Refund Anticipation Loan - Third-party Cross-collection of Bank Debt ("previous Debt")

Third-party Cross-collection of Bank Debt ("previous Debt")

As part of applying for the loan, the client is also directing his or her refund to the loan-issuing bank. Cross-collection occurs when the bank then uses this occasion to collect debt owed another bank. As the IRS Taxpayer Advocate described the practice in 2006: “if a taxpayer owes money on a defaulted RAL to Bank A and subsequently attempts to buy another RAL from Bank B, Bank B is authorized to collect the outstanding debt from the RAL proceeds, transmit the funds to Bank A.” This can also happen when the client signs up for non-loan banks product used to take the take the prep fee out of the refund. This practice is often not adequately disclosed to the tax preparation client. As a lawsuit filing against H&R Block by the California Attorney General in Feb. 2006 stated, “H&R Block does not adequately tell such customers about any alleged debts, or that when they sign the new RAL application, they agree to automatic debt collection - including collection on alleged RAL-related debts from other tax preparers or banks. These applications are denied, and the customer's anticipated refund is used to pay off the debt, plus a fee.” Tax prep firms sometimes merely vaguely refer to this practice as "previous debt."