IRS Drops the Debt Indicator
This hour, the IRS has announced that it intends to cease to provide tax refund companies with the debt indicator. This is a ground-breaking change for the tax refund anticipation loan market.
From the IRS press release:
“As we prepare for tax season every year, we look at past practices and consider whether they still make sense. We no longer see a need for the debt indicator in a world where we can process a tax return and deliver a refund in 10 days,” IRS Commissioner Doug Shulman said. “We encourage taxpayers to use e-file with direct deposit so they can get their refunds in just a few days.”
The IRS has been willing to check for outstanding tax liens as a service to firms that provide refund loans. The IRS’ expectation in providing the debt indicator was that it would be a public service. Mark Ernst, in a speech to CERCA in the spring, expressed some sense that this wasn’t working, because prices for refund loans had not gone down. Ernst wasn’t clear about the future of the debt indicator back in March. He was clear that he felt like something needed to change. Well, now we know at least a part of that change. It seems possible that more changes are coming. For one, the IRS is hinting that it may study the possibility of allowing taxpayers to give a portion of a due refund to their tax preparer. The virtue of such a split refund, as this is called when filers put refund dollars into separate accounts, is that it allows the filer to avoid having to pay cash out of pocket for the tax prep fees.
The fee payment hurdle is an important problem. It seems plausible that some filers will not do their taxes, even if they would be due a refund in nine days, if they have to pay cash out of pocket. They still have the alternative of a refund check, but the split refund is preferable. There’s less mess, less fuss: the filer doesn’t pay any fees, and the preparer is paid back by the Treasury.
Winners, Losers
Republic Bancorp: Loser.
Republic provides loans to both Jackson Hewitt and Liberty. They stepped in and took a portion of the business that Pacific Capital last year.
Jackson Hewitt: Loser
RALs were a high-margin product in an otherwise low-margin business. The future of Jackson Hewitt as a viable business would seem to be in doubt. They have a loan with Wells Fargo that has a clause to allow them to back out.
MetaBank: Winner
Really, MetaBank may come out of this doing fine. Meta was set up to supply tax settlement products, but their real capacity is debit cards with lines of credit. I hate to imagine it, but I can see the MetaBank debit card product, enabled through direct deposit to have a line of credit, as the unfortunate outcome. Tax preparers could draw out the cost of tax prep through an advance. The fees – $2.50 per every $20 – would be very high.
Filed under: Consumer Finance,Refund Anticipation Loans,unbanked | Tags: IRS, Refund Anticipation Loans
Guest
August 5, 2010
I understand that the IRS is encouraging taxpayers to e-file with direct deposit, but what happens to the taxpayers who still feel they "need" this product? Are they winners or losers? Isn't the consumer supposed to be who we're gauging the winning vs losing on?
Tweets that mention IRS Drops the Debt Indicator | Bank Talk -- Topsy.com
August 5, 2010
[...] This post was mentioned on Twitter by CRA-NC, Mike De Los Santos. Mike De Los Santos said: IRS Drops the Debt Indicator http://bit.ly/98VjkC Great news for Consumers and Bad News for RAL providers! [...]
Adam Rust
August 5, 2010
Consumers might “need” this product for two reasons: a) they can’t wait to get their money. b) they don’t have a means of paying the cost of their tax prep.
One option would have been to say that no portion of an EITC payment can be used as collateral for a RAL. That would have reduced a lot of RAL demand, perhaps to the point where the fixed costs made the whole thing questionable. For the second, they can get a RAC. Hey, in 2012, they might be able to use a split refund to pay for their tax prep. That would be the best outcome.
Sooner or later, the IRS was going to get fast enough to make the RAL a bad call for even a consumer with the highest discount rate.
The Facts
August 6, 2010
Even though the approval rate will drop, RALs will still be available at a higher cost to the consumers. No matter if you are pro or con RAL, the alarming issue is the Fed's intrusion in the oper market of doing business and making it difficult for the consumer to get the product that they need or want..
Esquire
August 6, 2010
the IRS essentially washed their hands of their complicity in the RAL business. Now, it will all fall back to private businesses and old fashioned under-writing to get these loans to people who want them. Unfortunately, those who want them are often the most desperate and the least financially astute. Bank Talk probably is right that MetaBank will profit handsomely because they will reap huge fees to make the tax pro fee a line of credit, and the wolves in the tax prep business will tax their cuts, too.
sdoggie
August 6, 2010
I agree with you that there will still be RALs next year. Ohio Valleyl, Republic, River City, HSBC, even perhaps MetaBank – none of them have said that they are stepping away. What we don\’t know is what the new product will look like. It seems likely that ti will have a new risk price.
On the second point, I need you to clarify. It sounds like you are saying that the government is intruding into the marketplace. Do you mean that they were intruding, when they supplied the underwriting to the private marketplace, or now, where they are no longer doing so?