IRS Considers New Restrictions on Refund Anticipation Loans

Illinois Offers Resources

With the catastrophic housing market, rising costs of food and energy, and talks about a looming recession, many cash-strapped Americans will be tempted by quick, yet costly, refund anticipation loans during this upcoming tax season. In a recent press conference with the Illinois Department of Financial and Professional Regulation, John Bouman, president of the Shriver Center, said about lenders of such loans, “They take this chance to develop an asset, and they turn it into expensive, bad debt.”

The Internal Revenue Service is considering a proposal to restrict tax preparers from offering refund anticipation loans in connection with the preparation of tax returns, according to American Banker. Anecdotal evidence shows that tax preparers promote tax fraud when they encourage their consumers to inflate their anticipated tax refund in order to secure a larger cash advance.

Although refund anticipation loans represent a fairly low risk to lenders, the loans are offered at interest rates ranging from 40 percent to over 700 percent. An overwhelming majority of loan recipients are the working poor, and lenders of refund anticipation loans strip an average of $1.57 billion each year from recipients of the earned income tax credit, the largest federal poverty assistance program. Refund anticipation loans speed up the refund by only as little as one week when compared to filing online and having the refund directly deposited into a bank account. To learn more, visit http://www.responsiblelending.org/issues/refund/.

More than ever, advocates must be responsible for both educating consumers and proposing policies to protect consumer assets. Advocates can start by writing letters to the IRS during the 90-day comment period. More information on the proposed rules can be found at http://www.irs.gov/pub/irs-drop/reg-136596-07_anprm.pdf.

State advocates can support legislation to institute usury caps, which limit the interest rates that lenders may charge, and state agencies can help by promoting websites that encourage consumers to link to free tax-preparation resources and to file taxes electronically. Brian Hamer, director of the Illinois Department of Revenue, says that e-filing is the best way to go. “It is fast, easy and secure.” See http://myrefund.illinois.gov/ for more information.

The Shriver Center is committed to building the stability of families and working to move individuals from poverty to prosperity through asset building and protection. For more information, contact Dory Rand at doryrand@povertylaw.org or Kelly E. Slay at kellyslay@povertylaw.org