Early Income Tax Loans
When e-filing began becoming common practice at the major tax prep chains across the nation, the early income tax loan began as well. Commonly called "refund anticipation loans," these bank products quickly became a major source of revenue for tax prep chains. The refund anticipation loan, which had been gaining in popularity from their inception has been steadily losing favor in the early 21st century. It isn't for the lack of desire for the product, it is more about those who request the product.
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History of Early Income Tax Loans
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Before electronic filing existed, it wasn't unusual to receive a tax refund check a full two months or more after mailing in the return. People were used to waiting, and there were no problems with doing so. With the advent of electronic filing came the idea of creating a loan product that equals the amount of the taxpayer's anticipated refund. The return would be processed and soon be approved. The tax prep office would have a check for the taxpayer within one week instead of two months.
How the Product Works
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An early income tax loan is a bank loan that equals the anticipated amount of a tax refund. The length of the loan is usually 10 days, which is the length of time it would take a tax refund to be directly deposited into a taxpayer's checking account. The interest rate on these loans can range from about 50 percent to 500 percent. The banks offering these products attempt to make as much profit per loan as possible, and that means charging exorbitant interest rates.
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The Name Changes
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Because tax prep chains were able to use this bank product to get a taxpayer's refund so much earlier, they began to refer to these bank products as "rapid refunds." These products became so popular that more than 70 percent of clients were requesting the rapid refund. Advocacy groups began taking on the tax prep industry and forced it to stop using the term "rapid refund" and begin using the term that more accurately described the product as a bank loan-- 'refund anticipation loan."
Advocacy Groups Keep Up Attacks
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After successfully forcing the major tax prep chains to stop mislabeling these products, the attacks did not stop. Lenders began withdrawing the bank products to avoid the negative publicity and potential lawsuits. Two of the major providers of refund anticipation loans, J.P Chase Morgan Bank and Santa Barbara Bank and Trust, stopped offering the products after the 2009 tax year. Santa Barbara was the major provider for the Jackson-Hewitt franchise.
IRS Changes Laws
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Because of the many complaints about these bank products, the Internal Revenue Service changed the rules about offering these products. The provider must ensure that the client is aware that first, she will not be receiving her refund from the IRS; second, that the refund anticipation loans are loans and not a quicker way of receiving refunds from the IRS; and third, that she may not receive the loan if there are delinquent taxes or child support delinquency.
The provider must also make the client aware of all fees for services that will be taken from the refund amount, and the client must give consent for her personal information to be sent to the lending institution.
The professional preparing the return must not be connected with the lender providing the loan. And the provider is not permitted to charge fees based on the amount of the refund, it must be a fixed fee that is identical for all customers.
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References
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