Hat Trick!

I don't know much about soccer but I do know that a hat trick (3 points by the same player in one game) is a big deal. Well, today the tax profession received it's equivalent of a hat trick being played against them. Last November, Congress mandated e-filing of tax returns. In January, the IRS released it's report on tax return preparer registration and testing and their intention to start the process in 2010. Finally, today the IRS announced that it will be no longer be releasing the "debt indicator"(DI) to preparers and the RAL Banks. Hat Trick!

Granted this doesn't effect all preparers directly. But it is a big game changer for those of us who work with lower income clients and it does become a planning factor for me. Last month I wrote a post called "This Year's Spin" and explained the debt indicator:

The debt indicator is currently part of the acknowledgment we receive when an e-filed return is accepted by the IRS. It can be one of 4 letters; N, I, F or B. "N" means that a quick look at the taxpayer's file shows no claim against the refund. The others show a debt and who to the taxpayer needs to contact for more information.

I don't use the DI directly a lot but the Refund Anticipation Loan (RAL) banks rely on the debt indicator to help decide if they want to advance the taxpayer on their refund. Without the DI the loan becomes much more risky. The last time the IRS pulled it, the banks lost big money. So, how does this effect the tax business?

1. First the RAL banks will have to decide what they will do. Are they going to try to loan? Should they cut loans completely? What about the second part of the bank program which doesn't use the DI? Can they keep that going without RALs? While I stopped offering RALs last year, I do use a RAC (refund anticipation check) program. Will I have something like this to offer clients?.
2. This is going to effect the big chains directly. They have built their business on RALs. Even if the banks try to offer RALs, they will have to be more conservative lenders and fund fewer loans. Clients talk and word will get out early about how others aren't getting their money. (Remember the problems one small chain had last year when people couldn't get their money like they wanted? It was ugly.) The big chains draw and keep clients because of these programs. Clients who stay with the chains despite poor treatment and high prices. Without the RAL program, it's going to be easier for clients to change preparers. And there will be a loss of income from the RALs themselves. (I'd be careful investing in national chain right now.)
3. The big chains are not the only ones who depend on the RALs for a client base. This could really hurt some independents who haven't been planning. Hopefully, the good preparers have built a relationship with their clients which will let them hold on to them without RALs.
4. There are going to be a lot of taxpayers howling this year. If the banks figure out a way to keep the programs without the DI, the approval rates will go down. More people will have to wait for their money. While the preparers, banks and tax firms have taken most of the flak for the RALs, it needs to be understood that some clients have come to expect fast money as a right. 8-10 days is too long. They don't care about the cost or practicality, they want their money, they need that money now. They budget (?) based on getting their refund by "date" and they can get hysterical if it doesn't come in when they want it.
5. A lot of marketing will have to be changed.

I'm sure there are more ways the tax world will change because of no debt indicator. It will make the business crazy for a while and 2011 filing season has become more stressful. Luckily, there is time for the banks to decide what to do and for all of us to decide how this will change our practices. It was coming and since the business is upside down now with the other changes, what's one more thing?

Comments

[Esquire]

Did your bank partner use the debt indicator for RACs?

Without a debt indicator, A RAC has about 1/15th the risk of a RAL since the only money "on the line" with a RAC is the tax pro's fee (let's say $200), not the typical $3,000 refund associated with a RAL.

My thought is that banks have to run credit checks on every RAL applicant. So the non-banked and bad credit folks (i.e. really poor) are hosed. The banked and lower-to-middle income folks are more likely to get a RAL although at lower levels.

[Trish]

Esquire- you're correct the debt indicator doesn't directly effect RACs as it does a RAl. But they do use the same bank procedures as a RAL (creation of a temporary account, DD of refund, payout when the money is received from the IRS. The only thing missing is the loan.) Right now the banks have to decide whether to offer some kind of limited RAL or drop RALs altogether. If they choose to offer the RALs, then RAC will continue. But if they stop the loans, will the bank continue to offer RAC? Especially in light of the IRS saying they are looking at a way to have preparer fees come out of the refund. It would be interesting to be a fly on the wall at the RAL banks right now.