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IRS May Limit 'Instant Refund' Loans

New regulations will also limit sharing of returns with third parties

By Martin H. Bosworth
ConsumerAffairs.com

January 4, 2008

The new rules were issued in part because of taxpayer and legal concerns about preparers using tax return information to market expensive refund anticipation loans (RALs) to taxpayers.

As a result, the IRS and the Treasury Department say they "are considering a proposal that tax return preparers be prohibited from disclosing or using taxpayer return information for the purpose of selling products such as RALs and similar products."

The potential new rules restricting RALs will be offered as an Advance Notice Of Proposed Rulemaking (ANPRM), with a 90-day comment period from the public and interested parties, the agency said.

Among the new privacy rules instituted by the IRS:

• Preparers must obtain taxpayer consent, either via paper or electronically, before disclosing tax return information to any third party.

• Any consent form must clearly identify the disclosure, its purpose, and the intended recipients.

• The consent must contain a warning notifying taxpayers that they do not have to sign the consent form, that they may set a limit on the amount of time the information is shared, and that federal law may not protect their information from being shared with more outside parties.

• The paper consent documents must be in 12-point type on 81/2 by 11 inch paper and require electronic consent requests to be in the same type as the Web site's standard text, to ensure the consent forms can be clearly and easily read.

• If a taxpayer does not consent to a disclosure, the preparer may not ask them again.

• Consent is required to share the tax information with preparers outside the United States, and the taxpayer's Social Security number must be redacted.

Large tax preparation firms such as H&R Block have come under fire for marketing costly RALs to low-income taxpayers, often pushing customers to apply for the loans without clearly describing the terms and payments involved.

The IRS had initially proposed regulations that would greatly enhance the ability of preparers to share returns with third parties, but the move was opposed by consumer groups and Attorneys General from 46 states and the District of Columbia.

Refund anticipation loans enable borrowers to receive loans immediately or soon after filing their tax returns, which are then paid back with the actual refund. But the loans often come with exorbitant interest rates and hidden fees that end up costing the borrower more than they would have received from the refund itself.

H&R Block settled a $39 million consumer class action lawsuit contending that Block charged interest rates of more than 100 percent on refund loans and failed to properly inform customers of the finance charges they were paying.

Shares of H&R Block and fellow tax preparation firm Jackson Hewitt dropped significantly on Wall Street after the new IRS rules were announced.

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