Still Waiting for News on RALs

Mark Ernst’s comments at CERCA created expectations that rulemakers would be thinking about how to improve settlement on tax preparation fees. His speech, given in May, was candid and cutting for its clear sense that the debt indicator was no serving a public purpose. Ernst noted that prices on RALs have gone up in the period since the debt indicator was re-instituted.

Since then, there has been little talk and no action. John Hewitt did shake things up for a while.

Well, it is almost August.Something is going to happen soon.

Crystal Ball:  What happens if the debt indicator is canceled?

In this scenario, refund anticipation loans remain legal, as does demand for a means to avoid paying out-of-pocket for tax prep. There would be more risk, though, and prices would probably have to increase in order to make up for the new underwriting problems faced by a lender. Bank regulators would probably be concerned about the threat for fraud and debts to undermine the capital ratios at some of the smaller banks.  Incrementally, there would probably be less money available for RALs.

This could have an unfortunate consequence, where fewer low-income people file their taxes because they are averse to paying $200 to file. We would probably see a drop in the number of people that are able to get their Earned Income Tax Credit.

It might create an advantage for H&R Block. Unlike JTX and Liberty, Block has a secure funding source for its RALS from a bank that is very large. HSBC can take risks that Republic, River City, and SBTPG/MetaBank cannot. Those smaller banks might have to cut back on their volume of RAL loans.

It would be an especially challenging outcome for small tax preparers. When Chase stopped making RALs, it left 13,000 independent preparers without a RAL partner. Those businesses are going to want to be able to compete with the retail chains. If RAL money is tight, though, it seems like the banks are going to want to dedicate as many of their dollars as they can to their best clients.  Having met those needs, they might then look to throw some money to the small guys.

Alternative Scenarios

The real problem that the IRS and Treasury are facing is that they need to give people a way to pay for the costs of their tax prep.

Another option might be the adapt the split refund. The split refund already exists. In it current iteration, filers can designate that refund is delivered into separate accounts. One is likely to be an account with immediate liquidity, but the other could be some kind of savings vehicle. Taxpayers can pick up to three accounts, and beginning in 2010, they had the option of using one of those transfers to fund the purchase of Series I Savings Bonds.

Split Refund, with one line for tax preparer: A new option might be to give tax preparers the option of making tax fees a receivable, collateralized by a split refund that could be channeled directly to the tax preparer. The downside for preparers is that they have to wait 9 days for payment on their services. The good news is that settlement is still handled, and in a relatively risk-free approach.

No junk fees: Another possibility would be a new ruling that prohibits junk fees. Junk fees, such as “technology fees” or “e-filing fee” ramp up the price of a return. They add additional expense layers. Many preparers can state that the specific costs of a RAL have dropped, but this is only a half-truth, because it disingenuously ignores the ultimate expense that filers must pay, regardless of what cost category they are considered.

No RALs for EITC recipients: Another choice would be to make it impossible to get a RAL on a refund that includes an Earned Income Tax Credit. EITC filers get the majority of RALs, and cutting them out of the market would take away most of the benefits of scale for providers.