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New Tax Season Options: RALs, RACs and a new U.S. Treasury pilot program

OW Staff | 1/19/2011, 6:26 p.m.

Right now, the Internal Revenue Service (IRS) is preparing for this year's tax season and an estimated 140 million individual tax returns. Eager tax filers will be tempted to use one of the temporary neighborhood business locations that open their doors each year in the name of convenient and quick tax preparation. But, as with many quick cash offers, a significant cost is incurred for services marketed as either Refund Anticipation Loans (RALs) or as Refund Anticipation Check (RACs).

Each year, high-cost, tax-related services drain an estimated $11 billion from the pockets of moderate and low-income households. Moreover, when a RAL is used in tax preparation, the service fee is usually a sliding scale that increases with the size of the refund. In other words, the larger the refund, the greater the fees.

Many consumers denied a RAL application or others without a checking account, will turn to RACs, a financial product that enables unbanked consumers to receive a direct deposit refund.

After an Internal Revenue Service refund is deposited, the participating bank issues a check and closes the temporary account. Although RAC fees may vary, in some cases, consumers who opened RAC accounts were also charged check cashing fees.

With either of these options, consumers lose a significant portion of their tax refund. For low-to-moderate income households, the annual tax refund helps retire holiday debt, large purchase items or even high winter utility bills.

Low and moderate income households that qualify for the federal Earned Income Tax Credit (EITC) are particularly vulnerable to the lure of expensive RALs and RACs are.

When the EITC exceeds the amount of taxes owed, a sizable tax refund goes to those who claim and qualify for the credit. For 2010 returns, the tax credit ranges from a low of $457 for a single-person household to a high of $5,666 for married couples or workers with three or more dependent children. To learn more about EITC, visit IRS at: www.irs.gov/individuals/article/0,,id=96406,00.html.

The Federal Reserve estimates that 30 million households-nearly one in four-are either unbanked or under-banked. African Americans and Latinos comprise more than 60 percent of the country's unbanked households. African Americans alone account for 36.9 percent of the unbanked.

However, this year and for the first time, an estimated 600,000 low and moderate income tax filers across the country, will have an alternative government-sponsored pilot program intended to be quicker, safer, and more convenient. This week, the U.S. Treasury Department will randomly offer My Account Card Visa Prepaid Debit Card to consumers with limited or no access to traditional banking services.

Letters will advise selected consumers of the card's features, free services, and optional low-cost service fees. The correspondence will also explain how to sign up and how to use the card to receive a federal tax refund and additionally how the card can be used for everyday financial transactions.

The results of this pilot program will help the federal government determine whether the benefits and feasibility of expanding card accounts should become permanent part of an integrated tax filing and refund process.

"This pilot program will provide low- and moderate-income Americans with a low-cost option for faster delivery of their federal tax refund," said Neal Wolin, Deputy Secretary of the Treasury. "This innovative card can be used for everyday financial transactions such as receiving wages by direct deposit, withdrawing cash, making purchases or paying bills.

Charlene Crowell is the Center for Responsible Lending's communications manager for state policy and outreach. She can be reached at Charlene.crowell@responsiblelending.org.