What RALs Cost North Carolinians

Today’s announcement by the IRS that it is canceling the debt indicator is very significant.

The debt indicator is what made the refund anticipation loan possible. Without it, banks would never have been able to tell if a tax filer had outstanding tax liens. Now that the IRS is ceasing to provide the debt indicator, the future of refund anticipation loans seems dim.

RALs were a big business. More than 470,000 North Carolina households spent almost $50 million on RAL fees in 2006 (according to research we did with the IRS’ SPEC data).

The IRS’ complicit involvement in the RAL business was undermining efforts at Treasury to relieve poverty. The RAL had a nasty way of sapping the Earned Income Tax Credit.  More than half of all EITC recipients used a tax settlement product (A RAL, or a refund anticipation check) in 2006.

The whole thing reached its peak of idiocy when the government’s TARP funds were essentially propping up the largest RAL provider – Pacific Capital Bancorp.

It’s a win for consumers, and a loss for those banks and their partners in RALs, the tax prep shops.