IRS promotes Usury?

In an effort to take advantage of and promote use of electronic filing for tax returns, the IRS has been accused of assisting tax preparers to gouge consumers through the use of extremely high interest rates on tax refund loans. The IRS is providing The Debt Indicator Service that allows tax preparers (lenders) to verify a potential refund for a taxpayer. Essentially, this amounts to a free credit check for the lender to determine if this refund will be available to pay back a loan given to the customer based on the anticipated refund.

Preying on consumers desire for immediate cash, preparers have marketed this as a value added service through promotion of instant gratification (24 hour turnaround). As the fees for this service are deducted from the refund, the consumer does not feel the impact. Their desire to get the cash now outweighs the financial ramifications of this transaction. The price associated for obtaining this cash is not regulated and has allowed many companies to turn a handsome profit with very little risk. Based upon prices for RALs (Refund Anticipation Loans), a consumer can expect to pay about $100 in order to get an average refund of about $2,150. This fee includes a fee for a "dummy" bank account to be used to receive the refund from the IRS to repay this loan. The effective APR on this loan would be 178%. (A number that is not revealed nor discussed with the taxpayer). Depending on the amount of the refund, this % may be as high as 700%.

The IRS views this service as a way to allow tax preparers to make these loans, thus encouraging mostly low income taxpayers to file electronically. According to their data, 78% of RAL applicants in 2004 had adjusted gross incomes of less than $35,000. These exhorbinant interest rates are thus being applied to those who can afford them the least.

Although consumers certainly have the ability to determine these rates, and can theoretically make an informed decision, this appears to be American capitalism at its best (or worst). Companies providing this service are targeting consumers who are more prone to quick cash loan offers. These consumers also make use of rent-to-own credit services, payday loan services and pawnshop services.

Other companies have also taken advantage of this IRS service to provide these loans for cars, and big ticket appliance purchases. They have realized the opportunity to market to consumers for these purchases, while having the ability to minimize their risk through the debt indicator service.

As for the role of the IRS, this debt indicator service may be helping them to reach their targets for electronic filing, but this self serving arrangement may only help to perpetuate the animosity for their organization in the minds of consumers. In addition to the obvious issues from this, there is also a concern from consumer groups regarding their privacy. The IRS is releasing information to these companies regarding a consumers personal financial situation. For example, if a taxpayer owes child support subject to withholding from a tax refund, he/she would not qualify for an RAL. Suddenly, this information is not private, but available to these lenders.

With a recent push from consumer groups, some of the more reputable tax preparers such as H&R Block have reduced some of the fees associated with this service, but not all have followed suit. It would appear that this type of program will continue as long as consumers are willing to pay the price, or until the government steps in and tries to regulate this type of behavior. Until then, these companies are filling a need in the marketplace and will continue to profit from their services.

For more information:

http://www.bankrate.com/brm/itax/news/20030127a1.asp

http://www.consumeraffairs.com/finance/hr_block_ral.html

http://www.consumerlaw.org/initiatives/refund_anticipation/content/debt_indicator_pressrelease.pdf