The IRS announced today that it is considering new rules on the marketing of refund anticipation loans (RALs) and "certain other products" in connection with 1040 preparation.
The IRS can't ban such products, but it can tighten its rules, and penalties for violating them, in connection with the high-fee/high-interest loans. In that regard, the agency is considering prohibiting tax return preparers from "obtain[ing] a taxpayer's consent to disclose or use tax return information for the purpose of soliciting taxpayers to purchase such products."
This is the latest in the IRS' tougher stance toward such tax-related loans. Last year, tax software companies that participated in the Free File Alliance weren't allowed to market RALs as part of their free e-filing packages.
Free File members insist they took that step voluntarily (blogged about here), but if you don't think the anti-RAL action was hurried along by the IRS in the wake of complaints from consumer groups and some members of Congress about the short-term loans, then I've got some of that mighty fine Florida swampland to sell you.
In today's advance notice of proposed rulemaking (another good gov'ment acronym for you: ANPRM), the IRS says it is "concerned that RALs and certain other products may provide tax preparers with a financial incentive to take improper tax return positions in order to inappropriately inflate refund claims."
Did you hear that big "Duh!"? It was from those aforementioned consumer advocacy groups.
"In general, RAL amounts are capped by the amount of the refund claimed on a tax return," says the IRS. "Therefore, a preparer who inappropriately inflates the amount of a refund is able, directly or indirectly through arrangement with a RAL provider, to collect a higher fee."
Death and Taxes has a good overview of how costly these loans can be.
EITC et cetera issues: Federal revenue officials also are concerned about the connection of RALs and the earned income tax credit (EITC), specifically "that the financial benefits of selling a RAL to a taxpayer can create an incentive for the preparer to not fully comply with due diligence requirements to ensure the accuracy of EITC claims."
Two other financial products, the refund anticipation check (RAC) and audit insurance, also raise similar concerns in the IRS' eyes.
A RAC is a post-refund check that allows a taxpayer to pay for tax prep services out of their refunds. Audit insurance is self-explanatory, but many consumer advocates question its value.
In fact, the IRS notes that taxpayers who purchase the insurance might tend to take more aggressive filing positions since they feel like they're covered if the agency ever questions the tax moves.
"The Treasury Department and the IRS generally believe that arrangements that create financial incentives for taxpayers or tax preparers to exploit the audit selection process undermine tax compliance."
Did you hear it again? Another "Duh!"
Market reaction: Forbes reports that shares of both H&R Block and Jackson Hewitt fell Thursday after the companies were mentioned in a note from Thomas Weisel Partners as tax-service providers that could be "negatively impacted" by the proposed RAL-tax data restrictions.