Consumer Groups Criticize Proposed IRS Pact with Commercial Prepapers to Provide E-file Services

Date: SEPTEMBER 5, 2002

Contact: Chi Chi Wu (NCLC) 617-542-8010
Jean Ann Fox (CFA): 757-867-7523
Edmund Mierzwinski, USPIRG, 202-546-9707
Frank Torres, Consumers Union, 202-462-6262

Cite Concerns Over High-Cost Loans and Failure to Help Low-Income Taxpayers

Leading consumer groups today issued a letter sharply criticizing the Internal Revenue Service's "seriously deficient" proposal to partner with commercial tax preparers to provide electronic filing services. The letter urged the agency to cancel the proposal. The consumer groups warned that taxpayers who sought "free" services under the proposed program would become prime targets of high-cost, high risk refund anticipation loans, as well as other over-priced services.

The consumer groups also criticized the proposed program for failing to benefit the most needy taxpayers -- low-income recipients of the Earned Income Tax Credit. Signing on to the letter were Consumer Federation of America (CFA), Consumers Union, the National Consumer Law Center (NCLC), the U.S. Public Interest Research Group (U.S. PIRG). A copy of the letter is available on CFA's website at http://www.consumerfed.org/, NCLC's website at http://www.consumerlaw.org/ and U.S. PIRG's website http://www.uspirg.org/

The letter said, "Instead of entering into this Agreement, which is of limited benefit and exposes taxpayers to the risks of usurious tax refund loans, we urge the IRS to provide e-filing on its own website. We also urge the IRS to provide more free tax preparation services to low-income taxpayers."

"Taxpayers who use these so-called 'free services' will be a captive audience for commercial tax preparers to sell outrageously expensive refund anticipation loans," charged Jean Ann Fox, CFA's Director of Consumer Protection. She also noted that the proposed partnership did not appear to prohibit commercial preparers from charging extra fees (such as customer service fees) or "padding" their regular fees for other additional services (such as state income tax preparation) when taxpayers sought free services from those companies.

Refund anticipation loans (RALs) are high-cost loans secured by a taxpayer's refund, with APRs ranging from 67% to 774%. Commercial tax preparers sell RALs in conjunction with banks, and RALs are mostly marketed to low-income consumers. The numerous problems with RALS have been documented by a report from CFA and NCLC as well as a report by the Brookings Institution.

Under the proposed IRS/commercial preparer partnership, the IRS would provide a direct link on its website to the commercial preparers. The consumer groups expressed concern that this link would imply an endorsement of commercial preparers without sufficient safeguards. The consumer groups noted that even taxpayers without Internet access might be at risk if they are encouraged to visit the offices of paid preparers to determine if they were eligible for free services under the IRS program, and then subject them to a high-pressure face-to-face sales pitch for RALs.

"Instead of doing its job and assisting taxpayers directly, the IRS is leading them into the clutches of companies that make hundreds of millions from predatory tax loans," said Ed Mierzwinski, Consumer Program Director at U.S. Public Interest Research Group (PIRG). "This back-door privatization risks transferring even more tax credit dollars intended for low and moderate income taxpayers into commercial preparer's pockets."

The consumer groups also criticized the IRS proposal for failing to provide meaningful assistance to the neediest taxpayers - low-income workers who are eligible for the Earned Income Tax Credit. The agreement requires the commercial preparers to provide free services to 10% of their clients, but does not specify which 10% and does not require the preparers to serve EITC recipients. Furthermore, the vast majority of low-income taxpayers will not be able to access free services because according to the federal government's statistics, they do not use the Internet. Finally, the proposed program fails to address the fact that many low-income taxpayers do not have a bank account to take advantage of the best feature of electronic filing - speedier refunds if they are direct deposited.

The consumer groups recommended that IRS scuttle the proposed program and instead provide electronic filing directly to the IRS website, citing the example of the Massachusetts state tax agency as well as other federal agencies such as the Social Security Administration and the Department of Education. Furthermore, the groups encouraged IRS to provide more free tax preparation services to low-income taxpayers.

"The needs of working poor taxpayers aren't going to be met with a website link to commercial preparers," stated Chi Chi Wu of NCLC. "They need a live person to help them prepare their taxes without paying costly fees and without being sold usurious loans."

If the proposed IRS/commercial preparer partnership is permitted to proceed, the consumer groups recommended that the preparers be prohibited from selling RALs to taxpayers who receive free services, from padding prices for other services, and from charging for customer service under the free services program.

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CFA is a non-profit association of almost 300 groups, which, since 1968, has sought to advance the consumer interest through advocacy and education.

Consumers Union is the not-for-profit publisher of Consumer Reports.

NCLC is a non-profit organization specializing in consumer issues on behalf of low-income people. NCLC works with thousands of legal services, government and private attorneys, as well as organizations, who represent low-income and elderly individuals on consumer issues.

U.S. PIRG is the national lobbying office for the State Public Interest Research Groups. State PIRGs are non-profit, non-partisan public interest advocacy groups.