A Look at Refund Anticipation Loans and Refund Anticipation Checks - - PowerPoint PPT Presentation

Who Needs Credit at Tax Time and Why: A Look at Refund Anticipation Loans and Refund Anticipation Checks

Briefing for the U.S. Department of the Treasury

October 21, 2010

The Products

Refund Anticipation Loan (RAL)

• Interest-bearing loan

secured by taxpayers’ expected tax refund

• Loans made by banks

facilitated by tax preparers and software

• Loans received within 1-3

days Refund Anticipation Check (RAC)

• Bank opens temporary

account where tax refund is directly deposited

• Consumer issued a paper

check or debit card after refund arrives

• For tax filers with bank

accounts, no quicker than

• ther IRS direct deposit

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Product Fees and Profits

• Pricing varies and fees are ‘unbundled’
• Flat fee to set up account (typically $30-$35)
• RAL loan fee (typically 1% of loan)
• Document processing and other added fees
• RALs typically range from $62 to $117; RACs

typically cost $57

• Consumers paid approximately $833 million in

RAL fees in 2006 and $740 million in 20071

• As RAL fees have declined, tax preparation fees

have increased2

1Wu and Fox (2010). 2Holt (2009).

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Study Questions

• Who uses RALs and RACs?
• Demographic, economic, and geographic

characteristics associated with take-up

• Why do RALs and RACs exist?
• Taxpayer motivations
• Role of tax preparers

Data and Methods

• IRS data from tax years 2005 through 2008
• Descriptive analyses on the universe of tax filers 18

years or older with refunds ~111mil filers in TY 2008

• Multinomial logistic regressions using 1% sample of

US taxpayers in TY2005 and TY 2008

• Secondary data about the communities where

taxpayers live

• 18 interviews with 11 organizations
• Tax preparers, RAL/RAC lenders, RAL/RAC

transmitters, Low-cost RAL lenders, VITA program sites

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Sources: Wu 2005, GAO 2009, Wu and Fox 2010, and authors’ analysis of IRS data.

RAL/RAC Use Over Time

RAL/RAC Returns Filed Early

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Date of Tax Filing*, Calendar Year 2009 (TY2008) RAL Cumulative RAC Cumulative Non-RAL/ RAC Cumulative

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EITC and Children Matter

• 64% of RALs and 42% of RACs are taken out by

EITC claimants with qualifying children

• EITC claimants with qualifying children are 126%

more likely to take out a RAL than non-EITC claimants

• Complicated tax forms and EITC instructions

may be driver

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HOH Filers are Highest RAL/RAC Users

Greatest Use In Early Career/Family Years

RAL Use Down Among Military Hhlds

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Being ‘Banked’ Matters

RAL/RAC Use Highest in Low-inc Communities

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10 20 5 Miles 10 20 5 Miles

RAL & RAC Use in St. Louis (Missouri) Metropolitan Area, TY 2008 RAL & RAC Use in Washington (District of Columbia) Metropolitan Area, TY 2008

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8 16 4 Miles

RAL & RAC Use in Chicago (Illinois) Metropolitan Area, TY 2008

10 20 5 Miles

RAL & RAC Use in Memphis (Tennessee) Metropolitan Area, TY 2008

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Consumer Motivations

• Quick money to alleviate post-holiday financial

strain

• General financial strain and unexpected

expenses

• Lack of funds to pay for tax preparation costs
• Lack of a bank account
• Complexity of tax returns
• Mistrust of conventional financial institutions

Provider Motivations

• Profit
• Attracting customers to tax preparation

businesses

• For non-profits: providing financial education

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Policy Implications

• Regulation
• APR disclosures vs. fee disclosures
• Enforcement of current laws
• Competition
• Education and Disclosure
• Reducing Demand
• Splitting tax refunds in creative ways
• Reducing processing time
• Broader financial strategies and helping people

become banked

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