New IRS Rule Threatens Refund-Anticipation Loans

7:54 AM, Aug 6, 2010   |    comments
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(USA TODAY) The IRS said Thursday that it will no longer provide tax preparers and lenders with information that helps them decide whether to offer a taxpayer a refund-anticipation loan, a move that could sharply reduce the sale of the products.

The IRS said that starting with next year's filing season, it will no longer provide tax preparers and partner financial institutions with a code known as the "debt indicator," which signals whether some or part of a taxpayer's refund may be withheld to pay government debts. Lenders have used this information to determine whether to offer a taxpayer a refund-anticipation loan, which is a short-term loan backed by the taxpayer's refund.

In an interview Thursday, IRS Commissioner Douglas Shulman said the debt indicator was created in the early 1990s to encourage tax preparers to file tax returns electronically. The use of the information to market refund-anticipation loans was a "side effect," he says. Now, more than 70% of tax returns are filed electronically, and the debt indicator is no longer necessary, he said.

Consumer groups, long critical of refund-anticipation loans, applauded the decision. "We are pleased that IRS has decided to stop aiding and abetting high-cost RALs that siphon off hundreds of millions in taxpayers' hard-earned money and federal benefits meant to lift the working poor out of poverty," said Chi Chi Wu, staff attorney for the National Consumer Law Center.

Fees on some refund-anticipation loans translate into annual percentage rates of 50% to nearly 500%, the NCLC said.

But H&R Block said the IRS decision will make the loans more expensive. "Restricting the debt indicator does not eliminate the need for refund-anticipation loans," CEO Alan Bennett said. "As a result of the IRS' 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."

John Hewitt, CEO of Libert Tax Service, called the IRS decision "a disappointing decision for consumers." He said, "We are emerging from the greatest financial downturn since the Great Depression. This really isn't the time to take financial options away from those who choose them and, more importantly, need them. "

Shulman maintained, though, that taxpayers who e-file and arrange for direct deposit can get refunds in as little as 10 days at no cost.

By Sandra Block, USA TODAY

 

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