IRS delivered a Knockout Punch to RAL

[dtlee]

As I read it, the RAL will still be available, but the IRS is beginning to realize that working out something to enable the RAL/EIC crowd to pay the preparer thru a direct IRS-to-preparer method and bypassing the RAL banks and associated fees would be in the best interest of all concerned. By waiting 10 days rather than getting the loan a big savings would occur and the preparer would get paid without having to resort to the RAL method.

None of my clients would be affected since they all have funds to pay me, but it would be a big benefit to those who are unable to pay their preparers without an RAL.

I agree that these alternatives are better. I had several clients receive their refund within a week last year and was completely baffled (as were they). However, there have been methods to pay a preparer without a huge interest fee in the past, it is just that few preparers pushed these and few customers wanted them.

I also question how I would get paid by the refund if the client had a huge debt to the government. Would I get paid first and then the government? I doubt it. Without the debt indicator, I would not know that I am not getting paid until it happens.

[MLINDER42]

Rals

Received e-mail from River City Bank my RAL provider they will still offer them but use other criteria to grant loans.Probably fewer people will qualify but that has been happening anyway. I don't see a big difference.

[taxmandan]

That the IRS has tried this before .. maybe ten, fifteen years ago or so. Eliminated the debt indicator. The banks continued to offer RALs, but only after doing real credit checks and then only for previous year RAL customers. Huge outcry from all concerned. Debt indicator was back the next year.

Anyone else remember that, or is this just a senior moment in reverse?

Update - The IRS eliminated the debt indicator in 1994 to cut down on RAL fraud. In 1998 congress set a goal of 80% participation in the e-file program. The IRS reinstated the debt indicator in 1999 as an incentive for the e-filing industry.

Ref: Corporate Welfare for the RAL Industry: The Debt Indicator. Congressional Record Oct 20 2005.

Yes, that was 1995, my first year in tax prep and boy was that fun! I worked for one of the two nat'l firms where that was the bread & butter business. Really angered the clients and the DDI came back the next year.

You don't need a RAL to get the prep fee deducted from the refund. Chase (now out of the business) had a RAC where the fee was deducted and the balance forwarded to the client, much cheaper than the loans and I have a large number of early season clients who use that option. My tax software offers that option now also and that is what I will probably use.

[OtisMozzetti]

we can live with it: 3-day money has had knockout blow

I believe that the lack of debt indicator will make it impossible for banks to approve RAL's to many but the most creditworthy, who seldom apply for RAL's anyhow.

It won't matter much, though, to the tax preparation industry as a whole, because those that seek fast cash will in most instances settle if they must settle for the 2-week money, i.e. for RAC's. It will probably still be true that those wanting quick money will be able to apply for RAL's, which convert automatically into RAC's if the RAL is not accepted by the Bank. All it will take is an honest statement to RAL applicants that a much higher percentage of RAL's will no longer be approved by the banks.

Yet another benefit is that the banks won't collect as many RAL fees and interest on the anticipation loans. Clients typically think of those bank fees as part of the expense of tax preparation; so in a way it will make tax preparation seem that much less expensive.

[taxea]

I have never done a RAL and never will.

[gkaiseril]

The banks could still provide the RAC, since there is no release of funds until the IRS makes the refund deposit. This product helps those taxpayers that do not have a checking or savings account get their money like a direct deposit with a fee.

The RALs are a different story, but since the first attempt at removing the offset flag, the banks have kept a history file on these borrowers along with a credit check, have the computer make a decision. Also many banks provide an answer and do decline bad risks within 72 hours or less. This action could cause the banks to raise the service fee and loss splitting so expensive that small firms may not be be able to provide this service, so only the larger services may provide this service.

Makes one want to look to Canada, where the tax preparation firm can either have an ownership interest in the bank making the RAL or directly make the RAL to the taxpayer.

[FEDUKE404]

Perspective on RALs

......
HRB stock down 3%; JH down 23%. right twenty three percent.

Actually, JTX is now under $1 after trading in the high 30's as recently as late 2007. While there are other reasons for its demise, rest assured problems with its "bread and butter" high-priced RALs and associated average clientele were both major factors.

Having worked with a "couple" of store-front firms over the years, I was always amazed at what people would pay to get quick money. I finally figured, especially for the EITC folks, since they were playing with the house money anyway, walking out the door with a huge check was seen as a positive. So what if they dropped a bunch of funds in the pockets of the business owner on the way out?!?

Most rational clients now realize how quickly their refunds can arrive, especially with efiling and direct deposit. To them, tossing large amounts of money at someone just to see a refund a few days earlier than is otherwise possible is viewing as ridiculous!

I do like the IRS mention that a system is being considered for tax preparation fee payments to be made, more or less painlessly and possibly without using a third party, to the tax preparer.

FE

[taxxcpa]

Getting paid

[QUOTE=dtlee;105830

I also question how I would get paid by the refund if the client had a huge debt to the government. Would I get paid first and then the government? I doubt it. Without the debt indicator, I would not know that I am not getting paid until it happens.[/QUOTE]

The preparer would probably be the low man on the totem pole. You might need to add a fee to cover the risk involved. If you did ten returns with the payment to be deducted from the refund, probably 9 would come through and if you lost on one, the extra fee might cover most of that loss. Next year you would need to collect in cash from the guy that defaulted if he came back. He would probably switch preparers and come to some sucker like me the next year.

[taxmandan]

I also question how I would get paid by the refund if the client had a huge debt to the government. Would I get paid first and then the government? I doubt it. Without the debt indicator, I would not know that I am not getting paid until it happens.

You need to call the FMS offset to find out if there is an offset of the refund BEFORE you file the return. I usually do it before I even prepare the return, when the client indicates that they want a RAC or RAL. I haven't lost a fee yet to an offset.

[luke]

what is FMS?

and how do I "call"?

[ChEAr$]

FMS is financial management service, a branch of U S Treasury which administers payments.
The do have a telephone in their office, but I don't know the number.

[origun]

Don't like RALs but they aren't as bad as some of the opponents say

I am an EA working for Block so do have to deal with RALs although I discourage clients from using them if at all possible. They are more work for me (lots of paperwork) with no additional compensation and they cost the taxpayer too much. However, they aren't as costly as I have heard some people say; if our clients have the proceeds put on one of our Emerald Cards (works like a debit card) the interest rate is about 36%. HSBC is the bank we use. I caution clients to only use as a "swipe" debit card at stores and get cash back (not at ATMs) to avoid all other charges. 36% is not a great rate for sure, but nothing like the 200+ % I read about.

There are some people in desperate financial shape who really need the money to pay the rent to avoid eviction, for example, and these loans are far preferable to payday loans at storefront lenders. And, unfortunately, many of these people don't have checking accounts so can't use direct deposits.

[David1980]

However, they aren't as costly as I have heard some people say; if our clients have the proceeds put on one of our Emerald Cards (works like a debit card) the interest rate is about 36%. HSBC is the bank we use. I caution clients to only use as a "swipe" debit card at stores and get cash back (not at ATMs) to avoid all other charges. 36% is not a great rate for sure, but nothing like the 200+ % I read about.

Part of it depends upon how you calculate the interest rate. I'm not sure how HRB calculates it, or what fees they charge when they do a RAL, but it's not uncommon for the bank to calculate not including any RAL or bank fees other than the interest when they determine the interest rate, while many consumer organizations (correctly IMO) add the bank fees in when calculating APR.

For example a $1000 refund with say, 10-days til funding (so a 10 day loan) at 36% APR would cost $9.86. If the fees ended up being a $30 bank processing fee, a $20 RAL setup fee, and $9.86 of interest, the bank might calculate that as 36% interest, while a consumer group adds the $30, $20, and $9.86 and comes up with 218% APR interest.

[taxmandan]

and how do I "call"?

Have the client read and sign FMS Form 13, found here: http://www.fms.treas.gov/debt/top.html

Then call 800-304-3107 for an automated process to check for any government offset of a federal tax refund. Takes only a minute or so, and you have to one for both if MFJ. Ignore the fax instructions on Form 13, not necessary.

[WhiteOleander]

Have the client read and sign FMS Form 13, found here: http://www.fms.treas.gov/debt/top.html

Then call 800-304-3107 for an automated process to check for any government offset of a federal tax refund. Takes only a minute or so, and you have to one for both if MFJ. Ignore the fax instructions on Form 13, not necessary.

Thanks for the info.

Do you mean that you don't have to fax the form like you have to fax in POA's?