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Volume 13, Issue 1, 2013   Federal Reserve Bank of Dallas

Alternative Refund Settlement Products May Compromise Asset-Building Goals

High-cost, short-term loans such as the refund anticipation loan (RAL) have historically been popular with low-income filers. RALs are based on the taxpayer’s expected refund and are issued at the time of filing. They allow the taxpayer to receive an anticipated refund earlier, in the form of a loan. These products have often been associated with high prices and extra filing costs. Nationwide, 7.2 million taxpayers received RALs in 2009, and 87 percent of those were low income.[1]

For the 2011 tax filing season, the IRS ceased providing the debt indicator that contained information about outstanding federal debts owed by filers that would prevent them from receiving their full tax refund. Without this indicator, tax preparers and associated financial institutions may not know if filers will be able to repay their RALs.[2] As a result, the share of Earned Income Tax Credit (EITC) recipients who requested RALs declined from one-third in tax year 2006 to about 5 percent in tax year 2010 across Texas. Figure 1 shows the breakdown by county and tax year.

Figure 1: Requests for Refund Anticipation Loans Decreasing in Texas Counties

Although use of RALs is down, some entities continue to offer them, and related products are on the market as well. The refund anticipation check (RAC), for instance, allows filers to have the cost of fees deducted from their refund rather than paid up front. However, this service costs an extra $25 to $55 and does not speed up the receipt of refunds.[3] The use of RACs has increased in recent years (Figure 2).

Figure 2: Percent of EITC Filers Requesting RACs in Texas Counties

The terms and conditions of these products can be difficult to understand, and the costs associated with them can take a chunk out of low-income families' refunds, leaving them less able to take advantage of tax-time asset-building opportunities.

—Wenhua Di and Emily Ryder


  1. “Fast Facts,”off-site Center for Responsible Lending.
  2. “Fact Sheet: IRS Removes Debt Indicator for 2011 Tax Filing Season,”off-site Internal Revenue Service, Aug. 5, 2010.
  3. “Rapid Refunds: Instant Trouble,”off-site Center for Responsible Lending.

e-Perspectives, Volume 13, Issue 1, 2013

Federal Reserve Bank of Dallas Off-site page
Community Development Office Send an e-mail
P.O. Box 655906, Dallas, Texas 75265-5906
Alfreda B. Norman Send an e-mail
Vice President and Community Development Officer
  Jordana BartonSend an e-mail
Senior Community Development Advisor
Wenhua Di Send an e-mail
Senior Economist, Community Development
  Julie Gunter Send an e-mail
Senior Community Development Advisor
Jackie Hoyer Send an e-mail
Senior Community Development Advisor, Houston Branch
  Emily Ryder Send an e-mail
Community Development Analyst
Elizabeth Sobel Blum  Send an e-mail
Senior Community Development Research Associate
The views expressed are the authors' and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. Articles may be reprinted on the condition that the source is credited and a copy is provided to the Community Development Office.
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