Is it the End for Refund Anticipation Loans?

Refund Anticipation Loans, which have been around since 1989, were conceived as a means to provide a taxpayer with their tax refund money in a matter of days rather than wait the several weeks it took the IRS to issue a refund check.

However, before a RAL can be made, the lender must be sure a taxpayer’s refund won’t be taken by the government to pay past tax liabilities, arrearages in child support, etc. To facilitate RALs, the IRS has provided the lenders with an underwriting tool referred to as a “debt indicator.” This tells the lender if any portion of the refund would be withheld by the IRS for other liabilities.

With the advent of e-filing and Internet technology, the IRS can now deposit a refund to a taxpayer’s bank account within 10 days.  If the taxpayer does not have a bank account, the refund can be applied to a debit card.

Because of the quick turnaround time for e-filed refunds, many sources in the government have long held that the cost of RALs were an unneeded expense for taxpayers.  Thus, in August, the IRS announced that they would no longer provide electronically-filing tax preparers and affiliated financial institutions with a debt indicator that is used to facilitate refund anticipation loans, in effect killing RALs.

Subsequently, three of the nation’s largest tax preparation firms, Jackson Hewitt Tax Service, Inc., H&R Block and Liberty Tax Service joined forces to express their “strong opposition” to an IRS decision blocking their access to the agency's “debt indicator.”   The companies questioned the wisdom of the Treasury and IRS for taking such unilateral action.

We will have to wait and see how this all unfolds.

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