By
Kenneth Long on August 9, 2010
The Internal Revenue Service has scored one for the disadvantaged tax filer. The IRS announced that it will no longer supply banks with the information they need to determine the likelihood that a tax filer will actually receive their refund.
This "debt indicator" would previously inform banks if a tax filer owed money for child support, back taxes or student loans that had been defaulted on. However, the IRS has agreed with numerous consumer groups that the information does more harm than good. It gives predatory lenders the information they need to provide high interest refund anticipation loans (RALs) to tax filers in large numbers.
While this does not stop the practice of RALs, it does change the marketplace substantially. For one, those who are poor credit risks may no longer even qualify for a RAL. Anyone who does qualify may see the average fees increase beyond the 400+% APR that is currently charged on many such loans.
Since most federal tax refunds are direct deposited in about 10 days, the need of such high interest loans should be minimal. However, predatory lenders push these products on poorly educated and financially desperate consumers when they are eager to obtain their much anticipated income tax refund. Many of these households receive much larger refunds due to the
earned income tax credit (EITC) and child tax credits.
RALs are specifically designed to skim hundreds of dollars from each tax filer's return at exceptional interest rates and minimal risk. However, without the information from the IRS regarding seizure of tax refunds, RALs now carry tremendous risk. It is up to each bank to determine whether it will approve a RAL. While it is possible that some banks may review a credit report for signs of seizure, it is likely that RALs will no longer be an option for most households regardless of what their credit report shows.
The gluttonous business models of paid tax preparers are about to get a real shock. Now they must depend more on their ability to overcharge for preparation and filing of income tax returns. We expect that other financial products will be emphasized as a way to recover some of the lost profits now that RALs are much less feasible.
Tax filers who want help with their income tax return can avoid predatory preparers. Instead, they can either utilize a reputable tax filing service, prepare their own returns using
do-it-yourself software or get help with an IRS volunteer return preparation partner. AARP's TaxAide and the IRS
Volunteer Income Tax Assistance (VITA) programs provide free tax preparation and electronic filing to lower income households.
With this change, we can score one for the less fortunate. Most of these tax filers have no idea how much money they are throwing away. It's good to make a change that benefits those least fortunate folks who get taken to the cleaners every year.