For quite some time, commercial tax preparers have been providing what is known as a refund anticipation loan (RAL) to taxpayers for the purpose of providing them with their refund check quickly–usually within one or two days. The RAL requires consumers to make up-front payments in the form of interest. Many of these people also received the Earned Income Tax Credit (EITC).
In 2010, the Internal Revenue Service voiced its decision to discontinue the “debt indicator” service; this had been a tool utilized by tax preparers to determine whether or not a taxpayer’s refund would be used towards paying any outstanding debts such as back taxes, child support and/or student loan fees.
Subsequently, several banking institutions stopped offering RALs, and in response to this trend, federal banking regulators mandated the termination of their issuance. These so-called “unsafe or unsound” loans could not be repaid from tax refunds utilized to cover other financial obligations.
The National Consumer Law Center and the Consumer Federation of America found that every year, up to $1 billion was taken from the tax refunds of over 10 million individuals in fees associated with RAL loans. In 2013, 100,000 Americans applied for a Refund Anticipation Loan (RAL), yet by 2014, this number had plummeted by over half.
RapidTax free dedicated Tax Professionals will walk you though the RAL filing process from start to finish to maximize your chances of getting your RAL issued as soon as possible.
Substitute RALs
No longer offered by banks, Refund Anticipation Loans (RALs) remain an option for certain lower-income taxpayers at tax time. Although financial institutions originally provided these loans, some tax preparers have turned to alternative lenders, such as payday lenders in order to furnish them instead. Although various tax return options can be marketed as alternatives to Refund Anticipation Loans (RALs), these products often incur higher fees than RALs. An increasingly appealing option, however, is filing for an early refund with paystub information instead of waiting on W-2 documents.
Following the introduction of refund delays in 2017, another type of RAL became more prevalent. Known as “no-fee” RALs, they are typically provided by paid preparers – although the various fees associated with them aren’t usually made known at first.
Compared to other credit options, Refund Anticipation Loan (RALs) offer a less risky option for tax filers since they are not mandated to repay the loan if their actual refund does not match the amount predicted by their preparer. Last year, research conducted by the National Consumer Law Center revealed that over 1.6 million no fee RAL were distributed.
Refund Anticipation Checks
As an alternative to refund anticipation loans (RALs), a growing number of tax preparers are turning to refund anticipation checks (RACs). Although these present less risk to the preparer, they can be costly for the taxpayer, with higher fees associated. With RACs, the IRS is able to directly transfer a tax filer’s refund into a temporary bank account opened by the tax preparer.
Prior to the taxpayer obtaining their refund, fees for tax preparation as well as RACs are deducted. Generally, federal refunds charge between $25-$60 in RAC charges, and state refunds cost $10 (with possible extra check-cashing fees).
In 2015, nearly 20 million taxpayers – most of whom claimed the Earned Income Tax Credit (EITC) – received a Refund Anticipation Check at an expenditure of about $475 million. This was higher than 2011’s figure of 18.4 million and 2009’s 12.9 million taxpayers. Alarmingly, the rate of RAC usage is not reduced, even though free tax programs can grant refunds within the same timeframe via direct deposit.
State Regulations for Refund Anticipation Loans
In comparison with federal regulations, certain states have enforced more substantial standards for refund anticipation loans (RALs). For example, many states have barred tax preparers from charging additional fees only to those individuals taking out RALs or RACs and specified the kinds of companies allowed to offer these advances. Moreover, when states imposed limits on the high APR that usually surpasses 100 percent for RALs, lawsuits were brought up against them.
In 2008, the Attorneys General of California and New Jersey took legal action against tax preparers for their deceptive advertising practices concerning Refund Anticipation Loans. According to the National Consumer Law Center, this was not an isolated incident; states across the nation have implemented regulations surrounding RALs and are enforcing them through similar court proceedings.
In 2010, the New York State Division of Human Rights brought suit against certain tax preparers for discriminatory targeting. As a result, Maryland, Colorado, and Louisiana all implemented RAL legislation that same year. Maryland’s law prohibited most additional fees associated with RALs, while both Colorado and Louisiana increased disclosure standards related to the applications.
20 States Currently Regulating RALs:
- Arkansas
- California
- Colorado
- Connecticut
- Illinois
- Louisiana
- Maine
- Maryland
- Michigan
- Minnesota
- Nevada
- New Jersey
- New York
- North Carolina
- Oregon
- Tennessee
- Texas
- Virginia
- Washington State
- Wisconsin
