Refund anticipation loan
The loan term was usually about two to three weeks, related to the time it took the U.S. Internal Revenue Service to deposit refunds in electronic accounts.
The refund advance loans became a success from the start and a sensation in the area in 1986 and 1987 and was the first and only firm in the United States that was offering that service according to the IRS.
The practice of tax refunds being used in conjunction with car financing quickly spread throughout the area and then throughout the entire United States.
In 1989 H & R Block joined in, coopting into thousands of accounting firms and tax practices across the United States and becoming a billion-dollar industry.
This meant that there was good chance that the IRS would pay the refund within weeks, barring fraudulent income reporting.
As a result of this, and also to discourage filers from this rather uneconomical offer, in 1994 the IRS stopped providing tax preparers with a confirmation that a deposit would take place for a certain amount and that it would begin sending refunds directly to taxpayers instead of banks that made the loan,[13] but not having the desired effects, the confirmations were re-instated the following year.
[14] Opponents of RALs, like the National Consumer Law Center, argue that the profit motive of the lender results in RALs being issued too often to low-income individuals who are made to believe the wait for their refund is longer than it really is, who do not realize they are taking a loan, do not understand the high interest rates charged by the loan (often exceeding 100% APR until the last two tax filing seasons), and who do not actually need the funds immediately.
This risk exists even if the client is only using the RAC account for purposes of taking the tax preparation fees out of the refund.
[3] On August 5, 2010, the IRS announced that for the upcoming 2011 tax filing season, the agency would no longer be providing preparers and associated financial institutions with the "debt indicator" (a one-letter code that discloses whether or not the taxpayer owes back taxes and whether or not the taxpayer owes federally collected obligations such as child support, student loans, etc.).
[19] In the same news release, the IRS stated it was exploring ways to allow filers to directly split off part of the refund to pay for professional tax preparation, possibly starting in January 2012.
They will instead be offering the similar financial products of RACs, which are not loans but are rather temporary accounts which sit empty waiting for the client's IRS refund.
