RALs Harder to Come by with IRS Ruling

The IRS has announced that from next year onwards, they will no longer provide taxpayer debt positions to tax preparers and financial institutions, bringing an end to a practice carried out by the IRS since the 1990s. The tax preparers and banks use such information to disburse Refund Anticipated Loans (RALs) which are short-term loans given to taxpayers while they await their tax refunds. The loans are repaid when the tax refunds arrive.

The information provided by the IRS also includes the amount out of the refund that the government has a rightful claim to due to reasons such as unpaid child support, back taxes or federal student loans. This information is known as the taxpayer’s debt indicator and is quite necessary for banks who underwrite the loans to be sure that the taxpayer is able to repay their loans. Thus, the debt indicator has been a security that the refund will in fact cover the loan.

According to IRS Commissioner Doug Shulman, the IRS had been providing debt indicator information all this while to encourage electronic submission of tax returns by the public. The RAL process goes like this – tax preparer companies electronically submit a client's tax return and then receive the taxpayer’s debt indicator from the IRS. “Back in the day, the preparers would say, ‘We can set up the bank accounts if you give us the debt indicators,’” Shulman said.

But today, more than 70% of taxpayers file their taxes electronically, amounting to some 95 million tax returns. Electronic filing drastically cuts down the time it takes to receive refunds, as the money can be deposited directly into the taxpayers’ accounts, thus virtually eliminating the need for RALs. Refunds nowadays take no more than 10 days via direct deposit.

The IRS’ move has been lauded by consumer groups who have long complained that RALs have been targeted at mostly the lower income earners who need every cent of their refunds. Figures until the end of June show that 82% of RAL recipients in 2010 earned $35,000 or less per annum. The Consumer Federation of America and the National Consumer Law Center in their report showed that in 2008, 8.4 million RAL debtors paid $738 million in RAL fees, plus $68 million more in add-on fees. RAL fees are between $34 and $130. This amounts when converted into an annual percentage rate, can add up to rates of 50% to almost 500%.

On the other hand, the tax preparers like H&R Block, who provided about 2.1 million RALs in 2010, are unhappy about the latest move by the IRS.

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