IRS Considers Changing Rules For Refund Anticipation Loans

Wichita Business Journal - by Kansas City Business Journal
Thursday, January 3, 2008

The Internal Revenue Service began asking for input Thursday on whether it should consider banning tax return preparers from offering refund anticipation loans.

The IRS did not enact restrictions on the loans but said it will accept public comments on the issue until April 7.

David Williams, IRS director of electronic tax administration and refundable credits, said in an interview that the IRS wants to know whether it should propose new tax regulations prohibiting tax preparers from sending client information to banks that provide the loans. He said this wouldn't prevent clients from taking their information directly to a bank or other entity that could grant a refund anticipation loan.

If enacted, the restriction on RALs could have a significant effect on the bottom line of Kansas City-based H&R Block Inc. (NYSE: HRB). According to a filing with the Securities & Exchange Commission, Block recorded $193.5 million in revenue related to its RAL program for its fiscal year that ended April 30.

Block issued a statement Thursday saying it looks forward to working with the IRS on continuing to develop best practices for refund anticipation loans. The company said RALs are already regulated by 10 federal laws and IRS rules.

A guidance statement from the IRS and Treasury Department expressed concern that RALs and other products offered by tax preparers could create financial incentive to take improper tax return positions in order to inappropriately inflate refund claims. The federal authorities were concerned that even if a flat fee is charged, tax preparers could still be encouraged to inflate refunds so clients can spend more on the merchants products and services.

"H&R Block's tax professionals are not compensated on the sale of ancillary products," the company said in a statement, "so there is no incentive for them other than serving taxpayers' best interests."

Block added that its RAL products cost borrowers about 2 percent of the principal, or less than the cost of a credit card advance, bank overdraft or even an ATM fee in many cases.

Harland Stamper, a lawyer with Shughart Thomson Kilroy PC, said the reality is that the IRS can't audit everyone, so it targets anything that could lead to improprieties. He said the IRS basically is saying that it's a free country and people can get refund anticipation loans, but that they are concerned tax preparers are involved in the process.

"It sounds like they're saying two things," Stamper said. "One, they want to protect the taxpayer so they aren't willy-nilly giving up their tax information and God knows where it goes after that. Second, they don't want to leave inducements out there for tax preparers to take overly aggressive stances on deductions or other aspects that might increase refunds."

After what happened with H&R Block, they'd better look at this.