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IRS Rule Modification Might Have Enormous Impact On Short Term Loans
IRS announced a policy shift that may combat the usage of refund anticipation loans, the short-term loans that give taxpayers fast access to cash but usually at a high cost.
From a notice, the IRS stated that starting in the 2011 tax-filing period, it would no longer provide tax preparers and financial firms with a key debt indicator banking institutions employ to facilitate those refund loans.
We no longer understand a need for the debt indicator in a world where we could process a tax return as well as deliver a refund in 10 days by e-file and direct deposit, these taxpayers now have other ways to hastily access their cash.
The IRS change is seen as part of a more broad based effort by the government to crackdown on substitute loans for example pay day loans frequently aimed at low-to-moderate income households. The announcement also comes just several weeks after the IRS indicated plans to manage tax-preparation firms including H&R Block Inc. and Jackson Hewitt Tax Service Inc. for the first time.
H&R Block expressed disappointment with the IRS decision. The move, probably, will only increase the price of refund debts for many taxpayers.
The real concern will be how the increased financing risk will possibly hurt consumers through significantly lower loan approval rates and increased costs for the most weak taxpayers. It is regrettable that persons impacted as a result of this decision are often individuals with no bank accounts and have no centralized organization to speak for them.
Tax-preparers such as H&R Block have marketed these loans as a way to generate money quickly and easily. Those short term loans, which are protected through a taxpayer's expected tax refund, are often targeted at poorer taxpayers.
In some cases, consumers might get the obligations in up to fifteen days. In other cases, consumers might opt for instant refunds, which provides them access to loans in minutes.
Traditionally, the IRS has furnished banks with a debt indicator, which the banking institutions then employ as an underwriting device because it indicates the amount of the refund the taxpayer would actually see after accounting for just about any tax liabilities or other debts.
Consumer groups have recommended consumers to steer clear of payday loans, also known as refund anticipation loans, regularly called RALs, because they typically come with extraordinary fees as well as interest rates.
News of the IRS change was welcomed by the Consumer Federation of America and the National Consumer Law Center, groups that are working to minimize the use of the debt indicator for several years. Those organizations say that by providing debt information to financial institutions and tax preparers, the IRS was just helping banks make high-priced loans to the to people who were not in a good financial situation to start with.
In a joint declaration from the aforementioned organizations, they indicated that tax refund anticipation loans skimmed $738 million from the refunds of 8.4 million American taxpayers in 2008. They said the loans might carry fees that translate into APR of 50% to nearly 500%.
This modification will adversely impact the ability for individuals to secure short-term personal loans when they are waiting to get their tax returns.
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