Ask the taxgirl: Refund Anticipation Loan (RAL) Denials and Delays

Taxpayer asks:

Why was my RAL denied?

Taxgirl says:

RALs are refund anticipation loans. They are basically loans (usually high interest) against your refund from the IRS.

I am not a fan of the RAL. In many cases, I think they’re oversold to folks who can least afford to pay the fees when a normal direct deposit refund would be available within about 10 days for taxpayers who e-file. But I digress.

RALs are private loans to taxpayers. In many cases, the marketer of the loans, such as a tax preparation service, is not the same as the lender.

The IRS does not impose a fee for a refund either by direct deposit or check. However, the tax preparer may impose a processing fee for a RAL and the lender may impose a fee and/or interest. According to Americans for Fairness in Lending, the average RAL lender fee is $100. The interest rates for a RAL ranges from 40% to 700% depending on the size of the refund.

Not all RALs are subject to credit checks, though they may be required as part of the terms and conditions imposed by the lender. This is because your tax refund is used for collateral – the lender is entitled to use the refund for repayment – making the loan, in theory, not much of a risk. So, credit history may be a reason for denial in some cases, but is not the most common.

The most common reasons for a RAL denial are a refund that is smaller than anticipated (many banks impose a minimum refund in order to qualify) or a refund that has been offset. Examples of offset refunds are back taxes, child support obligations and outstanding student loans.

Additionally, your RAL may be delayed if you have large EIC amount and no prior year history. In that event, you will be asked to substantiate your claims.

If you are denied or delayed, you may request that your RAL application be reviewed again.

However, there are two situations where a review will not produce a different result:

1, Since banks are anticipating a higher than usual volume due to the Rebate Recovery Credit, some banks are choosing not to allow RALs that include a refund based on the Rebate Recovery Credit. I have heard that Republic Bank has instituted this rule. If you know of others, let me know.

2, Members of the armed forces on active duty are prohibited by federal law from receiving most RALs due to restrictions on interest rates. Apparently, H&R Block has created a Military Refund Anticipation Loan, which keeps the total amount of interest and fees below 36% (yes, that says 36%) in order to allow them to continue to issue RALs to active duty.

All of that said, you are usually liable for the bank and loan fees, even if your RAL is eventually turned down. If your loan is approved but you don’t receive a large enough refund to cover the cost of the entire loan, you may still required to pay back the loan.

The bottom line is that these are private loans and as private loans and if you use these services, you’re subject to their terms and conditions. I can’t make you not use these products. I wish that I could. But I do hope that you’ll ask the right questions and make smart decisions. Don’t get ripped off.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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