IRS may curb loans against tax refunds

from www.latimes.com



IRS may curb loans against tax refunds
The agency suspects that some tax preparers may inflate refunds to increase the size of the loans they make, and thus their fees.
By Kathy M. Kristof, Los Angeles Times Staff Writer January 4, 2008
The Internal Revenue Service said Thursday that it was considering curbing tax refund loans offered by tax preparers such as H&R Block Inc. and Jackson Hewitt Tax Service Inc. More than 12 million people take out such loans each year to in effect get advances against their refunds, according to a study by consumer groups, which have long criticized the fees on the loans as excessive. The IRS suspects that some preparers may be inflating refunds to increase the size of the loans they make."A preparer who inappropriately inflates the amount of a refund is able, directly or indirectly . . . to collect a higher fee," the IRS said in a notice seeking public comment about the potential refund-loan regulations, which would not go into effect until next year. The news slammed the stocks of the two big tax preparers. Jackson Hewitt plunged $7.26, or 23%, to $24.13, a two-year low. H&R Block slumped 86 cents, or 4.6%, to $17.75.Kansas City, Mo.-based H&R Block said its tax preparers were compensated without regard to the amount of refund loans made and therefore had no incentive other than to serve the interests of clients. Executives at Parsippany, N.J.-based Jackson Hewitt did not return calls seeking comment.Refund loans generated $192.4 million in revenue for H&R Block last year, up from $177.9 million the year before, a spokesman said. A taxpayer typically signs up for a refund loan when having his or her taxes done and receives the money two days later. One or two weeks after that, when the expected refund comes in, the loan is paid off. The loans "provide refund money in 48 hours instead of eight to 15 days," H&R Block spokesman Dan Smith said. "People can't always wait eight to 15 days to get their money."But consumer advocates say the loans not only are usurious but also are marketed to the most vulnerable of taxpayers: low-income parents claiming a special tax break for the working poor. H&R Block, which reduced its fees on refund loans last year under an agreement with consumer groups, currently charges an interest rate of 39% a year on its refund loans. But because the loans are so short-term, the cost averages about 2% of the loan amount, or less than the typical fee on a credit-card advance, the company said.For example, the fee on a $3,000 refund loan from Block averages $62, Smith said.Jean Ann Fox, director of financial services for Consumer Federation of America, called the IRS' action a step in the right direction. But she said the agency should have formally proposed a rule Thursday rather than just say it was thinking about it. "This is an expensive, unnecessary product," she said. "The folks who are having trouble making ends meet don't need to share their refund with the bank and a tax preparer." The move being considered by the IRS would bar tax preparation firms from sharing taxpayer return information with lenders, even with the consumer's consent. That would be a detriment to taxpayers who want the loans, H&R Block's Smith said.Without refund loans, he said, "taxpayers may still need funds quickly but may be forced to use higher-cost lenders -- assuming they even have access to credit -- since they will not have the ability to secure their loan with a tax refund." The IRS proposal now undergoes a public comment period, which lasts until early April. After that, the rule can be revised and then formalized. It then would need to go through another comment period. That makes it unlikely that any rule would go into effect until sometime next year, if at all."We are not making a definitive statement here," said David Williams, director of electronic tax administration for the IRS."We are trying to determine whether there is a problem, and if there is a problem, whether this would be a way to solve it."kathy.kristof@latimes.com