IRS will stop aiding the issue of high cost loans to poor

The IRS announced this week that they’ll no longer be providing something called the “debt indicator” to tax preparers.

Most people have never heard of this item. (In fact, while I was aware of the concept, I didn’t even know this specific term before the announcement.) This is an indicator of a taxpayer’s creditworthiness that is used by tax preparation firms to determine eligibility for Refund Anticipation Loans (RALs) and Refund Anticipation Checks (RACs). RALs are essentially very high-cost loans frequently used by low-income taxpayers to get fast access to their tax refunds. And by high-cost, we’re talking about taxpayers paying hundreds of dollars to get their refunds a week or two faster than waiting for the IRS to issue the refund.

So you’re likely to see fewer advertisements next season offering instant tax refunds. And I think this is a great thing. Many low income taxpayers are not financially savvy enough to understand what a terrible deal these loans are, and many unscrupulous tax preparers use them as a way to lure in clients, and make some extra cash by getting a cut of the fees on these high cost loans.

Of course, there are more steps that need to be taken to help the people who have used these products in the past. Many low income individuals don’t have access to bank accounts and need considerable financial education. But getting the IRS out of the business of aiding the selling of horrible financial products to these individuals is certainly a step in the right direction.

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