Tax preparers steered low-income taxpayers to extra-fee refund products, says GAO

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Low-income and minority taxpayers were more likely to use extra-fee tax preparation offerings like refund advances and refund transfers, according to a report Friday from the Government Accountability Office, and tax preparers often didn’t present them with information about the fees ahead of time.

The GAO report, and recent disclosures about a provision in the IRS reform legislation that was passed by the House this week codifying the Free File Alliance of tax prep industry vendors, are prompting some Democrats to propose a new bill to simplify the tax prep process and allow more users to get their taxes done for free by the IRS itself.

For its report, the GAO made undercover visits to the offices of nine tax preparers and reviewed some tax prep providers’ websites. It also reviewed documents it got from several banks and tax preparers. It found the disclosures generally followed requirements for disclosing fees, but the disclosure practices by some tax preparers could pose challenges for consumers.

For example, the tax preparers reviewed by the GAO investigators generally indicated they present taxpayers with almost all of the fee information documents only after their tax returns have been prepared, and after the preparers determined that taxpayers qualified for a tax-time financial product like a refund transfer or a refund advance . The timing of these disclosures could pose a challenge for taxpayers looking to compare prices for different providers, the GAO noted.

During six of the nine undercover visits, GAO investigators explicitly asked for literature on product fees but weren’t given the information by preparers. Refund transfer fee information on the websites the GAO reviewed sometimes was presented only after the tax preparation process started, or it was in small print, or could be found only after navigating through several pages on the site. As a result, taxpayers can face challenges if they try to compare prices among the different online tax prep services.

Trends in the market for tax-time financial products since 2012 include the decline of refund anticipation loans (short-term loans subject to finance charges and fees). The IRS cracked down on the practice of offering RALs by removing an important indicator of credit worthiness relied on by RAL vendors. The loans often came with high interest rates being charged to taxpayers who needed the money from the tax refunds right away. However, since the RALs declined in use, the tax prep industry has instead seen a rise in alternatives like refund transfers (temporary bank accounts in which to receive funds), and the introduction of refund advances (loans with no fees or finance charges).

“More recent product developments include increased online access to products for self-filers, higher refund advance amounts, the introduction of new products, and for tax year 2019, the reintroduction of fee-based loans,” said the GAO.

For many taxpayers, their income tax refund is the single biggest cash infusion they get all year, the GAO pointed out. In 2017, more than 20 million taxpayers used refund advance loans and other financial products to get quick access to this cash. Lower-income and some minority taxpayers were more likely to use them. But the products can be comparatively expensive.

“We found that tax preparers don't always clearly communicate about fees associated with tax refund products,” said the GAO. “This may make it difficult for taxpayers to compare prices for these products. We also found that IRS's data on the use of these products is inaccurate.”

The GAO identified some limitations in IRS data on product use, including over- or under-counting of certain types of products like RALs and refund transfers and advances. The IRS hasn’t communicated these data issues to users, nor has it updated its guidance to tax preparers on how to report new product use. As a result, users of such data (including federal agencies and policymakers) don’t have accurate information to inform their findings and make decisions.

Lower-income and some minority taxpayers were more likely to use tax-time financial products, according to a GAO analysis of 2017 data from IRS, the Bureau of the Census, and the Federal Deposit Insurance Corporation. “Taxpayers who made less than $40,000 were significantly more likely to use the products than those who made more. African-American households were 36 percent more likely to use the products than white households,” said the GAO. “Product users tend to have immediate cash needs, according to studies GAO reviewed. For these users, tax-time financial products generally provide easier access to cash and more cash at a lower cost than alternatives such as payday, pawn shop or car title loans.”

The GAO made two recommendations to the IRS to make the collection of product use data more accurate and make data limitations known to users of the data. It said the IRS should communicate data issues regarding the refund anticipation loan indicators for tax years 2016 and 2017 and the refund transfer indicators since tax year 2016—for example, by attaching explanatory material to the dataset. It also said the IRS should improve the quality of tax-time financial product data collected; for example, by allowing authorized e-file providers to indicate more than one type of tax-time financial product for each return or by informing tax preparers of the addition of new product definitions and instructions on how to accurately code the products. The IRS agreed with both recommendations.

“The IRS neither administers nor promotes the sale or use of these products,” wrote Kirsten Wielobob, deputy commissioner for services and enforcement at the IRS. “We recognize that variations have occurred in recent years affecting the nature and number of refund-related products and how they are promoted to the public.”

The American Coalition for Taxpayer Rights, a 14-member trade association of some of the biggest retail and do-it-yourself tax preparers and the financial institutions that offer tax-time financial products, took issue with the GAO report. “Every year, about 20 million hard-working Americans voluntarily choose financial products at tax time because they provide them with the financial flexibility they want and best serve their individual needs," said a statement Friday from the group. "ACTR members are proud to offer these products, knowing that taxpayers choose them for a variety of reasons, including secure refund disbursement, identity-theft protection, and continuing customer service to monitor the status of a refund. ACTR members continuously look for ways to improve the value, security, and transparency of these products. We look forward to any discussion with the IRS, advocates, stakeholders and the current bank product regulators.”

Sen. Elizabeth Warren, D-Mass., and Tammy Duckworth, D-Ill., sent a letter Friday to the IRS in response to the GAO findings. The lawmakers asked the IRS for more information about obstacles to disbursing tax refunds more quickly to enable families to get faster access to tax funds without using products like RALs and refund advances, and how the IRS could better regulate tax preparers.

"The findings of the GAO report are alarming, showing that low-income taxpayers -- those with the greatest need for additional funds -- are forced to buy expensive tax-time products because they need to pay bills due before refunds arrive," the senators wrote. "As the distributor of tax refunds, the IRS plays a role in perpetuating this problem."

Two years ago, Warren asked the GAO in an oversight letter to conduct a review of the tax-time financial products most commonly used by taxpayers, as well as the transparency of and fees charged for these financial products. The newly-released GAO report found that:

Warren and Duckworth, along with several other Democrats and independents in the Senate reintroduced the Tax Filing Simplification Act on Friday. The bill would make it easier for taxpayers to file their taxes online directly with the IRS to help more eligible taxpayers receive tax refunds, like the Earned Income Tax Credit.

IRS Commissioner Chuck Rettig praised the IRS for how it managed to navigate tax season effectively this year as it dealt with the Tax Cuts and Jobs Act and the aftermath of the government shutdown. “I’m very proud of every IRS employee,” he said in a message to taxpayers Friday. “They remain dedicated to helping taxpayers understand and meet their filing obligations. Our employees make a difference, and they take pride in serving taxpayers and our country. We’re are also hiring people to join our IRS family — if you know someone who may be interested, please suggest they visit Beyond technical skills, the success of the IRS also depends on respecting taxpayer rights and treating everyone we encounter with fairness. My pledge to taxpayers is that we at the IRS will continue to keep taxpayer rights paramount in all of our interactions. Inside our agency, we understand, accept and value our differences, and strive to maintain an inclusive and diverse workplace, where employees treat each other with kindness and civility. We will continue to carry those values with us in all of our dealings with taxpayers as well. We believe every person is important, none more or less so than any others. By valuing and respecting each other, we are better able to move forward together.”

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