Refund Anticipation Loan (RAL) Basics
REFUND ANTICIPATION LOAN
Definition of a RAL…
A refund anticipation loan (RAL) is a loan made to a
taxpayer by a bank, based on several criteria including
the taxpayer’s anticipated federal tax refund.
This loan provides a taxpayer with credit, usually up
to the amount of the taxpayer’s expected IRS refund.
But, since IRS refunds can take up to 6-8 weeks to receive,
RALs enable taxpayers with pressing financial needs to
quickly access short-term credit to meet immediate needs.
Banks make these loans, which are facilitated by tax
return preparers and extensively regulated by federal
authorities, including the IRS and the Office of the
Comptroller of the Currency (for national banks) among
others.
Reasons to Obtain a RAL…
It’s estimated that more than 8 million taxpayers obtain RALs during the tax season. Specifically, taxpayers find that RALs provide:
Speed – RALs provide
access to short-term credit and funds, typically within
1-2 days. This quick turnaround time allows many taxpayers
to meet pressing needs or family emergencies. Because
many RAL customers are credit-constrained or without
access to credit cards and/or checking accounts, RALs
serve an immediate need for access to short-term credit.
Those without a personal bank account or those who
are unable to secure a conventional loan use RALs to
expedite funds, cutting up to eight weeks off the time
they would otherwise have to wait for the IRS to deliver
their paper check in the mail. Those who have bank
accounts, who file electronically, and who use direct
deposit, still save about 1-2 weeks.
Convenience – RALs not only help taxpayers address immediate financial needs, they also provide the convenience of not having to pay out-of-pocket for professional tax preparation and loan-related fees because these costs are deducted from the loan proceeds.
Security – RAL
funds are usually delivered at the tax preparation
office, helping taxpayers avoid concerns over lost
or delayed mail, security issues with their mailbox,
or problems transferring direct deposits into accounts
due to account or routing number errors.
Cost – For many
taxpayers who do not have access to other immediate
funds or credit, RALs can serve as a less costly
option than other alternatives. For example, late
payments or bounced check fees can be more costly
and damage credit ratings. RALs can cost as little
as, or less costly than one-tenth of payday
loans on a per-$100 basis, and are often comparable
to the cost of a credit card cash advance for the
same amount.
Regulation of RALs…
At least ten federal laws 1 and IRS rules 2 provide
extensive regulation of RALs. Advertising is regulated,
fees are restricted, deceptive practices are prohibited,
and penalties are provided. Tax professionals advise
clients of comparative delivery times for IRS refunds
and different bank products and less expensive forms
of credit may be available. Consumers must be informed
that RALs are loans rather than tax refunds, and that
they are responsible for repayment of the loan if the
IRS does not issue the full amount of the anticipated
refund.
OTHER TAX-RELATED FINANCIAL PRODUCTS
(ACRs and RACs)
Definition…
Another tax-related financial option is a non-loan financial tool, often called an accelerated check refund (ACR) or a refund anticipation check (RAC). This product enables taxpayers without a traditional bank account to accelerate the refund process. With this tool, temporary bank accounts are set up for taxpayers to receive the IRS direct deposit of refunds. Associated fees and tax preparation fees are deducted from the refund amount.
Reason to Obtain…
ACRs and RACs enable taxpayers without traditional bank
accounts to obtain the speed of an IRS direct deposit
refund in 8-15 days, rather than waiting for IRS delivery
of a mailed refund check, which can take up to 6 weeks.
Regulations…
Providers of these non-loan products are required to disclose the full terms, including all costs associated with the product, and comply with IRS fee and advertising restrictions.
1. All aspects of the RAL process must be compliant with applicable federal laws and regulations, including the Truth in Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, Federal Trade Commission Act, Fair Debt Collection Practices Act, Electronic Funds Transfer Act, Gramm-Leach-Bliley Act, National Bank Act (for national banks), USA Patriot Act, and Internal Revenue Code.
2. To facilitate RALs, tax return preparers must apply to the IRS and be approved as Electronic Return Originators (EROs). The IRS subjects ERO applicants to a suitability test that may include fingerprinting and an FBI criminal background check, a credit history check, a tax compliance check to ensure that all required returns are filed and paid, and a check for prior non- compliance with IRS e-file requirements. Once approved, an ERO’s identification number is included on all returns he e-files. The IRS extensively regulates EROs and RALs through Revenue Procedure 2005-60 and IRS Publications 1345, 3112, 1345A, 1346, and 1436.
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