August 6, 2010

The disgraceful practice of persuading taxpayers to fork over part of their tax refunds so they can receive the money a few days earlier may be on the way out. The IRS has announced that it will no longer provide “debt indicators” that are used by less reputable tax return preparation companies in processing refund anticipation loans, or RALs, that sometimes bear costs that equate to interest rates exceeding 1,000%.

Taxpayers who file electronically and have their refund direct-deposited in their bank account can now have their money within eight to ten days, making these loans unnecessary. Defenders of the $800 million RAL industry point out that there are many taxpayers who don’t have bank accounts and must wait longer for their refunds.¬†Critics respond that these tend to be people who are in economic terms relatively vulnerable, and that further impoverishing them so they can obtain access to cash a few weeks earlier isn’t justified.

The IRS announcement doesn’t place an outright ban on RALs, and clients of companies that persist in offering them may see even higher fees than in the past. The hope among those concerned with consumer protection is that return preparation firms that have offered RALs will take the hint and drop the practice. Meanwhile, the IRS will be considering how to devise a method by which taxpayers can use a portion of their refund to pay their tax return preparation fee without incurring the additional, unnecessary charges for a RAL.

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