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Two consumer groups criticize IRS for offering ‘debt indicator’ service
By JONATHAN D. EPSTEIN
News Business Reporter
7/12/2005
A pair of national consumer organizations is criticizing a service offered by the Internal Revenue Service to tax preparers, saying the federal agency is wrongly helping firms that offer controversial tax loans to low-income consumers.
The National Consumer Law Center in Boston and the Consumer Federation of America in Washington are calling on the IRS to end its “debt indicator” service, which they say increases profits for tax preparers at consumers’ expense, while potentially violating privacy.
They also say the service, which was suspended from 1994 to 1999, has not led to a promised lowering of fees on tax refund anticipation loans (RALs). And it may be contributing to a big jump in loan fraud.
A Democratic senator from Hawaii, Daniel K. Akaka, has introduced a bill that would, among other things, end the service.
“The debt indicator helps pad the profits of lenders who charge triple-digit interest rates to working poor families just so they can get their refund monies less than two weeks quicker,” National Consumer Law Center staff attorney Chi Chi Wu, author of a report by the two groups, said in a press release. “Why is the federal government helping to promote this form of predatory lending?”
IRS spokesman Kevin McKeon declined to comment on the report, but stressed that e-filing a return and using direct deposit can help taxpayers get their refunds in three weeks or less, without the need for loans.
RALs are short-term loans of about two weeks, based on the value of an expected tax refund. They are automatically repaid when the IRS deposits the refund electronically into a bank account set up by the lender. But they must still be repaid if a refund is delayed or denied.
Fees can range up to $115, which translates to annual percentage rates of several hundred percent. And many of the borrowers are low-income recipients of the Earned Income Tax Credit, which consumer advocates say is being drained.
According to the NCLC, more than 12 million American taxpayers paid more than $1 billion in loan fees, plus $389 million in other fees, in 2003.
Consumer advocates have long denounced the loans as “predatory,” and lawmakers such as New York Sen. Charles Schumer have even proposed legislation restricting the loans and requiring more disclosure. But the loans are legal and have been money-makers for the tax preparers who market them and the lenders – including HSBC Taxpayer Financial Services – that underwrite them.
According to the groups’ report, that’s in part because of the IRS’ “debt indicator” service, which allows tax preparers to find out if a taxpayer’s refund will be paid in full or will be garnished to pay government debts.
First offered in the early 1990s as the “direct deposit indicator,” the service screens electronic tax returns for any claims against the refund, such as for prior tax debt, child support or delinquent student loans.
But the two groups say tax preparation firms have been using it as a credit check to decide if they should offer a RAL. If the service came back showing no federal claims, the refund almost always came back in full and the loan was almost guaranteed to be approved.
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