The last couple of tax seasons have been tough for many taxpayers trying to utilize popular refund anticipation loans (RALs). With banks increasingly unwilling to provide loans for third-party preparers, the potential pool of money available to folks seeking RALs was pretty limited. This made taxpayers unhappy. It made the IRS fairly happy. They, like me, aren’t fans of RALs.

If you’re one of those taxpayers who found it difficult to find a provider who would offer a RAL last season, hold onto your wallets. It’s about to get worse. The IRS has announced that starting with the 2011 tax season, it will no longer provide the infamous “debt indicator” to third parties. The debt indicator notifies third-party preparers about debts, unpaid child support, delinquent student loans or other federal debts. Loan underwriters use this information to determine how much a potential taxpayer might receive after any offset – and in some cases, whether or not to even offer the loan in the first place.

Information about refunds and offsets will still be available through the IRS website. That will assist taxpayers directly but will make the jobs of third party preparers who offer RALs a little more tricky.

If it sounds like the IRS is trying to squeeze RALs, they are. IRS Commissioner Shulman said, about the change:

Refund Anticipation Loans are often targeted at lower-income taxpayers. With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.

And by “other ways”, Shulman clearly means avoiding RALs and Refund Anticipation Checks (RACs) altogether.

H&R Block immediately blasted the change, saying that it would hurt profitability. Shares of both Block and Jackson Hewitt Tax Service Inc fell on the news yesterday.

Many smaller tax preparers cheered the news, however, noting that IRS is now exploring is the idea of allowing taxpayers to pay for professional tax services out of their anticipated refund without the baggage of a RAL or RAC. This is likely of interest to many of you – keep watching for more information.

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Kelly Erb is a tax attorney and tax writer.


  1. I’m not a big fan of these either. Unfortunately, many taxpayers who use them do not have and can’t get bank accounts for direct deposit. For higher dollar amount refunds, they also must pay high fees to get the US Treasury checks cashed, if they can find any bank willing to cash them at all.

    • I’ve never heard of a financial institution refusing to cash a US Treasury check. In fact, when I worked retail (as I did for many, many years through school), many retail and grocery stores would allow you to cash government checks on their premises for little or no fees – hoping that you’d spend it there.

  2. Kelly,

    About cashing government checks: there is a lot that those of us who are fortunate enough to have access to normal banking relationships take for granted.

    These days, many low-income Americans without bank accounts receive IRS refunds that are thousands of dollars, due to EITC and other refundable credits. (That was not true back when you were working retail, but it is true now.)

    Most retail and grocery stores in the neighborhoods where they live simply do not have the amount of currency on hand to cash these large checks. Banks are not very welcoming to non-customers walking in with large government checks they want to cash.

    The problems of the “unbanked” Americans are very real, unfortunately, and there are no simple and easy answers. Dealing with large amounts of cash in the neighborhoods where many of them live is an inherently high-cost and high-risk enterprise, and many conventional financial institutions do not find those neighborhoods attractive places to do business, due to high crime rates combined with relatively low profits.

    That said, I am in hearty agreement that it’s great that the government has decided to get out of facilitating the RAL business. RAL fees are huge relative to check-cashing fees.

    And it should be noted that there are a few bright spots. A number of financial institutions, especially credit unions, are doing outreach and offering financial literacy classes to help low-income taxpayers get access to the banking system and use it effectively. And there are some interesting innovations to watch, including WalMart’s moves toward entering into the financial industry.

    • Mary, I find that pretty shocking. I have a number of clients without checking accounts (it’s not unusual to be paid by money order – just got one today) and have never had a single client unable to cash a refund check. I just Googled around because I’ve heard of many folks cashing their checks at Wal-mart. Wal-mart offers this service at many stores, apparently, as does Sam’s Club, Sears, K-Mart and more. There are some restrictions but some of them actually flip the balances to MC or Visa debit cards which are as good as cash.

      Additionally, the rates at some check cashing services are discounted for government checks (just as with paychecks). How secure can you get?

      I’m not saying that it doesn’t happen that someone has zero options when it comes to cashing a tax refund check, I just haven’t seen it. 😉

  3. Our city, Schenectady, does not have any of the large stores you mentioned–those stores are out in the suburbs, and our area does not have the kind of public transit infrastructure that a big city like Philadelphia has.

  4. I should hasten to add that our VITA site has never had a client unable to cash a tax refund check either. But for some of them, their only realistic option was to use a check cashing service.

    Fees for those services can vary a great deal from place to place, depending on whether there is a lot of competition and/or state regulation. WalMart’s fees do seem relatively modest, but not everone has access to WalMart, as I mentioned.

    Running a business that involves handling a lot of cash in a neighborhood with a high crime rate is not a low cost enterprise. New York limits the fees to 1.82% of the value of the check being cashed. If the amount of the refund is $6,000 or more (not uncommon), that is over $100.

    It might be cheaper for the IRS to offer unbanked Americans the option of getting refunds on a stored value card rather than a paper check. Such cards are already used by other government programs. Food stamps use stored value cards. In at least some states, unemployment benefits are loaded onto Citibank VISA stored value cards, for example.

  5. They need to ban RALs altogether. People don’t seem to understand that if you owe a debt, IRS or other, your money is going to go there first. You’ll wind up owing more on the RAL (I’ve heard of 100% interest on some RALs). Also, some tax preparers will only prepare your taxes if you agree to a RAL because they can take their preparation fees from it. Too much potential for fraud. It only take 3 weeks for the IRS to process an electronic return. People just need to have the patience to wait for their refund to come to them from the IRS.

  6. Elizabeth R Reply

    In Indiana, our clients will also have problems cashing big checks. I agree with Mary and expect that the IRS will eventually issue a refund VISA card of some sort for those who do not have direct deposit. Unfortunately, many of them also carry a lot of fees and are very difficult to get cash off of as well.

    We offer RAL’s in our office and have many clients who utilize them. Most of the clients see this money as free money and they don’t care how much they have to pay to get it as quickly as possible. I will not be sad to see RAL’s go away as long as it’s across the board for everyone.

  7. My sister is the office manager for one of the name-brand tax preparation services. She has many a tale to tell, but RALs loom large in her collection of stories. She knows what a ripoff they are, and tries to convince her clients to take direct deposit, even points out the bank in the parking lot and tells those without an account to go there and open one. It almost never works. “I almost never can talk them out of it [the RAL] . . .” she says. One client got a check for almost $4,600.00. She told him to go to WalMart to cash it, they charge only $10. No,he said, I’m taking the bus and I don’t know if they go to WalMart. So he went to a check cashing service a few doors down and paid $400 (!) to cash his check. It never occurred to him that he could have taken a taxi to WalMart, had it wait while he cashed his check, and then take him home and he’d be several hundred dollars ahead. Heck, he could have rented a LIMO to take him there and home and had plenty left over.
    The moral of the story is — people can be really stupid.

  8. I am very heartened that the IRS is making RAL’s more difficult. But in this day of privacy concerns, I wonder where the IRS got the notion they could share taxpayer’s debts and other information to third parties in the first place.

  9. Bo, you raise an interesting issue, but if you have ever efiled, you should read the fine print on Form 8879, “IRS e-file Signature Authorization” that you were required to sign.

    Every taxpayer who wanted to efile was required to sign that form, even if you didn’t want a RAL. Buried in the fine print was a clause giving consent for the IRS to send “an indication of any refund offset” to their “intermediate service provider, transmitter, or electronic return originator (ERO).” Even EROs that had no reason whatsoever to receive that information (such as our VITA site, which certainly does NOT deal in RALs!) automatically got the debt indicator information. It was absolutely none of our business whether the taxpayer owed back taxes, student loan debt, or child support, but the IRS forced that information on us all the same as part of the “Acks,” i.e., the computerized acknowledgements we were required to check to make sure the efile submission had been processed.

    I don’t think the IRS policy change will end the RAL business, but I heartily applaud the government’s decision to stop facilitating it!

  10. I will add that the Debt Indicator allowed us the opportunity to be more proactive with couples who may not be aware that the Injured Spouse form may apply for them. Without the debt indicator, taxpayers may not be made aware of an offset for a period of 2-4 weeks. With the Fresno service center, where we submit our paper, taking upwards of 20 weeks to process the injured spouse (incorrectly, more often than not) there is an incredible burden being placed on the taxpayers who are trying to access their refunds.

  11. Wal-Mart’s fees to cash checks are lower, but they (at least our local one) limit the dollar amount of checks they are willing to cash. Not helpful if you have a large refund from EIC. If you wrote them a bad check in the past, they will not cash checks for you no matter what the dollar amount. Same goes for banks. If you have bad credit (such as bankruptcy) none of our local banks will not allow you to open an account.

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