IRS Should Have Gone for a Baker's Dozen with RAL

Each year the IRS releases a Dirty Dozen of tax scams. I wish the 2008 list had labeled another practice a scam--refund anticipation loans or RALs. A RAL is a short-term cash advance against an anticipated tax return. Essentially, the taxpayer is paying to access their own money immediately rather than waiting for the IRS to process their refund. There are about 9 million RALs made each year, with APRs ranging from 50% to 500%. Perhaps their high fees are justified by the fact that they are short-term loans. On the other hand, the tax preparers have a lock on this market, which could reduce competition. It seems hard to believe that the risks of nonpayment are very significant when the amount of the refund is being determined during the tax preparation process and the preparer captures the refund directly, rather than relying on voluntary remittance from the debtor.

The IRS does warn against "dishonest" tax return preparers who "make their money by skimming a portion of their clients’ refunds." Although most leading preparers offer RALs, I think RALs are "making money by skimming clients' refunds."

If a taxpayer electronically files and has their refund direct-deposited, they could get their refund in just 8-14 days. An RAL borrower pays a hefty fee for such a short-term loan. From a policy standpoint, the more disturbing aspect of RALs is that about 60% of borrowers are recipients of the Earned Income Tax Credit. For an EITC taxpayer, an RAL is essentially a shift of the government dollars that are designed to help them improve their financial prospects to the profits of a private tax preparation preparer.

The IRS is considering regulations that would limit the use of tax return information to market RALs. Comments may be made online until April 7th.

Comments

[Patches]

Off subject a little: Katie, Jeff Bohm Bankruptcy Judge Southern District of Texas came out with an Mem. Op. citing your paper "Misbehavior and Mistake in Bankruptcy Mortgage Claims" in re: Parsley S.D. Tex. 05-90374. Thanks to your paper I am up to my eyeballs in Objection to Claims. It has helped me a great deal when I work up answers to Relief from Stays. The Mem. OP above has some great testimony cited and shows how Countrywide goes about hiring bankruptcy attorneys and the way “Pay Histories” are “manufactured” at the attorneys office by paralegals! They say its because the Bankruptcy Judges need a pay history they can understand. A must read. I love your papers and I am a huge fan.

Any…..hooo... "RAL" or rapid refund loans(as we used to call em)... Thank god they are prohibited in Chapter 13 cases. But I always thought they were a bit weird in that the tax preparers charge a fee to set up the account where the money is to be deposited. Of course the debtor does not have access to that account the tax preparer does.

When debtors come in to provide tax returns and they have all that RAL paperwork attached I just have to shake my head and ask "Why?" It only takes a week or two to get your money directly deposited...??? To make matters worse we still have tax preparers filing married people as separate head of households to boot! We have to "get real" with the debtors and say that it is incurring debt without permission from the court AND YOUR FILING WRONG!!! What if they owe attorney general debt? Now under some new "bells and whistles" the AG has in 362 or 363 they can hold or offset the refund despite the stay. Now the debtor has a refund loan and the tax preparer does not have the check either. What then?

I used to see a lot of the following: Ohh.. say 1995-2000 (before they started requiring account set ups) The debtors would come in owing not only the IRS but the tax preparer for the loan they received but had their TR offset or they just didn’t bother signing the check and delivering it to the Tax preparer. They would come in and have two debts for the price of one. Again I used to see that a lot but it seems to be a rare thing these days.

[Mike Rich]

Hear hear. These loans would seem to fit the very definition of usurious and predatory lending.

[J.]

There is some risk to the tax preparer in providing RALs. Some filers already owe the IRS or have unpaid student loans, etc, so the refund is retained by the IRS to apply to the prior debt. In these cases there is no tax refund payment and the preparer is out the amount of the RAL.

I agree that the cost is very high compared to the amount of the loan, and I don't know why people opt for RALs instead of waiting 2 weeks for the deposit.

[Mike Dillon]

Would you expect anything less from Mark Ernst?

Block needed SOME way to finance Option One ....and that fancy new HQ they built for themselves before everything went belly up. Next thing you know, they'll start eliminating the TEN year preparers much like they did the 20 and 25s in order to increase upstream bonuses and profits even more.

[Patches]

Just talked to a friend of mine at the IRS, and she informed me that tax preparers get a cut of the refund! I don't know why I didn't know that. I guess because I have done my own for the past 7-8 years. So they charge a fee to prepare the tax return, charge a fee to set up the account, and charge a % on the tax refund based on how much they get.

Where is the incentive to filing Tax Returns correctly? If the tax preparers are to prepare one tax return but instead prepare 2 tax returns (incorrectly) ie. (both head of households)both with RAL's, they get a ton more money! Even though the debtors may get in trouble for filing incorrectly! That’s if the IRS doesn't flag the refund.

Unfortunately I see a lot of this. When debtors come in to file BK 13 or 7 and they have been filing incorrectly I have to break the bad news. They either won’t file or they are going to have to file 1040X amended tax returns dating back at least 3 years. Some people have to decide whether they are going to try to save their homes, cars etc. by filing a 13 and possibly owing the IRS or not filing, continue doing what they were doing and losing their homes. I think that filing chapter 13 and amending tax returns is the best way to come clean with the IRS in that situation in that they can pay off any IRS claim thru their 13.

For the most part I think the debtors know what’s up, but I think that the preparers should not file them that way if they know... I guess that’s the million dollar question, "do the tax preparers know?” I think they do. Ultimately it’s the debtors responsibility.

Kind of makes you question the advertisements claiming to find $1,300.00 more on average for past returns..

[jason]

It is amazing how ignorant most of your comments are. First off TP does not charge anything for setting up an account. The bank charges a set up fee. Second it is illegal for a TP to charge a percent of the refund. All bank charges are already preset regardless of how much the refund. A TP does or the owner does not receive any kind of kick back or incentive in pushing a Ral product. It is actually there benefit for them not to choose that product and go the 8-15 day period. The owners with some companies do get a kick back for having clients do 8-15 day wait. The rates are through the roof but there is huge risk with the lenders in giving out this money. I try to discourage every client from taking any kind of Ral products but guess what they want it. It is not right to tell these people what they can and cannot have. W live in the US and that’s there right, period! So in short yes it’s not a financially sound choice for customers but hey neither or credit cards with 39.9 interest rates but it doesn’t stop the average American from racking up 15k in debt. God bless USA!