The IRS will stop providing information that helps banks issue short-term tax-refund loans, a move that advocates for the poor hope will put an end to the controversial high-interest loans.
The loans, which critics have attacked for years as predatory and unscrupulous, essentially function as an advance payment on a tax refund.
The fees on these refund anticipation loans can range between $50 and $200, said Adam Rust, research director at the Community Reinvestment Association of North Carolina, a Durham nonprofit that advocates for low-income and minority groups.
According to the group, about 470,000 North Carolina households take out refund anticipation loans every year and pay almost $50 million for the service.
Critics say that the people who take out these loans are sometimes under the impression they are getting a speedier tax refund without realizing they are paying extra fees to get their money only a week or two early.
The IRS has been criticized as an enabler of the loans because the agency provided a service to banks called the debt indicator. The financial tool alerted banks if the person filing the tax return would be receiving the full amount or if the total would be reduced by an outstanding lien for student loan defaults, child support, back taxes or some other unpaid debt.
The IRS on Thursday said the debt indicator is no longer necessary because tax refunds can be processed quickly online.
Without the debt indicator, a bank can't tell if it will recover its loan. As a result, the bank would be taking on greater risk in issuing a refund anticipation loan. Only a handful of banks in this country issue the loans.
The loans are typically processed by tax preparation services. The industry decried the IRS move, saying that ending the debt indicator won't end the loans, but will increase lending risk and force the banks to charge even higher fees for issuing refund anticipation loans.
Tax-prep chain H&R Block said refund anticipation loans serve a need in low-income communities, where people live from meager paycheck to paycheck and juggle debt.
Jackson Hewitt Tax Service, based in New Jersey, said the need for refund anticipation loans is great during an economic downturn.
