Refund Anticipation Loans Could Be More Costly Next Year

Some taxpayers expecting tax refunds take out short-term loans, called refund anticipation loans (RALs). Money is advanced to taxpayers to the extent of the refund they expect to receive, and the loan is paid off when the refund is actually received. These loans often are used to pay tax preparer fees or other immediate and pressing expenses. In the upcoming filing season (for 2010 tax returns), the cost of these loans may rise because the IRS will no longer provide “debt indicators” to preparers.

Debt indicators explain whether a refund will be offset by any outstanding tax owed or other liabilities that the IRS is allowed to offset with a tax refund, such as student loans. Until now, debt indicators appeared on the e-file receipt confirmation sent to preparers. Starting with the upcoming tax season, this information will not be included here. This could increase the cost of RALs because it will be more difficult for lenders to determine the amount that can be advanced. H&R Block, however, does not rely on debt indicators to make RALs; it has patented a way to make an assignment of the right to the refund. Also, taxpayers can find out their personal information from the IRS through an interactive online tool called “Where’s My Refund?”

Starting in 2012, it may be possible to have a tax refund paid directly to a return preparer. The IRS has yet to work out the details. Presumably, this payment method will work much like direct deposits of tax refunds that can currently be made to bank accounts, IRAs, health savings accounts, Coverdell education savings accounts, or Treasury Direct accounts for the purchase of Series I savings bonds.

Source: IR-2010-89, Aug. 5, 2010