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MSP #21: REFUND ANTICIPATION LOANS

Increased Demand for Refund Anticipation Loans Coincides with Delays in the Issuance of Refunds

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #21-1

Survey the RAL products currently on the market, including detailed analysis of direct and indirect fees, to understand how taxpayers and tax administration are impacted.

IRS RESPONSE TO RECOMMENDATION: The IRS agrees to conduct an environmental scan of the top providers of products that involve advances on federal tax refunds, how they work, and what fees/charges (direct and/or indirect) may apply. At this time, it is not known whether the scan will provide a measure of the impact of RAL products on taxpayers or tax administration.

CORRECTIVE ACTION: The IRS agrees to conduct an environmental scan of the top providers of products that involve advances on federal tax refunds, how they work, and what fees/charges (direct and/or indirect) may apply. At this time, it is not known whether the scan will provide a measure of the impact of RAL products on taxpayers or tax administration.

TAS RESPONSE: The National Taxpayer Advocate is pleased that the IRS has committed to conduct an environmental scan of the top providers of refund advance products. However, we encourage the IRS to expand its plans to include a sampling of smaller providers to fully understand the entire marketplace. The smaller providers may not have the same resources or industry support as the larger providers and, as a result, the fees and terms associated with their products may be vastly different than those offered by larger providers. We firmly believe that the results of a comprehensive scan of the industry as a whole will prove useful in understanding how these products influence preparer and taxpayer behavior.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #21-2

Conduct a consumer education campaign before the filing season about RALs and RACs, including some tips on how to identify indirect costs associated with these products.

IRS RESPONSE TO RECOMMENDATION: Even though the IRS is neither involved in offering, nor responsible for, RALs, RACs, and similar tax refund-related products, we do provide taxpayers with important information on RALs and RACs on IRS.gov, at https://www.irs.gov/e-file-providers/taxrefund-related-products. In particular, the webpage lays out the responsibilities of the authorized e-file Providers who assist taxpayers in applying for these financial products. Specifically, these providers must advise taxpayers of all fees and other known deductions to be paid from their refund and the remaining amount the taxpayers will actually receive, and that they may be liable to the lender for additional interest and other fees. Due to the variety and changeability of possible indirect fees and the products to which they relate, we believe requiring the provider to provide this is the best way to timely and accurately provide this information to taxpayers.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The refund product information on IRS.gov is certainly useful for those taxpayers who have internet access and actively seek out such information. However, we believe that the IRS should take additional efforts before each filing season to ensure that the information is received by a significant population of taxpayers before they begin the tax return preparation and filing process. We encourage the IRS to proactively issue news releases and consumer alerts on this topic before each filing season. The IRS should incorporate RAL information into outreach and education initiatives targeting both taxpayers and return preparers.

The IRS cannot solely conduct outreach and education on RAL issues through digital channels. A recent TAS survey found that approximately 41 million U.S. taxpayers have no broadband access in their homes. More importantly, vulnerable populations, including low income taxpayers, elderly taxpayers, and taxpayers with disabilities, are particularly affected by the lack of broadband in their homes. Therefore, it is essential to deliver the message to these taxpayers through more traditional channels, such as grassroots outreach.

While IRS Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, sets forth the rules and requirements for providers to inform taxpayers of fees and terms of the refund products, it is unclear whether those standards are enforced in any manner pursuant to § 7 of Revenue Procedure 2007-40, 2007-26 I.R.B. (June 25, 2007). Therefore, it is best to take a multi-faceted approach to ensure that the necessary information reaches taxpayers before they purchase these products.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #21-3

Revise Revenue Procedure 2007-40; IRS Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns; and IRS Publication 3112, Applying and Participating in IRS e-file, to require all e-file participants offering RAL and RAC products to provide a standard “truth-in-lending” statement to help the taxpayer better understand the terms of the loan product, including any “hidden” or “indirect costs of the loan product.”

IRS RESPONSE TO RECOMMENDATION: ​​The IRS does not have the authority to require e-file providers to incorporate a standard “truth-in-lending” statement into their RAC and RAL products. The IRS agrees that e-file providers should be transparent about the costs associated with the loan products that are offered to taxpayers as part of the return preparation process. The IRS will work with the top providers of products to develop a “best practice” including a statement or statements that inform taxpayers about the direct and indirect costs of RAL and RAC products that are offered. The IRS will inform providers of the “best practice” information in IRS Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, and/or IRS Publication 3112, Applying and Participating in IRS efile.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS has the authority to monitor and sanction e-file providers who violate the rules and requirements of Publications 1345 and 3112. Providing such a “truth-in-lending” statement would put some teeth into the requirements included in the publications. Currently the rules and requirements in Publication 1345 require the provider to advise the taxpayers of the fees and terms of the products. However, there is no requirement to put such information in writing or to indicate in the records that such discussion took place. Without any proof that the provider actually advised the taxpayer, it is difficult for the IRS to monitor such practice and sanction any violations. We encourage the IRS to work with the Office of Chief Counsel and the National Taxpayer Advocate to determine the extent of the IRS authority to require providers to provide written information to taxpayers on the terms and fees of refund products.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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