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.
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
Favorite quote:
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."
Thomas Jefferson
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