The IRS is Your Friend
Word from the IRS ... "We are here to help!"
From the conversation, I gathered the IRS has no intention to ban RALs. It is doing a study, soliciting comments from interested (and disinterested) parties. The IRS doesn't even know (at least doesn't have a formal study showing) that there is a causation between RALs and higher fraud. The IRS doesn't even know the route this proposal for solicitation of opinion will take. It may die after comments are received, in fact many of these studies do. It may decide that it doesn't really fall under its jurisdiction and send it to Congress. Though Congress may decide to go after RALs, it is very unlikely. RALs are usually lumped into the same category as payday loans – both have very high interest rates once you annualize their fees. However, there is a one huge difference. Payday loans get rolled over and customers end up paying fees double or triple the amount they've borrowed. RALs are a onetime deal, 2-2.5% fee is it until next year. It is not rolled over and in reality it is not much different from what the bank charges us for a bounced check or overdraft.
Finally, the IRS may find out that RALs need to be regulated more. I believe from all outcomes this is the most probable and the worst possible one, but really a non-event as seen from H&R Block's (HRB) press release which says, "RALs are currently regulated by 10 federal laws and IRS rules". Tax preparation is a very fragmented industry, JTX and HRB account for only 25% of market, where little mom and pop shops will carry the bulk of the burden if RALs are banned. The big guys like JTX or HRB may actually benefit from that (on the margin) as additional regulation may become a burden for the little mom and pop operators.
Yesterday's stock market reaction was a wakeup call to the IRS that its perceived actions (ban of RALs) may have tremendous consequences that will also result in lost jobs – that is not its intention. As I said it before and will say again (by the way, the IRS representative agreed with me on that point), the IRS's job is not to legislate morality or to decide what is the "right" interest rate, its job is to collect tax revenues.
As a side note: I've been pleasantly surprised by the courtesy, promptness and openness of the IRS official with whom I had the pleasure to talk.
Vitaliy's recently published book, Active Value Investing: Making Money in Range-Bound Markets is now available for purchase. AVI has two parts: in part one, Vitaliy makes the argument that there is a very high probability, that over next dozen years or so the U.S. stock market will be range-bound, going nowhere, similar to what we observed since 2000. In the second part, he provides a very practical, actionable investment guide to investing in range-bound markets.
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