IRS Changes The Way RAL Providers Will Do Business

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.