Talking Points: The Debt Indicator & the 2011 Tax Filing Season
The Internal Revenue Service (IRS) announced that it will no longer provide tax preparers and financial institutions with the debt indicator. This will have a large impact on the refund anticipation product industry and the taxpayers that use them. These talking points will help guide your program, volunteers, and clients as they navigate the changing tax preparation environment.
What is the difference between a RAL and a RAC?
In the past, commercial tax preparers have offered both Refund Anticipation Loans (RALs) and Refund Anticipation Checks (RACs):
- A RAL is a short term loan that is secured by a taxpayer’s expected refund. A check is issued and the loan is repaid when the taxpayer’s refund is released by the IRS. The standard tax preparation fee, cost of the RAL, and banking fees are deducted from the loan before a check or a card is issued.
- A RAC is often provided to taxpayers who are denied a RAL or who cannot pay for tax prep fees upfront. Similar to the RAL, the commercial tax preparer opens a one-time use bank account to use for direct deposit of the taxpayers refund. However, unlike a RAL, the check is not issued to the taxpayer until their refund has been released and deposited by the IRS – 7-14 days. Before the check is issued, the costs of the RAC and tax preparation fees are deducted from the taxpayers refund.
Commercial Preparer Red Flag Services
Commercial tax preparers are worried about the loss of clients previously drawn to them by the need for a RAL. Thus some preparers are:
- INCREASING FEES: While there will be fewer RALs, those that are offered will be more expensive and riskier. Tax preparers may also charge larger RAL, RAC, and tax preparation fees.
- ADVERTISING “FREE TAX PREPARATION:” Some are offering to prepare the 1040EZ for free. Form 1040EZ is used mostly by single or married taxpayers who do not have dependents and do not itemize deductions. This does not cover EITC filers with dependents or the state tax return. Some preparers are only making it available through February 15th.
- POSSIBLE SCAMS: Taxpayers should be on the lookout for scams; for example, a commercial preparer could use the standard deduction and then charge clients when they come back for an amended return to itemize deductions.
The Better Option: Direct Deposit
NCTC encourages taxpayers to open up a bank account in order to directly deposit their tax refund. With e-filing and direct deposit, taxpayers can receive their refund within 8-15 days – receiving their refund just as fast as they would with a RAC but without the fees. However, if a bank account is not an option, taxpayers can still receive their refund quickly through a prepaid card. To learn more about the various prepaid cards, see NCTC’s Prepaid Card Matrix.
Key Marketing Messages
- Don’t lose a portion of your tax refund; get your taxes done for free at a VITA site.
- Get your full tax refund in 7-14 days with direct deposit and e-filing.
- Watch out for hidden fees if you pay for tax prep.
Delay to the 2011 Tax Season:
Due to last minute tax law changes, some VITA clients will not be able to file their returns until mid-February, including those with:
- Educator expenses
- Tuition and fees deductions
- Itemized Deductions (Schedule A)
Resources for Taxpayers
- Find Free Volunteer Income Tax Assistance (VITA) Site: 1-800-906-9887 / www.irs.gov
- File Your Own Taxes for Free:
1. IRS Free File: www.irs.gov
2. I-Can! E-file: www.icanefile.org - Where’s My Refund?: This IRS taxpayer services gives workers information about the status of their federal refund. Access the information at www.irs.gov or 1-800-829-1954
