For 2011 Tax Filing Season, The IRS Removes Debt Indicators....

[clydewolf]

A Debt Indicator is an indication that you owe the IRS or other agency some back taxes, child support or student loans.

In the past the IRS has provided this information to tax preparers that use electronic filing, and this in turn would be used by the tax preparer organization and a bank to determine the amount of the Refund Anticipation Loan (RAL). And most likely the interest rate.

Over 70% of tax returns are electronically filed in the 2010 tax season. The IRS claims with electronic filing and direct deposit they can provide a refund in 10 days or less. This makes the need for the RAL or RAC (Refund Anticipation Check) not necessary. A check from the IRS typcially takes about 10 additional days to make it to the tax payer's mailbox.

The taxpayer will be able to see how their tax refund is progressing at the IRS website, under, Where's My Refund? http://www.irs.gov/individuals/artic...=96596,00.html

These types of products/services (RAL and RAC) are typically used by folks that:
1) do not have the money to pay for the tax preparation service.
2) do not have a bank account.

It is likely tax payers that use the RAL and RAC will see higher fees for the 2011 tax filing season.
For 2012 tax season the IRS expects to have a tool in place that will allow the taxpayer to have part of their tax return go to the tax preparer. I believe this second option should come first. Some folks will be in a bad situation when they find the RAL/RAC costs more in 2011.

You can learn more here: http://www.irs.gov/newsroom/article/...226310,00.html

[4jacks]

I always thought of RAL's as something along the lines of predatory lending. It just never made sense to me to pay money to get your own money back. What are the typical fees on a RAL?

[TheWealthSquad]

I work in the retail tax industry and honestly don't like RALs...but then again I am not their target demographic. The people who typically get them in some cases desperately need the money immediately (eviction, car repossession, bail, etc). The majority of them are low income whose return is primarily based on Earned Income Credit. The refund may be as much as 20-25% of the annual wages. They have lived paycheck to paycheck for a long long time.

Interest rates on RALs have come down DRAMATICALLY over the years at most of the reputable tax prep companies and the banks they deal with. Most RALs have a max of 36% APR. They also include an account handling fee (the bank sets up a temporary account, handles the transaction, delivers a check to the client and pays the tax company). It is typically in the $40 range.

Tax companies also charge a fee that can range from $15 to nearly $100 (the low end of this scale is where the national brands tend to stay at. They want to stay out of the IRS spotlight. The high end are smaller regional companies that focus on this part of the market... a generalization to be sure but I would say fairly accurate).

Then you also have the tax preparation fees which tend to be higher on these clients. The reason they are higher is that EIC claims are complicated and filled with potential fraud. The tax company assumes a good bit of liability on these returns as the IRS has stated we have to perform Due Diligence before filing. Depending on who you get audited by, that Due Diligence requirement varies. Companies can get hit with hefty fines even if they are trying to follow all the rules.

My first year I tried to discourage everyone from getting a Refund Anticipation Loan (RAL). The people who want them, want them. Nothing you say discourages them. It isn't their money as they typically don't contribute anything in income taxes from their payroll. They often ignore the higher fees and simply want to know how fast can I get my check.

If the IRS wants to get rid of these products, simply upgrade their system and deliver the refunds in 24 hours. They go away immediately (though the ERC or RAC would remain as most clients don't have bank accounts nor can they pay up front).

[clydewolf]

I too spent several years in retail tax prep. Often the taxpayer requesting a RAL or RAC does not have a bank account, and they feel they are in a desperate financial situation. Some of them are, others just do not know how to break the cycle/habit.

Here is an idea to promote for these folks. Take the RAL/RAC this time. When you receive the RAL/RAC check take it to a local bank and open a savings account. Deposit an amount equal to this years tax prep charges, and take care of your financial needs with the remainder. Forget about the new savings account.
Next year come in and have your taxes prepared, and learn the cost of the tax prep. Hopefully you can go to your bank and make a withdrawl in the amount to pay for the current tax return. Return to the tax prep shop and pay cash for your tax prep. For this year's refund, have it direct deposited to your bank account. Once the money is there, the tax payer can use the money (there will be more because there is no RAL/RAC fee or interest) to meet those existing financial needs. Save some in your savings account for the next year's tax prep cost and repeat the process for the next year.

The problems are discipline, and the fact that tax prep costs tend to increase each year.

[TheWealthSquad]

I love your idea but as you probably realize having been in this industry it is probably not going to be effective.

The majority of people who apply for RALs have a limited understanding of financial matters and an even more limited desire to learn. We offered free financial education and were never taken up on it.

One psychological reason in the case of RALs is the not my money phenomenon. Since a very large portion (all of it in many cases) comes from Earned Income Credits, the person filing the taxes doesn't even consider the fees. They simply see what their check will be.

They are in the situation they are in because of their limited financial education but from my experience, many of them don't want to learn or change their habits.

I quite trying to talk them out of them after the first year. I even offered discounts if they would not get one. They would rather than the immediate money now than get more just a few days later.

Learning to accept delayed gratification is a key to building long term wealth. It is probably the strongest indicator of future success.

[clydewolf]

Wealthsquad,

I agree with your points.

I feel I was successful in moving a few folks from a RAL to an RAC, small victory!

[TheWealthSquad]

Maybe with modernized e-file and the Cade system being fully implemented and no debt indicator banks will eventually quit offering the RAL due to lack of profitability. The IRS could eliminate them if they offered 24 hours funding but that will probably be a while.

[clydewolf]

Yesterday the Treasury Dept. announced a trial program using Debit Cards for tax refunds to taxpayers that do not have a bank account or to some that are under banked. This should help some folks to avoid the RAL.

http://www.ustreas.gov/press/releases/tg843.htm

[Randy Barnett]

I prepare taxes as a part of the Volunteer Income Tax Assistance (VITA) program, administered through the United Way. There's no reason that anyone who is receiving Earned Income Tax Credit (EITC) should pay to have their taxes prepared. We do it for free and eFile. Refunds in about 10 days, 20 days by mail.

[4jacks]

^That is very cool. I wonder how many know about it though. Obviously we still have tax preparers advertising in these areas.

[clydewolf]

Randy Barnett,

You have a good idea. But when someone is facing eviction for not paying rent, or their car is in shop and the mechanic won't release the car until he is paid,,,, getting a tax refund in a day or 2 vs 10 days removes a lot of pressure.

As was mentioned in some earlier posts in this thread, often these folks do not have a bank account, and are not very savvy when it comes to money management, even on a day to day basis. Generally they do not know where to begin.

It is good to hear you are in the VITA program. I am a VITA volunteer in our county. The program here supported by the AARP and United Way.

++++++
4Jacks,

Read your local newspaper, these programs are often in the local community section or in the news for Seniors. Locally we have some mention in our papers each week in January and then monthly for February and March. Some times local TV stations will interview the Chairman, and radio stations do this too. Any type of advertising that is free.

To locate the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit AARP's website.

For folks that are interested in becoming a VITA Volunteer, see this link: http://www.aarp.org/giving-back/volu...-needs-ma.html