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Will IRS Debit Cards Curb Refund Anticipation Loans?

Thanks to the Treasury Department, 600,000 low- and moderate-income taxpayers can get their tax refunds through prepaid debit cards this tax season. Such filers, who earn about $35,000 or less, will start seeing letters arrive in their mailboxes next week that explain how to get on board. The measure not only folds into the IRS’ ongoing efforts to go paperless, but also provides this subset of taxpayers a possible alternative to pricey refund-anticipation loans and refund-anticipation checks.

The mailings–as detailed in a Wall Street Journal story–will explain how to activate a MyAccountCard Visa prepaid debit card. The card provides many routine features of a traditional checking account like free bill pay, point-of-sale transactions and ATM withdrawals at more than 15,000 machines. The letters will pitch—at random—slightly different deals to recipients to help evaluate which features, fee structures and marketing approaches are most appealing. Some will offer a savings-account feature. Half of the offers will carry a $4.95 monthly fee, while the rest will be free.

The pilot, originally announced in September, will cost the government about $1.5 million. The U.S. issues an estimated 45 million paper-check refunds a year at a cost of about $1 a check, which includes the cost of processing missing-check claims, WSJ reported. Direct deposit payments are nearly one-tenth the cost. With almost 70% of taxpayers e-filing their returns in 2010, Congress is focusing in on its 80% target for e-filing.

Consumer advocates are cheering the Treasury’s move. MyAccountNow “enables taxpayers to get their tax refunds fast without paying steep fees for refund-anticipation loans or refund-anticipation checks,” says Jean Ann Fox of Consumer Federation of America. As The Tax Blog discussed just yesterday, refund-anticipation loans have become a hot-button issue for consumer-rights-minded groups and the government.

Yet analysts say that the program isn’t likely to make much of a dent in the millions of RALs issued each year (data from the Consumer Federation of America and the National Consumer Law Center show that 7.2 million filers got RALs in 2009). That’s not just because the 600,000 sampling is “miniscule,” says Vishnu Lekraj of Morningstar, Inc. “The loans are for money, right away, in your pocket. The [Treasury-issued] debit cards will run up against RACs more than RALS,” he says.

RACs–or refund anticipation checks–are temporary accounts opened in the filer’s name into which the IRS directly deposits a refund. The service deducts the cost of tax preparation from the refund, so filers don’t have to pay upfront to have their taxes done.  Like the debit cards, RACs have a turnaround time of about eight to 15 days.

Analysts do anticipate the Treasury pilot will pick up steam next tax season. “I wouldn’t underestimate the government’s ability to market this,” says Vance Edelson, executive director at Morgan Stanley.  He likewise notes that “the government is moving in on [tax preparers’] turf.”

Readers, do you think the Treasury’s pilot program will take off or have any impact on the number of people who apply for refund-anticipation loans?


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Comments (5 of 8)

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    • Knoekcd my socks off with knowledge!

    • ko es mekleju, paldies

    • i dont think it would take off and work. however if the irs wNted me to pay $50-$100 to them so i could get my refund in 3-5 days in stead of 15 days…that for surd would be a big hit

    • Why no mention of the effective interest rates of these loans? According to a Americans for Financial Reform, it ranges from 40 to 700% APR….I believe the lenders get around the usury laws because even though these are effectively 10 day loans, because the “end date” of the loan isn’t known, there’s some loophole where they get away with charging higher rates b/c it’s assumed that’s a it a year long loan. (If there’s an attorney who wants to explain this more clearly, go for it).

      The NYT has an article today about another form of loan-sharking- loans given to poor people who are waiting on lawsuit settlements…also accompanied with usurious loan rates.

    • The IRS will never process the cards as well or quickly as the tax prep companies. Many tax payers want their money NOW, not in 15 days, and they want to pay from their refund NOW because they don’t have the money (or bank, or credit card).

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  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.