Debt indicators — IRS information about back taxes and other debts taxpayers owe — are going away. Tax preparers were warned by the IRS with debt indicators that back taxes and other debt may be paid off with the tax refund. Debt indicators are used by refund anticipation loan banks to determine whether to make short-term loans to customers backed by their tax refund.
Debt indicators not allowed in 2011 tax season
Saying they are no longer needed, the IRS announced Aug. 5 that it will stop providing debt indicators beginning with the upcoming 2011 tax season. Electronic filing and direct deposit lets taxpayers get their refund in a matter of days. The IRS said that eliminates the necessity for refund anticipation loans. Many companies use anticipation loans for much of their service to the underbanked and unbanked, meaning eliminating debt indicators is bad for their business.
Debt indicators help banks detect delinquents
There are many banks thriving off of refund anticipation loans, and they need debt indicators to tell them what rate of interest to give, how much to loan, and what kind of loan to give out. Journal of Accountancy reports that until now, when a tax preparer e-filed a client’s tax return, the IRS included a debt indicator in the acknowledgment file if the taxpayer would have any portion of the tax refund offset for delinquent taxes or other debts, including unpaid child support or delinquent federally funded student loans.
IRS feels strongly against refund anticipation loans
For giving someone cash just a few days before a tax refund arrives with high interest rates and fees, short term refund anticipation loans have been criticized by many. In 2008, 8.4 million taxpayers paid more than $ 738 million in fees for refund anticipation loans, according to the National Consumer Law Center. The Associated Press talked to IRS Commissioner Doug Shulman who said that those who are considered low-income are the ones targeted by anticipation loans. The longest it would take to get a tax refund would be 10 days when filing electronically and getting direct deposits. He explained:
“I think it’s unfortunate that there’s a lot of hardworking Americans that are in a financial situation where they have to pay a substantial fee to access their refunds a week or two before they can get it from the IRS.”
Lenders of refund anticipation loans mad
Companies that facilitate refund anticipation loans argue that debt indicators let taxpayers who are strapped for cash get their money faster. MarketWatch reports that Alan Bennett, president and CEO of H and R Block, said the IRS decision to ax the debt indicator would hurt consumers with considerably lower refund anticipation loan approval rates and higher costs for probably the most vulnerable taxpayers. He said these consumers are often unbanked or under-banked and can be forced to seek more costly and unregulated credit. Shares will go down 3 percent in 2011 making it go to 5 cents a share for H and R Block because of this.
Find more information on this subject
Journal of Accountancy
journalofaccountancy.com/Web/20103174.htm
Associated Press
google.com/hostednews/ap/article/ALeqM5gZhidWFh-omq3dh3M486iDXA4JbAD9HDHDKG0
MarketWatch
marketwatch.com/story/hr-block-responds-to-irs-elimination-of-the-debt-indicator-2010-08-05?reflink=MW_news_stmp
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