The Internal Revenue Service will stop notifying lenders when a filer's refund will be intercepted to pay for a government debt, according to a report in The Virginian-Pilot.
Banks working with tax-preparation companies use the IRS's "debt indicator" when deciding whether to extend a refund anticipation loan. The agency now will no longer provide that credit information to banks making tax-refund loans.
The loans, which are heavily marketed to lower-income households, provide a borrower with access to their cash in a day or two but at a hefty cost.
"We no longer see a need for the debt indicator in a world where we can process a tax return and deliver a refund in 10 days," IRS Commissioner Doug Shulman said in a statement.
The availability of the IRS's electronic-filing system, when coupled with the direct deposit of a refund to a bank account, enables tax-return filers to receive their refund rapidly, Shulman said.
The cost of the loans took tax-return filers' money and federal benefits that are meant to lift the working poor out of poverty, Chi Chi Wu, a staff attorney at the National Consumer Law Center in Boston, said in a statement. Consumer advocates, who criticized the availability of refund anticipation loans for years, lauded the decision.
The loans will become much more expensive because of the additional risk to banks, John Hewitt, CEO and founder of the Virginia Beach-based tax-preparation company Liberty Tax Service Inc., predicted. "The demand for refund anticipation loans is customer-driven," and many who would otherwise receive a loan will be turned down, he said in a statement.