Some changes for the better — and some for the worse.

Taxpayers know them as instant refunds. Tax pros know them as RALs: refund anticipation loans. I call them Really Awful Loans. Return prepares that offer RALs say they're offering a service. I say RALs are a way for a tax return preparer that has already been fully paid for the service of preparing the return to siphon off part of the refund. We don't want to be sued, so we won't call the practice predatory. Let's just say it's carnivorous. There's good news, but also bad news, from the seamy world of RALs.

You Can Wait

If you have a tax refund coming, you can get one of these loans, or you can wait and get the refund when the IRS processes your return. I can understand wanting the money right away. But here's a fact about these loans: most of them are outstanding less than two weeks. You pay a hefty fee to enjoy now a chunk of cash that might otherwise hit your bank account in ten days or so.
    When the fee is converted to a rate of interest, the rate is astonishingly high. Many taxpayers who availed themselves of these services over the years have paid interest in triple digits: more than 100% on an annual basis. Some of the large return preparation firms have been in hot water for violating lending laws, in some cases by pretending these advances weren't loans at all.

No RALs on Free File

The best recent news on RALs is that they won't be offered in conjunction with the Free File program. This is an arrangement in which commercial tax return preparation companies offer free online filing through a portal provided on the IRS web site. The arrangement has come under attack for various reasons. One of the most serious problems has been attempts by the tax prep companies to get people in the free file program to pay for unnecessary services, including RALs. A service that's supposed to be free ends up being expensive for those who are suckered into these loans.
    Pressure from the Senate Finance Committee has forced the companies to backtrack in this area. It's been announced that for the 2007 filing season RALs will not be offered in connection with the Free File program. The only service to be offered for a fee is filing of state tax returns, and even that will be free in some instances. We'll have to see how this plays out, but it appears to be a positive development.

Bear in mind these companies are not acting out of generosity. They realize it may be only a matter of time until taxpayers will be allowed to file directly with the IRS, without having to use a commercial return preparer. They're doing whatever they can to keep the political heat off and prevent us from having this obviously desirable service.

The Amazingly Low Interest Rate of 36%

Also in the good news category, at least sort of good, is an announcement from H&R Block that they're going to offer RALs at the amazingly low interest rate of 36% this year. If that sounds high, bear in mind that the interest charges on these loans have traditionally been much higher. To get the benefit of this somewhat less carnivorous RAL, taxpayers will have to receive it in the form of a debit card, however. We have yet to see analysis of how this aspect of the deal affects the recipient's access to the cash.

Bad to Worse

Unfortunately, the favorable news in this area is offset by other developments. The big tax prep firms are now offering different types of RALs that create even greater concerns. Instead of waiting until the taxpayer comes in to prepare a return, they're offering to loan money against the tax refund based on a final pay stub, even before the taxpayer has received a W-2. These pay stub loans offer a way to charge additional fee and in some cases effectively lock taxpayers into using the firm's tax preparation service when they might otherwise get the return prepared free through the Free File program. The National Consumer Law Center has prepared a detailed report on these programs (PDF).

My feeling is that people in the tax prep business shouldn't be looking for ways to screw the taxpayer. That's Congress' job.

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