Assemblyman Marcos A. Crespo: Avoid Risky Refund Anticipation Loans (RALs) and Refund Anticipation Checks (RACs) This Tax Season
In these difficult economic times, this year’s tax season will leave many hardworking families eagerly anticipating their tax refunds for some much-needed cash. Tough economic circumstances may tempt taxpayers to seek tax refund anticipation loans (RALs), which provide money right away in exchange for an extraordinarily steep fee. Recently, the Internal Revenue Service (IRS) has been cracking down on financial establishments, making it more difficult for them to offer such risky financial products to taxpayers, many of whom aren’t aware of the hidden details in the fine print of RALs.
RALs are one-to-two-week loans made by banks, facilitated by tax preparers, and secured by the taxpayer’s expected tax refund. RALs can carry annual percentage rates (APRs) ranging from 60-700 percent and potentially expose taxpayers to exorbitant unpaid debt if their refunds do not arrive as expected.i The loan term is short and there is often not enough time to save the money needed to repay the loan in full. If the loan cannot be paid back in full at the end of the term, it has to be renewed, extended or more money has to be borrowed to cover the first loan.ii
The IRS and New York State have both gone to great lengths to crack down on this form of predatory lending. New York State has decreased the frequency of RALs by prohibiting tax preparers from advertising RALs as “refunds.” The preparers must also state in an obvious fashion that an RAL is a loan – not a refund – and that fees or interest will be charged. In the past few years, the IRS also eliminated the Debt Indicator, a service that helped tax preparers and banks lend RALs by allowing them access to certain taxpayer information.iii
South Bronx families should know that the IRS has taken measures to make RALs less appealing by providing safer and quicker alternatives to the traditional wait time for tax refunds. These options include direct-deposit tax refunds that are processed in less than two weeks and tax refunds that are processed in a matter of days if one chooses to file electronically.
RALs are not the only high-cost tax-refund financial product to watch out for at this time of year. Tax preparers who are unable to sell RALs have turned to Refund Anticipation Checks (RACs), a temporary bank account in which the IRS direct deposits a refund check. When the money is gone, the account closes automatically. While cheaper than an RAL, those who set up RACs will incur set-up fees, check-cashing fees and other miscellaneous costs.
To speed up your tax refund’s turnaround time, consider the following suggestions:
- File your taxes online using an e-file system. Taxes filed online are often processed within 7 to 10 business days.
- Check your refund status using the IRS’s “where’s my refund” tool(www.irs.gov/individuals/article/0,,id=96596,00.html).
- Indicate “direct deposit” on your tax return form. Taxpayers who choose direct deposit when filing their taxes will have their return deposited into their checking accounts within 10 days of filing.
- If you don’t have a bank account, open one today. Many banks provide free checking accounts to consumers.
These tough economic times make instant cash appealing to hardworking families. But turning to an RAL or RAC can be a very dangerous and risky solution, especially when there are safer and more reliable alternatives out there.
For more information, please visit the IRS at www.IRS.gov or check out www.tax.ny.gov, the website for New York State’s Department of Taxation and Finance. Please do not hesitate to contact me concerning this or any other important community issue at 718-893-0202 or Crespom@assembly.state.ny.us.