I just received a letter from Instant Tax Service insisting that I correct or remove this article. Since I think I'm making an important point about finance companies trying to take over the RAL business, I have chosen to copy their letter into this post. I haven't seen the corrections to my sources he mentions. It was signed Todd E Bryant, General Counsel, Instant Tax Service.
My company just became aware of your recent blog post. Please be advised that the information upon which your post is based is inaccurate. We have also spoken with Phil Drake, as well as the check casher that posted the press release on Marketwatch. The check casher will be posting a retraction/correction shortly, and Mr. Drake will also be issuing a correction.
The checks were NOT returned for NSF, but were returned for "referred to maker" because the account had been the victim of some fraudulent activity. The bank made Tax Tree aware of the issue on Friday, January 6 and locked the account down. The issue was resolved on Tuesday, January 10, and the account was unlocked. Unfortunately, all checks presented in the intermediate period were initially returned unpaid, but all have since been made good, and all returned check fees have been credited back to the damaged parties.
Moreover, I note that your post mistakenly refers to the checks as RAL checks. If you carefully read the sources you have cited, you will note that the checks were not RAL checks (filing season hasn't even started yet), but were pre-season loans given to potential customers of Instant Tax Service.
We ask that you correct your post or remove it immediately. We do plan to take legal action against parties who recklessly spread misinformation.
My jaw dropped after reading a tweet Friday evening. The tweet was from Phil Drake of Drake Software. The message was simple, "RAL checks from an Instant Tax Office issued by Tax Tree BOUNCE." he included a link to a Marketwatch article. There wasn't much more information but that was enough. A bounced RAL (Refund Anticipation Loan) check that is something I'd never heard of before.
I've been working with bank products since they were rolled out nationally in 1990. I've seen taxpayers having problems getting a bank to cash the checks but never seen or heard of them actually being returned for insufficient funds once they were cashed.
But 2012 is a whole new RAL world. With true banks barred by the FDIC and OCC (Office of the Comptroller of Currency) from offering loans, it looks like the smaller finance companies are thinking taking over the business. Companies like Tax Tree. But do they know what they are getting into? I understand that the IRS's special MeF test meant that a few checks were issued early. But these checks bounced 1 business day before Tax Tree knew checks would begin to be issued. E-filing opens on Tuesday. With MeF's quick acknowledgements, Tax Tree had to know they would be writing checks then, Wednesday at the latest. Yet they didn't have the money in place.
How does this fall out? First, I would say taxpayers will have a harder time cashing their RAL and RAC checks. The banks and check cashing places will hear of the problem quickly and become much more cautious about cashing these checks from any finance company. When clients can't easily cash their RAL/RAC checks, they'll go back to the preparer. And the preparer will be the one dealing with the anger of clients who have refunds they can’t access. Fees all around will go up. But RALs won’t go away as long as taxpayers can find someone who will advance money on their tax refund.
Refund Anticipation Loans were a mis-guided idea that were abused by some taxpayers, the banks involved and some tax preparers. They aren't going away. We just traded a few nationally regulated banks for thousands of small loan companies and multiple state laws.