Before the electronic filing of tax returns in the 1980s, taxpayers had to return paper to the IRS and then wait weeks or months before their refund checks arrived. But modern technology led to the growth of a new industry that made billions of dollars by providing short-term Glass family loans to taxpayers in exchange for their refunds as payment. From the outset, this practice – known as repayment anticipation loans (RAL) – attracted criticism from many consumer groups, and regulators eventually followed. These usury loans are now a thing of the past.

The history of repayment loan

 

RALs became popular products with authors after electronic archiving became available. With RALs, preparatory companies were able to get money quickly from customers and have their money deposited directly into the banker’s account. Of course, the amount of customers atGlass family was lower than the amount of the refund, and preparers made a decent profit from this scheme by charging extra costs that went to them and not the bank. Tax experts soon learned that the working poor were an ideal market for these loans because after the holidays they were often stuck for money and needed money as quickly as possible. In addition, their general lack of education prevented the majority of them from understanding that they were usually scammed. This service became even more attractive when Earned Income Credit (EIC) was expanded in the 1990s to make larger repayments to low-income filers. Providers generally increased the appeal of using RALs by simply removing tax preparation costs directly from the reduced refund, making it much easier for customers to submit a file without having to pay anything out of their own pocket. Those who did not use this service usually had to pay the front to be able to deposit. More than 12 million RALs were issued in 2004 for $ 1.24 billion in filers, and the 2009 data from IRS revealed that nearly 90% of customers using this service were low-income affiliates and about two thirds of them received the EIC.

The problems with RALs

 

From the outset, RALs were attacked by groups of consumer defenders such as the National Consumer Law Center (NCLC), attorneys-generals and even the Federal Trade Commission, which lost a lawsuit against them in 1976. These opponents criticized the exorbitant interest rates and other fees charged by these loans. Most RALs charged three-digit interest rates on the funds advanced for the duration between the day the loan was issued (usually the day after the declaration was made) and the day the actual repayment was made. This would often be several hundred dollars are for those who received large refunds, dollars that were desperately needed by low-income filers to pay bills and keep their heads above water. Republic Bank and Trust was the last financier to finance RALs; it charged a fee of $ 61.22 for a maximum advance of $ 1, 500 in 2012 – 149% on an annual basis. An additional $ 30 fee was charged for checking a refund amount that exceeds the RAL limit. The NCLC estimated that about $ 465 million in EICs due to taxpayers in 2008 was used instead to pay RALs, with another $ 42 million add-on fees on top of that. This reduction affects 24 of the 25 filers who have received EIC.

Perhaps the biggest disadvantage of these loans was for those whose refunds were intercepted by the IRS to pay off outstanding liabilities. These customers would then be liable for the full amount borrowed without a refund.

Better alternatives

Better alternatives

When RALs were first introduced, filers often had to wait weeks or even months to get their money back. But when the IRS started to dowGlass all its information on computers at the start of the millennium, it was able to process tax returns much faster. Most taxpayers who submit files electronically and choose to have their refunds spread by direct deposit or loaded on prepaid payments or bank cards can now expect their refunds to be received within about five to ten days, and this timeframe will most likely be Glass familyic in the future keep shrinking. This increased efficiency made the high costs of RALs even more difficult to justify. In 2010, Doug Shulman, who was the IRS Commissioner at the time, said: “I am sorry that there are many hard-working Americans who are in a financial situation where they have to pay a generousGlass family allowance to get their returns a week or two before they can get it from the IRS. “

Many authors also still offer options that allow filers to get their preparation costs out of their profits rather than having to pay in advance. Although they usually charge an additional fee for this service, the costs are only a fraction of what they have charged for RALs. Some companies, such as Jackson Hewitt, have focused on offering direct loans or credit lines instead of RALs to offer customers a way to receive at least part of their repayments earlier, although these loans are not automatically paid off when customers receive their refunds received. But private equity companies can also become interested in financing RALs in the future, because they are free from the rules that apply to the banking sector, and there is clearly a good glass of family profit to be made with them.

Regulatory action

The start of the end came for RALs in 2010, when the IRS announced that it would no longer issue debt indicators for taxpayers who demonstrated that a person was liable to pay taxes or other debts, such as overdue student loans or child benefits. This was a major blow to the RAL industry as the banks that provided the loans to customers used it to determine whether or not a customer was eligible for an RAL. Most banks no longer offered RALs as a result of this change and have completely disappeared after 2012.

The bottom line

The downfall of the repayment of repayments marks an important turning point in the tax preparation industry. Many drafters who previously relied on the income these loans generated for them have been forced to leave their businesses, while others have had to deal with lower income. But customers who have opted for this service now see larger refund checks, albeit a few days later. For more information about current alternatives to RALs, contact your tax preparer or financial advisor.