IRS Voices Concern over Tax-Refund Loans

Each year, an estimated 10 million Americans, frustrated by long waits for their tax refunds, turn to tax preparers who provide checks within days. Those checks are usually refund-anticipation loans, payments that are secured by and repaid from a pending federal tax refund.

The loans often run for seven to 14 days—the interval between the date they're issued and the date the lender receives the IRS payment that satisfies the debt. Because the loans are short-term, the annualized interest rates often soar to 100% or higher. More than half of those who received these loans in 2004—more than 5 million taxpayers—were recipients of the earned income tax credit, a major federal anti-poverty program, according to the IRS.

These borrowers paid an estimated $1.24 billion in refund-anticipation loan fees for 2004, the most recent year for which data is available, according to a report issued earlier this year by the National Consumer Law Center, a non-profit organization that focuses on issues that affect low-income Americans. They often don't realize that they're essentially borrowing their own money at high rates.

At least two potential class-action cases are among recent actions posing legal and regulatory challenges to refund-anticipation loans, according to USA Today:

  • In February, California Attorney General Bill Lockyer sued H&R Block for allegedly misleading clients about the cost of the loans, a charge the firm denies. The case, which seeks several reforms, is proceeding even as H&R Block and its lending partners recently agreed to pay $101.5 million to settle other class-action cases filed over refund-anticipation loans.
  • Jackson Hewitt, the nation's second-largest tax preparer, disclosed to investors in July that it is nearing a $5 million consent judgment with Lockyer's office to settle an inquiry launched in 2003 over the firm's refund-loan marketing.

A pending bill in the Senate would require firms that provide refund-anticipation loans to register with the Treasury Department and comply with new public disclosure rules about the cost of the loans. The Senate also directed the IRS to produce a study on refund-anticipation loans. The report is expected soon.

IRS Commissioner Mark Everson called the loans "predatory." However, he said, "What you have is a real demand on the part of approximately 10 million people who, when they come in and file their tax returns, want their money and they want it right away. And if the IRS were to step in and say, 'You can't do it,' I think there would be an uproar over this. I don't like these loans, but I don't have authority to stop them."

Nina Olson, the IRS national taxpayer advocate, argued in a recent report that the agency should improve its inspection oversight of electronic tax return originators, which in many cases facilitate refund-anticipation loans. The agency should also speed up refunds, reducing the need for loans, and provide refunds through a government debit card for those without bank accounts.

Some members of Congress argue that the IRS has helped the refund-anticipation loan industry via the Debt Indicator, an IRS program revived in 1999. The program shows whether someone has federal or state tax debts or owes money on other government obligations. Financial institutions considering a refund-anticipation loan application limit their financial risk by checking the Debt Indicator to determine whether the IRS is likely to withhold a tax refund.

Despite criticism of the loans, businesses ranging from used car dealers to furniture sellers have joined tax preparers in the market as a way to boost sales. During recent tax seasons, for instance, CarBiz—a Canadian firm now based in Florida—offered used car dealers a program called TaxMax. The program, recently sold by CarBiz, enabled customers to have their taxes done and to get a refund-anticipation loan that could pay off an existing car loan or finance an upgrade to a newer car.

Everson, without addressing specific examples, voiced concern about companies involved in such arrangements "because there's a temptation to shuttle people into loan products" that make money for the firms. However, he said, the IRS has no authority over "what lines of business people can be in."

What the IRS has done is propose regulations Everson said would require stronger written taxpayer warnings "very clearly in bold letters, large size" about the legal and financial ramifications of refund-anticipation loans.

For their part, some companies that facilitate the loans have responded to the concerns of consumer groups and government officials. H&R Block and Jackson Hewitt agreed to eliminate some fees the firms previously charged for refund-anticipation loans.

This story was published by CU360 at and is reprinted with permission.

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