The End of RALs

This morning TaxMama received a press release from Harry W. Buckley, president and chief executive officer of Jackson Hewitt Tax Service Inc.
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in response to IRS’s announcement yesterday about removing the debt indicator from the electronically filed tax returns at the time of filing.

Mr. Buckley has strong concerns regarding the recent IRS announcement that it will eliminate the debt indicator for the 2011 tax season. In his opinion, this move has significant implications for taxpayers:
“The IRS decision to not provide debt indicator data to taxpayers through the electronic tax filing process will make it difficult for the millions of taxpayers who desire to receive cash quickly in connection with the electronic filing of their annual tax return.  This form of credit, especially important to middle and low income, often unbanked, taxpayers, may well continue to be available in our industry.”

And the release goes on.

I am not surprised to get such a statement from a storefront-type operation like Jackson Hewitt whose target customer is the lower income taxpayer. They, and chains like them who push the Refund Anticipation Loans (RALs) will lose millions of dollars in income as clients are no longer able to get instant refunds.
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In fact, if there is no incentive to come to a refund mill, they just might lose those clients altogether as they learn about no-charge tax preparation serices at VITA sites around their community, in their houses of religion, schools, libraries, etc.

For years, I have been speaking out strongly against the practice of pushing low-income taxpayers to get these quickie refunds. In fact, in my annual online filing article for MarketWatch.

com, I have eliminated all the tax preparation sites who make the RALs a prominent feature – to the chagrin of certain major companies.

The problem is, most of the clients who get RALs don’t understand that they don’t have to pay for such a service. Their refunds will arrive in about 2 weeks anyway even if they don’t pay an extra $40 – $60 or more the ‘instant’ refund. They are often encouraged to believe this is the only way to get their refund. The National Taxpayers Advocate, Nina Olson, has been railing against this practice for years. IRS Commissioner Doug Shulman has actively discouraged the practice, to the point of excluding companies that push RALs from the FreeFile Alliance program.  And the AARP Foundation, who runs Tax-Aide, one of the largest VITA/TCE programs in the country have always communicated to IRS the negative impact of RALs on low-income taxpayers, who cannot afford the high fees and interest rates that are very often applied to these short-term loans.

AARP joins me in  applauding  IRS Commissioner Doug Shulman for taking this bold step to pull the rug out from under the entire RAL program.

Yes, some people who really need the money within a day or two to keep from getting evicted will be harmed.

But, honestly, don’t you think it’s time that working people whose finances are that close to the vest learned more about how to get the refunds in advance?

Yes, you can get a substantial part of your Earned Income Credit refund in advance using Form W-5 to have some of that money added to your paycheck.

Perhaps the refund mills will earn some extra fees by helping these folks prepare those W-5s so they can get the money they desperately need to pay their monthly rent and groceries – so they face fewer financial emergencies requiring them to pay high fees to get their own money.

4 thoughts on “The End of RALs

  1. TaxMama says:

    Hi John

    Thank you very much!

    Really. Who knows, perhaps your words did help!
    Though I would NEVER represent the Block offices.
    Their software offering is a brilliant idea!

    You’re right. I don’t have a problem with RACs.
    They are designed to be quite cheap (as long as tax pros don’t abuse the service)


  2. John Jones says:

    Hi Eva,
    I agree with you 100%. I have never liked RAL’s and always tried to discourage any of my client’s who wanted one. I could not understand the rush. If they needed it that bad, than why not come into the office sooner. I think most people can wait one to two weeks.
    I do like RAC’s because it makes it easy for them to pay for the services with no money up front and it does not cost an arm and leg. When JH lost their bank last year they were telling their clients the IRS was not accepting RAL’s. I guess he saw in the future!
    As always I am amazed by all that you do and I am very thankful you are there for all of us.
    I have noticed that you have been involved with Block.
    When I was there last Dec for training I put your name out there often and I hope I might have had a small part of you getting together.
    Take care,

  3. Amy McVay says:

    I think you have a better opinion of human nature than I. *grin*

    I believe that *some* (but not all) people are poor precisely because they either refuse or cannot plan ahead financially. The subset that I’m talking about blows every single opportunity to get ahead. Far from being victims of “the system”, some (but again not all) poor people have created their own financial reality.

    Yes, H&R Block and the Jackson Hewitts of the world had no interest in telling their clients to wait for 10 days for direct deposit or that VITA exists. However, there’s not a doubt in mind that significant percentage (minority? small minority? tiny minority?) will not want to wait that time, even after they know about it. It’s just too long to them.

    There is another group of people have no interest in learning to do taxes for themselves. Maybe some are bad at math, others think they are stupid at such things, and others are just plain lazy. I can definitely see if you work entirely in cash because you can’t handle a checkbook, how a 1040EZ might be intimidating.

    VITA can fill the gaps but the removal of RALs does not create an advertising budget for VITA. How much tax compliance will we lose if the group I describe here decides to stop filing because it’s too hard, they don’t have the money, and they don’t know they can get help for free? (And, if VITA becomes more common knowledge, will the VITA system be overwhelmed? It’s not exactly like any old volunteer will do…)

    I completely agree that the RALs were not the way the solve the any above problems. However, I also understand the government’s hesitation in cutting off a system that was reasonably above board and accurate, ensured the proper people got a majority of the money coming to them, and encouraged tax compliance. I’m glad the RALs are gone, but I see problems ahead that still need to be solved.

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