The most likely RAL users are recipients of the Earned Income Tax Credit (EITC)

With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund check

RALs drain hundreds of millions of dollars from that program each year. IRS data shows that in 2010 nearly two-thirds (66%) of RAL consumers were EITC recipients, or 3.4 million families. Yet EITC recipients made up only 20% of individual taxpayers in 2010. Thus, EITC recipients are vastly over-represented among the ranks of RAL consumers.

In addition, IRS data shows that 18% of EITC recipients applied for a RAL in 2010. Almost 41% of EITC recipients obtained either a RAL or a RAC; in other words, a sizable portion of EITC recipients paid part of their publicly funded benefits to a bank to obtain a tax-related financial product. In contrast, only about 7% of taxpayers who do not receive the EITC get a RAL or RAC. The Urban Institute RAL report found that an EITC recipient with a qualifying child is over 125% more likely to get a RAL and over 75% more likely to get a RAC than a non-EITC recipient.

Based on this IRS data, we estimate that about $223 million was drained out of the EITC program in 2010 by RAL loan fees. Add-on fees contributed another $32 million to the drain.

Non-loan fees also drain significantly from EITC benefits

The EITC is the nation’s largest anti-poverty program. One criticism has been that no other anti-poverty program requires its beneficiaries to pay for the cost of accessing the benefit, which includes the drain created both by RALs and by tax preparation fees. Including tax preparation fees provides a fuller picture of how EITC benefits are chipped away. An average tax preparation fee in 2010 would have been $189 (this is the average fee at H&R Block) and could be higher for other preparers.

Thus, EITC recipients who got RALs paid an estimated $643 million in tax preparation fees. Including tax preparation fees, RALs drained $898 million from EITC recipients who got RALs for tax year 2010.

This year, only Republic Bank & Trust is offering a bank RAL, limited to $1,500. Republic charges a fee of $, representing an APR of 149%. If the refund is greater than $1,500 plus fees, Republic delivers the rest of it in the form of a RAC, at a cost of $30. Since Republic requires a minimum refund of $2,000 in order to be eligible for a RAL, it is quite likely the taxpayer will pay a total of $ to Republic.

Furthermore, it appears that both Jackson Hewitt and Liberty Tax, the two tax preparers that use Republic Bank & Trust for their RALs, also charge add-on fees. Jackson Hewitt charges as much as $40, so the total could rise to as much as $131.

The fee for the RAL comes on top of the fee for tax preparation, with an average of about $189. Altogether, the consumer might pay about $320. A low-income taxpayer could save this entire amount and still receive a quick refund using direct deposit by choosing a free tax preparation program that offers e-filing.

Refund anticipation checks (RACs) are another tax-time financial product offered by RAL banks as well as several other financial institutions. After the refund is deposited, the bank issues the consumer a paper check or prepaid debit card with the RAC proceeds, or direct deposits the refund to the taxpayer’s own account and closes the temporary account. For taxpayers who can receive direct deposit from the IRS into a bank account or onto a prepaid card, a RAC does not provide any advantage in terms of a faster refund, and the only reason to incur this added expense is to delay payment of tax preparation fees.

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