Starting in 2011, the IRS will be making it harder for consumers to get their hands on a quick income tax refund. The popular refund anticipation loans, which are short-term loans based on the anticipated amount of a tax refund. The loans are given to consumers who do not want to wait several weeks for their returns to be processed and afford them instant or overnight access to their cash.
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The problem with such loans is that while they may be speedy, they are also very costly with annual percentage rates running as high as 500%. There has been much criticism of the refund anticipation loan over the years, especially because it is often lower income consumers who are targeted for the services offered by tax preparation agencies. In 2008, there was a total of $738 million made in refund anticipation loans.
The IRS did provide tax prep agencies with what is known as a “debt indicator“. For each taxpayer who was set to have their income tax refund taken back by the government in lieu of outstanding debts like unpaid student loans, back tax debts, and child support arrearage, information was provided to the agency to alert the hold of the refund. This prevented the preparer from offering an anticipation loan. The debt indicator ended up becoming a pre-screen mechanism for consumer loans.
Now, the IRS has taken measures to ensure the tax preparation service doesn’t have the insider tip. When a consumer has their taxes done, the IRS will no longer indicate any owed debts, leaving the tax preparation service in the dark about whether or not a consumer can afford to pay back any kind of anticipation loan. Tax preparation agencies will not be as inclined to offer such risky loans, or so the government hopes. The IRS has acknowledged that past procedures did not protect the best interest of the taxpayer.
While it may be harder to procure a refund anticipation loan, it may be better for consumers all around who are looking to maintain a better financial track record. Since many consumers were of the mindset that they didn’t have the cash before the loan, they didn’t mind so much paying the exorbitant fees. The amount saved from not taking the loan could have been put to better use, such as paying off debts or opening a savings account.
With the change coming to the tax industry, consumers who are unable to get a RAL may be better off learning how to better manage their taxes from the start. If you continually receive a high refund each year, you might want to consider reviewing your W-4 selections. By adjusting the allowances you have, you will get more back in your regular paychecks and you will stop loaning your money to the government for free. Large refund checks once a year are often used for luxuries one normally can’t afford but in reality, better money management would allow you to save reasonable amounts of cash with every paycheck over a period of time to be used for reducing debt, for luxury purchases, or even an emergency fund.
For consumers who do have a tax refund in their future, consider that the IRS has many options now for accessing refund cash faster than in previous years. Waiting for a check is no longer the only method for getting tax refunds. There are now e-file and direct deposit options that make the process smoother and much faster.
If you are still all about the refund anticipation loan, make sure you don’t just give your signature away without a second thought. Read the agreement for the RAL and make sure you have a clear understanding of exactly what you are paying in interest and fees before agreeing to the loan. Once you clearly see how much more money you could be pocketing, you will be able to make a more financially smart decision.