A (Tax) Refund Anticipation Loan (RAL) is a high interest rate short-term loan secured by a taxpayer’s expected tax refund. Image File history File links Unbalanced_scales. ... Look up usury in Wiktionary, the free dictionary. ... For other uses, see Loan (disambiguation). ... In the United States, taxpayers will get a tax refund, a refund on their U.S. income tax, if the tax they owe is less than the sum of: The total amount of refundable tax credits that they claim. ...

United States

In the United States, the taxpayer commonly applies for the loan through a paid tax preparation firm. The tax preparation firm receives a fee for each loan originated, but in the United States the Internal Revenue Service rules prohibit basing this fee on the amount of the expected refund. Only the banks through which the loan is made are allowed to charge interest or finance charges. Tax preparation is the act of preparing the filing of income taxes. ... Seal of the Internal Revenue Service Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        “IRS” redirects here. ...

According to the National Consumer Law Center, 12 million taxpayers used an RAL in 2004.^[1] With e-filing, tax refunds can be direct-deposited into the taxpayer's bank account within two weeks, rendering RALs less attractive to some. The National Consumer Law Center is a nonprofit organization specializing in consumer issues on behalf of low-income people. ...

Controversy

Despite their commonplace nature, RALs are controversial. Supporters of the practice say the loans allow people access to funds immediately in cases of an emergency such as overdue medical bills, credit payments, and other debts while they wait for the IRS to process their income tax return. Processing of a tax return can take anywhere from one week to a month and a half. Fees for these loans are in line with industry wide standards for non-secured loans.^{[citation needed]} Supporters of RALs may also contend that many individuals are not entirely truthful when completing their taxes, and that banks take a great risk relying on the word of an individual that his or her tax refund will be received in the amount claimed. Specifically, if a taxpayer provides false information when asked about outstanding federal or state taxes, past due child support, delinquent student loans this can cause the refund anticipation loan to be issued, but the tax refund is never issued by IRS as it is seized to pay debts. Seal of the Internal Revenue Service Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        “IRS” redirects here. ...

Opponents of RALs such as the National Consumer Law Center argue that the profit motive of the lender results in RALs being issued too often to low-income individuals who are made to think the wait for their refund is longer than it really is, who do not realize they are making a loan, who do not understand the high interest rates charged by the loan (often exceeding 100% APR), and who do not actually need the funds immediately. An empirical study at Georgetown University found that a large fraction of RAL customers appear to use limited decision processes.^[2] The National Consumer Law Center is a nonprofit organization specializing in consumer issues on behalf of low-income people. ...

Even cash advances on credit cards have much more attractive long term rates than RALs. For example, a representative RAL is a ten-day $3,000 refund anticipation loan with a loan fee of $89-$170, resulting in an annualized interest rate between 108% and 202%. However, over the 10 day loan period credit card cash advances are comparable in cost to RALs because of the upfront percentage fees added when consumers take such advances. RAL fees are generally calculated as 3% of the loan, while credit card advance fees vary from 2-5% of the amount advanced, making them clearly comparable. It also bears mention that credit cards with $3,000 limits are generally not available to consumers who seek RALs because of their low incomes and generally incredibly poor credit histories. Look up credit card in Wiktionary, the free dictionary. ...

More than half of all RAL consumers are low-income recipients of the Earned Income Tax Credit (EITC), despite the fact that EITC recipients constitute only 15% of all taxpayers. The United States federal Earned Income Tax Credit (EITC) is a refundable tax credit that reduces or eliminates the taxes that low-income working people pay (such as payroll taxes) and also frequently operates as a wage subsidy for low-income workers. ...

In 2002, H&R Block settled a lawsuit brought by the New York City Department of Consumer Affairs for predatory lending practices with regard to RALs and the EITC. Predatory lending is a pejorative term used to describe practices of some lenders. ...

In 2003, the Illinois Attorney General issued a detailed warning to taxpayers about such loans.

On February 15, 2006, the California Attorney General, Bill Lockyer, sued H&R Block over its refund anticipation loan business. The interest rates charged in that business exceed 500%, including fees (this includes the tax preparation fee, which is unrelated to the RAL, but included per California law). Lockyer said the company falsely portrays the nature of the loans, advertising "cash, cold, green, in your hand, out the door." In May 2005, a federal judge in Chicago rejected a $360 million settlement as inadequate.^[3] is the 46th day of the year in the Gregorian calendar. ... Year 2006 (MMVI) was a common year starting on Sunday of the Gregorian calendar. ... In most common law jurisdictions, the Attorney General is the main legal adviser to the government, and in some jurisdictions may in addition have executive responsibility for law enforcement or responsibility for public prosecutions. ... William Westwood Bill Lockyer (born May 8, 1941) is the current State Treasurer of California. ...

Despite the litigation cited above, the vast majority of RALs are legally made and several dozen lawsuits are dismissed against each of the major tax preparation firms each year.

In December 2006, firms like Jackson Hewitt and H&R Block were making refund anticipation loans as early as October 15, 2006, aimed at providing money to individuals for Christmas. These were RALs and encouraged (but did not require) the individuals to return to file their taxes 4-5 months later with that tax company. Jackson Hewitt Tax Service, Inc. ... H&R Block (NYSE: HRB) is the leading tax preparation company in the United States, and claims more than 22 million customers worldwide, with offices in Canada, Australia and the United Kingdom. ...

Because of this pressure HSBC which backs H&R Block and the largest provider of RALs, has announced it will be withdrawing from the pre tax season industry; HSBC does intend to continue tax season refund anticipation loans.^{[citation needed]} Santa Barbara Bank and Trust(a division of Pacific Capital Bank) and Chase, the second and third largest providers of RALs, have also discontinued refund loans outside of tax season, though both intend to continue making RALs during tax season. The withdrawal of the three major banks from the preseason loan industry has effectively destroyed the product and they are not being offered after April 30, 2007 by any of the three major tax preparation companies (H&R Block, Jackson Hewitt, and Liberty Tax). For other uses, see HSBC (disambiguation). ... H&R Block (NYSE: HRB) is the leading tax preparation company in the United States, and claims more than 22 million customers worldwide, with offices in Canada, Australia and the United Kingdom. ...

Canada

In Canada the process is referred to as "tax rebate discounting", where a tax preparation firm purchases the right to the anticipated refund in exchange for a percentage of the refund amount. Canada Revenue Agency rules establish the maximum discounting fee as 15% of the first 300 C$ and 5% of any remaining amount. No other fees for preparation or filing the return are permitted. This commonly works out to a high effective interest rate, although in a small number of cases the discount may be comparable or even less than an ordinary tax return preparation fee. The Canada Revenue Agency (CRA) administers: tax laws for the Government of Canada and for most provinces and territories; international trade legislation; and various social and economic benefit and incentive programs delivered through the tax system. ... “C$” redirects here. ...

IRS regulations contained in IRS Circular 230 specifically prevent the implementation of a similar system in the US as tax preparers are not allowed to charge fees as a percentage of a client's refund. Preparer fees (not to be confused with bank fees to issue the loan) can be based on hourly rates, form/schedule charges, both, or any other reasonable method, but not a percentage of refund.

References

External links

• Consumer Use of Tax Refund Anticipation Loans, Gregory Elliehausen, McDonough School of Business, Georgetown University, April 2005.
• National Consumer Law Center: Refund Anticipation Loans
• E-filing can make high-fee loans unnecessary, MSNBC, 2006-02-15
• Calif. sues H&R Block over tax refund loans, MSNBC, 2006-02-15