Characteristics of Users of Refund Anticipation Loans and Refund Anticipation Checks

This report addresses two sets of research questions related to Refund anticipation loans (RALs) and refund atnticipation checks (RACs) First, the authors ask who obtains them and who does not and what demographic, economic, and geographic factors are associated with the use of these products. The authors provide descriptive breakdowns of many individual and geographical characteristics that are linked with use of RALs/RACs, and then conduct quantitative analysis of IRS-provided data on millions of tax filers who received a refund in tax year 2008. A second set of qualitative research questions examines why these products exist, using interviews with industry stakeholders. The report finds that among the most important characteristics influencing RAL/RAC use were lower income, young adulthood, single head-of-household filing status, receipt of the Earned Income Tax Credit (EITC), and use of a paid preparer. The authors also find that RALs and RACs are highly spatially concentrated and that living in the poorest communities is associated with dramatic increases in use of these products, even after controlling for a taxpayer’s income and filing status. There are also unique differences in the use of RALs versus RACs according to such variables as military status. Finally,individuals with any interest and dividend income used RALs and RACs to a much smaller degree than did those with otherwise similar characteristics. RALs and RACs are used by one in seven tax filers—and more than one in six filers who receive refunds. Taxpayers are able to receive their refunds more quickly than a mailed check by using RALs, often in one to three days. RACs are no quicker than other IRS direct deposit returns, but for those who lack a bank account, and/or would receive a paper check, they may speed up receipt of refund by up to six weeks. Both RALs and RACs enable payment of tax preparation fees out of the expected refund. Most RAL and RAC recipients use these products to pay for pressing financial obligations, both expected and unexpected, and for their tax preparation. RAL/RAC users, particularly those claiming the EITC, are driven to paid preparers by the complexity of filing a tax return. Stakeholders from the RAL/RAC industry do not feel that consumers use these products because they fail to understand that they are loans or because they are not aware of the fees involved. Consumer advocates disagree, claiming that use is partly driven by aggressive, targeted marketing.