IRS removes debt indicator for the coming 2010 tax season - Is your tax service ready?

What is the IRS debt indicator? This is the information provided to banks and software transmitters that allows them to determine if a taxpayer has prior outstanding federal debt. This debt can come from a number of different agencies but the most common ones are unpaid child support, back federal or state tax debt, unpaid student loans, and veteran affairs debt.

What does this mean for the tax industry? This translates to the availability of Refund Anticipation Loans (RALs) being more limited than in the past. Without this debt indicator being provided to lending institutions, it will be more difficult to determine the worthiness of a taxpayer to receive a RAL. Banks have stated that they intend to continue offering RALs to tax payers and that this would force credit checks to become more heavily relied upon in the approval process. Most Industry insiders see this action causing a raise in price for RALs and a decrease in approval rates as more people are considered a risk to the bank's lending criteria.

As a tax preparation service owner this will affect you. You might see customers that have always been approved for instant or rapid refunds of their tax returns in prior years getting turned down this coming year. It is important that you are prepared to explain why this is the case. Most banks offer a customer service line for taxpayers who wish to get details as to their denial.

This still leaves the door wide open for the 1-2 week bank product refund option know as Refund Anticipation Checks (RAC) or Electronic Refund Checks (ERCs). However, the IRS has hinted that they are attempting to put in place a method for un-banked taxpayers to easily create a checking account to have their refunds deposited into and also a way for tax preparers to have their fees withheld directly from the refund. This refund and taxpayer tool would lead to the transition away from bank products in general, not just the RALs.

Staying ahead of information like this can save you some headaches this tax season. If you explain the situation to clients early on in the process, they will be more accepting of the new policies.