The IRS announces it will no longer issue debt indicators to tax preparers and associated financial institutions beginning in the 2011 tax filing season (that’s next season). The debt indicators is used as one of the criteria for underwriting RALs (Refund Anticipation Loans) and RACs (Refund Anticipation Checks).
What is an RAL?
A RAL is a loan secured by the tax refund, typically the loan is received by the taxpayer 24-48 hours after the tax return is accepted by the IRS. The loan is for the amount of the estimated refund minus loan and tax preparation fees. This loan has a typical ceiling of $9999.00 (won’t lend more than that). If the IRS doesn’t issue the refund the taxpayer is still liable for the amount of the loan. The average consumer who takes advantage of this product is of lower income. When the fees are calculated out the APR is generally in the triple digits. Members of our Armed Forces are not able to receive this product due to the cost of the loan (when the APR is calculated).
What is an RAC?
A RAC (Refund Anticipation Check) is a simply way for a taxpayer to have their taxes completed without any out of pocket expense. There is a bank fee associated with this product. The bank opens a temporary bank account in the taxpayers name and waits for the IRS to deposit the refund. Once the refund is received by the bank; the fees are deducted and the rest of the refund is forwarded to the consumer in the method they chose when the taxes were prepared. The bank fee is generally between $35-$50 depending on who prepares the taxes and which bank is involved with the transaction.
How does the new rule affect you?
The policy shift by the IRS to not provide debt indicators to tax preparers and the banks involved with the paid tax preparation industry signals a dramatic change that could affect access to these two services. Tax preparers and banks will be more hesitant to complete the service and wait to get paid. Taxpayers will need to be prepared to pay for tax preparation services out of their pocket before the income tax return is filed. The average wait time for a refund without using a RAL is 8-10 days (depending on the day of the week the return is filed).
The IRS issued a Press Release about this change and most notably mentioned: “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.”
So far this year, more than 95 million tax returns have been e-filed, representing more than 70 percent of tax returns.
However, taxpayers can still find out if there is a tax offset on their account by visiting IRS.gov and clicking “where’s my refund” link.
In a related effort, the IRS plans to explore the possibility of providing a new tool for the 2012 tax filing season to give taxpayers a mechanism to use an appropriate portion of their tax refund to pay for the services of a professional tax return preparer. The IRS plans to engage with taxpayers, consumer advocates and the tax return preparer community to consider whether providing this option would be a cost-effective way for consumers to pay for tax return preparation services.
I believe this move by the IRS will decrease the number of tax refund loans being approved in the coming tax season. Banks want to decrease their risk and without know if the person in front of them owes a federal agency money – well, its about the same as playing roulette in a casino. Never know where the ball will land and if the loan will be paid.
Tax preparation, bookkeeping services, and business formation are a few of the services offered by the Diva. Cut down on the what-ifs and work with someone who truly cares about your financial well-being. I would love to read your thoughts on the matter.
