will Not Cover These 6 Medical Costs

Don’t let these health care expenses catch you off guard in retirement.

Beware This Hidden Ingredient in Rotisserie Chicken
Beware This Hidden Ingredient in Rotisserie Chicken

Something foul may lurk in those delicious, ready-to-eat birds.

8 Things You Should Always Buy on Amazon
8 Things You Should Always Buy on Amazon

The giant retailer shines when it comes to these things, from basics to hard-to-find specialty goods.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

5 Ways to Fill Your Pantry With Free Food
5 Ways to Fill Your Pantry With Free Food

Anyone can take advantage of these resources.

Never Buy These 10 Things on Amazon
Never Buy These 10 Things on Amazon

Just because you can purchase something on Amazon doesn’t mean that you should.

7 Big Purchases You Should Never Make
7 Big Purchases You Should Never Make

Sometimes a big-ticket purchase is nothing more than a big waste of money.

5 States With the Worst Health Care for Retirees
5 States With the Worst Health Care for Retirees

All of these states are located in the same region of the nation.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

5 Products You Should Never Buy Generic
5 Products You Should Never Buy Generic

Sometimes the brand-name version is clearly superior.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.