Earned Income Tax Credit (US) - Storefront "RALs" (Refund Anticipation Loans)

Storefront "RALs" (Refund Anticipation Loans)

The combination of EIC and "RALs" (Refund Anticipation Loans) has been the primary engine of the storefront tax preparation industry, including the very familiar companies of H&R Block, Jackson Hewitt, and Liberty Tax, as well as smaller chains and independent practitioners. RALs have been criticized on various grounds including the high interest rates common to short-term loans. The loans are often not as easy to be approved for as the advertising implies. In fact, RAL advertisement phrases such as "Rapid Refund" have been deemed deceptive and illegal. Customers denied these loans then have their RAL application converted to a RAC (Refund Anticipation Check), which is an estimated two-week bank product (10 days or more, no set date, no guarantee), in which the account merely sits empty waiting for the IRS refund (if any). And although such customers do not pay interest, they pay other fees. In addition, there is the practice of cross-collection which is often merely vaguely referred to as "previous debt," in which the loan-issuing bank (such as HSBC or Santa Barbara Bank & Trust in recent years) engages in debt collection for other banks who issued RALs in previous years to persons whose expected tax refunds then went uncollected. That is, HSBC or Santa Barbara will take all or part of a client's tax refund for purposes of third-party debt collection. This can also occur with the non-loan bank products used to take the tax prep fee out of the refund. This practice may not be adequately disclosed to the tax preparation client, just as some clients fail to disclose obligations that result in government taking their refunds. Of course, modernization of tax return processing may reduce or eliminate the remittance delay on which these short-term loans are based. For the upcoming 2010 tax season, the IRS will no longer be providing preparers and financial institutions with the “debt indicator.” Presumably, the result will be that fewer RALs are approved and that more RALs are then converted to RACS (estimated two-week product).