The Tax Attic with Jerry Coon

RAL a thing of the past

Jerry Coon, Enrolled Agent


Recently, I wrote an article publicizing that the Internal Revenue Service, starting next January, is not going to provide something called the “debt indicator” to tax preparers and financial institutions. This is a big thing because the “debt indicator” is the one item that tax preparers and financial institutions use when they are writing a Refund Anticipation Loan (RAL) for taxpayers.

In an RAL, the taxpayer is given a check by the tax preparer or financial institution immediately for the amount of his refund minus the cost of tax preparation and loan fees. “Immediately” has come to mean: as soon as the IRS provides to the preparer the information, via the debt indicator, that the taxpayer does not have outstanding debts that will redirect some or all of the taxpayer’s refund to a third party. The debt indicator gives the writer of the RAL the security that the refund will not be sent to a credit card company, the friend of the court, a mortgage company, the state of Michigan, or kept by the IRS itself.

Thus, the RAL is a short-term loan with the taxpayer’s coming refund as the security. The loan is then paid off when the IRS issues the taxpayer’s refund directly to the tax preparer or financial institution.

Congress and the IRS have long thought that RALs are not necessary and are somewhat of a rip-off because of the exorbitant fees that some tax preparers and financial institutions charge for an extremely short-term loan.

The IRS has gotten very efficient in the last few years in processing returns and issuing refunds. For example, if a return gets into their system by Thursday, Oct. 21, the refund will be direct-deposited into the taxpayer’s account on Friday, Oct. 29. So, if the fee for the RAL was $100, that’s a pretty stiff fee for what is in reality an eight-day loan.

By ceasing to issue the debt indicator, the IRS has effectively eliminated the RAL market. That is what they planned to do but, as always, there is more to the story.

I prefer to call this the theory of unintended consequences.

In this case, the unintended consequence is that there are millions of taxpayers who do not have an account with a bank, so they can’t get their refund direct-deposited into their account on October 29. These taxpayers are used to getting their refund the next day, albeit minus the $100 fee. But it was given to them the next day. Now, they will have to wait for the United States Post Office to deliver the refund, and that will take a minimum of another eight days and can take much longer.

These taxpayers with no access to a bank account are called “unbanked and under-banked Americans” by the Treasury Department. Michael S. Barr, Assistant Treasury for Financial Institutions, said, “Far too often, unbanked and under-banked Americans are forced to turn to high-cost alternative financial products, such as check-cashing and other services, that take a big bite out of the savings of those who can least afford it.”

It is estimated that there are currently nine million households without a bank account—the unbanked. There are an additional 21 million households that are under-banked. The under-banked actually do have a bank account, but the taxpayers still use high fee services such as check-cashing services.

The IRS has come up with a solution so these 30 million households will have access to a low-cost alternative. That program will be rolled out in 2011 and will entail taxpayers signing up for a debit card to which the IRS will credit their refund. When they file their tax return, they will have access to their refund through the debit card, and the IRS will make that happen in the regular eight-day time frame. This is a pilot program and will be evaluated after the tax season, but it appears that the IRS wants this program to become just another part of the filing process.

To get the program going, the IRS will take a two-angled approach. First, they will mail information about signing up for the program to eligible taxpayers early in 2011. This information will be sent to low- and moderate-income taxpayers who received paper refund checks in the past years or have received refunds and haven’t provided direct-deposit information to the IRS. Second, the IRS will supply pay-stub inserts to employers for employees who have received refunds and have not used direct deposit in the past.

I am sure the IRS will make the enrollment process as straightforward as possible. After the tax season, the IRS will determine if it is a program they want to expand to the full 30 million eligible American households. I think it’s a program that not only will prove to be a success, but will be greatly expanded. This is Jerry Coon signing off. 

Jerry Coon is an Enrolled Agent. He owns Action
Tax Service in Rockford. Contact Jerry

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