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IRS Ends Underwriting for Tax Refund Loans

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By Tanya Roth, Esq. on August 10, 2010 11:51 AM

About 10 million Americans received tax refund loans last year, and the IRS is going to do something about that. Many of us look at the Internal Revenue Service as the bad guy, depriving U.S. taxpayers of their hard-earned cash. But this time, the IRS says it is trying to do just the opposite. The agency will no longer provide certain information to banks letting them know that a tax refund will shortly be available for deposit, therefore making it riskier for the banks to underwrite tax refund loans.

The agency says it will now withhold a digital indicator that tells banks when taxpayers qualify for the refunds claimed on their tax returns and that a deposit will shortly be made, according to Bloomberg. The new decision to eliminate that indicator is aimed at helping to regulate the tax preparation industry. Many taxpayers have been pray to unscrupulous tax preparers; the Department of Justice filed a suit against five more tax preparers just this past January.

In addition, these tax refund loans can cost up to 25 percent of the total refund in fees and are often marketed to those who don't need them, Bloomberg reports. The loans, which are short term, (usually lasting between five and 14 days) are contracts between the taxpayer and the lending banks. The debt indicator tells banks issuing the loans that the borrower's tax refund won't be withheld to satisfy government debts or unpaid child support and that the money will be available to them. Without this type of assurance, the pricing of the loans will rise to reflect the true risk the lender is taking, according to Steve Trager, president of Republic Bancorp.

"We no longer see a need for the debt indicator in a world where we can process a tax return and deliver a refund in 10 days," IRS Commissioner Doug Shulman said in a statement. "We encourage taxpayers to use e-file with direct deposit so they can get their refunds in just a few days."

According to Bloomberg, the tax preparers, such as the well-known H&R Block, see this development differently. "Our real concern is how the increased lending risk will potentially hurt consumers with significantly lower loan approval rates and higher costs for the most vulnerable taxpayers," Alan Bennett, the company's president, said in a statement.

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