The Consumer Federation of America is thrilled that the IRS will no longer disclose a tax filer’s debt indicator status to tax preparers. Previously, if a tax filer owed money to or through a government agency (think child support, student loans, etc), the IRS would tell tax preparers that there was a “debt indicator” flag associated with the filer’s social security number. For example, if a tax filer had defaulted on a student loan, the tax preparer wouldn’t give a refund anticipation loan.
Consumer groups have long loathed the high interest rates that refund anticipation lenders have charged and yes, they were very high (50% to over 500%). Now those same groups mistakenly believe that refund anticipation loans are a thing of the past. Why mistakenly?
Refund anticipation loans won’t go away, they’ll just become MORE expensive.
There will be a greater risk associated with these loans and lenders will simply pass the cost of that risk along to the tax filer. There’s a market for these financial products and people who rush to the closest tax preparer with their W-2 on January 20th to file and get their refund aren’t generally worried about fees and interest. They’re worried about getting their money. For lower income people who actually paid little to no taxes, yet still want their “refund,” there’s no downside to paying those fees.
The average tax refund so far this year is over $3,036, so a tax filer who needs money NOW is faced with getting that $3,000 in two or three weeks or getting $2,750 today. Easy choice. But now it may be more like get $3,000 in two or three weeks or $2,050 today. A bigger bite to be sure, but considering that refund anticipation loans are supposedly targeted at lower income tax filers, today is a lot better than three weeks from now if you’re faced with losing your home.
Note that I’m NOT in favor of the exorbitant rates that shady tax preparers charge. These fees and interest are far too high, but once again the government applies a solution that won’t solve the problem, only potentially make it worse. A far better solution would be to speed up the refund process to a few days or to regulate the interest and fees that tax preparers can charge.