Adam Rust is a director of research for the Community Reinvestment Association in North Carolina. The Association is a nonprofit of Durham that fights for minorities of and low-income groups. Rust says that the fees on the refund anticipation loans could about $50 to $200.
According to the Community Reinvestment Association, 470,000 residents of North Carolina pursue refund anticipation loans each year. Fifty-million dollars is paid for these services.
Some critics are stating that some people are assuming that they are getting their refunds quicker, but they do not realize that they are in fact paying more to get their refund only a couple weeks earlier than normal.
The IRS allows banks to use a financial instrument called a debt indicator, which many people allows the IRS to act as enablers of these types of loans. This tool would let banks know if the individual who was filing their tax return be getting the whole return, or if part of it was being taken out by child support, defaulted student loans, back taxes, or any other unpaid debts.
On Thursday, the IRS said that this particular financial tool would not be needed anymore as refunds can be done fast online.
However, without these debt indicators, banks will not know if they will recover their loan or not. Because of this, banks might be handling a great risk in giving out tax advance loans. A small amount of banks only are giving out these loans in the country.
Tax preparation offices normally process tax refunds. This move by the IRS was slammed by tax preparation offices because they believe the use of debt indicators will not stop these loans, but the lending risk will increase and make banks increase the fees for giving tax advance loans.
The tax preparation company H&R Block said that refund anticipation loans are a big need in communities that are low income. People in poorer communities generally live from paycheck to paycheck while juggling debt.
Another tax preparation group, Jackson Hewitt Tax Service, stated that refund anticipation loans are important and needed in economic downturns.