IRS to quit assisting tax refund loans: consumer groups applaud

The Consumer Federation of America and the National Consumer Law Center applauded today's announcement by the Internal Revenue Service that it will no longer help banks make refund anticipation loans to the working poor.

The one- to two-week loans are made by banks and facilitated by commercial tax preparers, secured by the taxpayer's refund. In 2008, the groups say, the loans skimmed $738 million from the refunds of 8.4 million American taxpayers. Interest charges can be exorbitant, with some lenders levying fees that amount to annual percentage rates from 50% to nearly 500%.

The IRS has been facilitating these loans with a service called the "debt indicator" which helps banks that partner with tax preparers to make loans based on the borrower's expected tax refund. The "debt indicator" acts as a form of credit check, telling tax preparers whether a taxpayer's refund will be paid or will be intercepted for government debts.

"We are pleased that IRS has decided to stop aiding and abetting high-cost RALs that siphon off hundreds of millions in taxpayers' hard-earned money and federal benefits meant to lift the working poor out of poverty," said Chi Chi Wu, the consumer law center's staff attorney, in a statement.