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IRS to quit assisting tax refund loans: consumer groups applaud

The Consumer Federation of America and the National Consumer Law Center applauded today's announcement by the Internal Revenue Service that it will no longer help banks make refund anticipation loans to the working poor.

The one- to two-week loans are made by banks and facilitated by commercial tax preparers, secured by the taxpayer's refund. In 2008, the groups say, the loans skimmed $738 million from the refunds of 8.4 million American taxpayers. Interest charges can be exorbitant, with some lenders levying fees that amount to annual percentage rates from 50% to nearly 500%.

The IRS has been facilitating these loans with a service called the "debt indicator" which helps banks that partner with tax preparers to make loans based on the borrower's expected tax refund. The "debt indicator" acts as a form of credit check, telling tax preparers whether a taxpayer's refund will be paid or will be intercepted for government debts.

"We are pleased that IRS has decided to stop aiding and abetting high-cost RALs that siphon off hundreds of millions in taxpayers' hard-earned money and federal benefits meant to lift the working poor out of poverty," said Chi Chi Wu, the consumer law center's staff attorney, in a statement.

Advocates at NCLC and CFA have been lobbying the IRS to end the debt indicator since 2005, when they published a report entitled "Corporate Welfare for the RAL Industry: The Debt Indicator, IRS Subsidy, And Tax Fraud." Their most recent criticism of the debt indicator came during the IRS Commissioner's Return Preparer Review Forum in August 2009, during which they again urged the IRS to discontinue the program.

"The federal government should not be sharing taxpayers' personal information for the profit of banks and tax preparers by operating what is essentially a free credit reporting service for them," said Jean Ann Fox, director of financial services for Consumer Federation of America, in a statement. "We are glad the IRS finally stopped letting tax preparers and banks pry into taxpayers' records about what they owe the government."

The IRS also says it will consider allowing a portion of tax refunds to pay for tax preparation, which the groups say could further undermine the refund loan and refund anticipation check markets, since some taxpayers use them to avoid paying out-of-pocket tax preparation fees.

In January of this year, the IRS Commissioner announced another reform backed by the consumer groups -- regulation of tax preparers. In the future, the IRS will require tax preparers to be registered, tested and adhere to a code of ethics.

The CFA and NCLA also called on the IRS and banking regulators to end refund loans once and for all by prohibiting tax preparers from sharing or using tax return information to sell or arrange financial products.

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