Refund Application Loan

The Tax Attic with Jerry Coon

October 21, 2010 // 0 Comments

RAL a thing of the past   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 […]