IRS Announces the End of Debt Indicator for RALs

Refund anticipation loans (RALs) have always been a bad idea for taxpayers due to the high cost of getting a tax refund only a few days sooner than if the taxpayer had efiled and opted for direct deposit.

But that cost can become even higher for the 2011 tax year - the Internal Revenue Service announced last week that starting next tax season it will no longer provide taxpayer information known as the “debt indicator” to tax preparers and financial institutions.

“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,” IRS Commissioner Doug Shulman said. “We encourage taxpayers to use e-file with direct deposit so they can get their refunds in just a few days.”

The debt indicator is an underwriting tool used by the lender before the approval of a RAL; it tells the tax preparer if all or part of the taxpayer’s refund will be intercepted by the IRS for federal debts such as unpaid taxes, child support, or overdue student loans.

If RAL lenders can’t assess the risk of making the loan to a taxpayer, the cost is likely to go up for all taxpayers, making the RAL a real loser for taxpayers.

“Refund Anticipation Loans are often targeted at lower-income taxpayers,” Shulman said. “With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”

The nation’s largest tax preparation company, H&R Block, released a statement in response to the IRS announcement, expressing disappointment. No surprise there.

Alan Bennett, H&R Block president and CEO said in the statment, “It is unfortunate that those impacted by this decision are often unbanked or under-banked and have no unified voice or trade organization to represent them. They will visit our offices during tax season seeking tax refund-related products and learn their choices are now more limited and potentially more expensive than in years past.

“Restricting the debt indicator does not eliminate the need for refund anticipation loans. As a result of the IRS’s decision, the nearly 8 million low- to moderate-income consumers who select this product each year will likely be forced to seek higher-cost – and often unregulated – credit.”

So if you’re one of those who have relied on the RAL to get your refund a little bit sooner each year, it may be time to start looking at a better way to get your cash in your pocket. Remember, it is your money to begin with - why give lenders a cent of it?

E-filing is the quickest and most accurate way of getting your tax return to the IRS, and direct deposit is the fastest way to get your refund. This combination will get your refund back to you in as little as one to two weeks, as long as there are no problems with your tax return..

The IRS says that 95 million, or 70% of taxpayers e-filed their returns for the 2009 tax year. The vast majority of taxpayers can e-file, but a few must continue to file paper returns - for example, if they have certain tax documentation or tax credit certificates that require a paper filing.

But if you can e-file, take advantage of it. And if you meet the IRS income guidelines (Adjusted Gross Income, or AGI of $57,000 or less for tax year 2009), then you can e-file your federal taxes yourself for free using tax software. Check out IRS FreeFile at www.irs.gov/freefile for more information directly from the source.

By using this free program, you can save on tax preparation fees, as well as RAL fees. No tax law knowledge is needed to use the tax software. The tax preparation of your tax return is conducted interview-style - simply answer questions as you are prompted. Simple returns can easily be completed in about an hour, but of course more complicated returns can take much longer.

To get your refund back to you in the fastest way possible, opt for direct deposit to a checking or savings account. If you are one of the “under-banked,” as Alan Bennett calls it, then look into getting a bank account for the convenience of being able to get your tax refunds deposited directly, as well as having a place to cash your payroll and other checks without paying a service fee.

As with any financial decision you make, be sure you understand the costs involved, any minimum balance requirements, and whether your deal is a promotional product with an expiration date. Many financial institutions offer free checking and savings accounts, but there are likely to be conditions that must be met.




Sources:
Internal Revenue Service
H&R Block