Refund Anticipation Loans

Taxpayers who do not want to wait for their tax refunds from the Internal Revenue Service (IRS) may choose to obtain refund anticipation loans (RAL). RALs are short-term, high-interest bank loans that are advertised and brokered by both national chain and local tax preparation companies. Although the annual percentage rate (APR) on RALs can be over 500 percent, they allow taxpayers to receive cash refunds quickly--sometimes within the same day and even within an hour of filing their tax returns. After filing a taxpayer's return electronically, the tax preparer works in cooperation with a bank to advance the refund as a loan minus tax preparation costs, other fees, and a finance charge. As part of the RAL process, the taxpayer provides authorization to IRS to send the refund directly to the bank to repay the loan. Despite the benefits of receiving cash quickly based on an expected refund, IRS officials and others have raised concerns about whether taxpayers are fully aware of the costs involved and their tax filing alternatives. For example, in a 2007 report to Congress, the IRS National Taxpayer Advocate questioned whether RAL consumers actually understand the nature of the loan product they are receiving. According to the Advocate, while tax preparers offering RALs are required to obtain taxpayers' signatures on written disclosure forms, there are no requirements that such disclosures be made orally. The Advocate wrote that despite the written disclosures provided to them, consumers may not fully understand that the RAL is in fact a loan and not simply a way to receive a faster refund from IRS. Further, without an oral explanation, consumers may lack a general understanding of the nature of the product and its impact on credit reports, as well as other consequences of default. In January 2008, in order to address this issue, IRS and the Department of the Treasury (Treasury) indicated in a Federal Register notice that they were considering rules to prohibit tax preparers from marketing RALs based on information gathered during the tax preparation process. In their notice, IRS and Treasury cite concerns about tax preparers improperly inflating refunds in order to market RALs, particularly when working with customers eligible for the earned income tax credit (EITC). IRS studies have found that this credit is particularly susceptible to fraud, in many cases perpetuated by paid tax preparers. In 1999, an IRS compliance study found $10.4 billion of overclaims on the EITC, of which $7.2 billion (70 percent) was attributed to tax returns completed by paid preparers. Based on continuing concerns over how RALs are marketed to taxpayers, Congress requested that GAO perform a limited investigation to identify examples of where RALs are marketed and the types of information tax preparers disclose to potential RAL applicants.