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The U.S. Internal Revenue Service said it will no longer help banks including HSBC Holdings Plc and Republic Bancorp Inc. underwrite tax refund loans that lawmakers and consumer groups say carry unfairly high interest rates.
The agency said it will withhold a digital indicator that tells banks when taxpayers qualify for refunds claimed on their tax forms and that a deposit is imminent. Tax preparation firms such as Jackson Hewitt Tax Service Inc., H&R Block Inc. and Liberty Tax Service advertise the loans as a way to get immediate cash.
“We no longer see a need for the debt indicator in a world where we can process a tax return and deliver a refund in 10 days,” IRS Commissioner Doug Shulman said in a statement. “We encourage taxpayers to use e-file with direct deposit so they can get their refunds in just a few days.”
The IRS’s move is part of a larger initiative announced this year to regulate the tax preparation industry for the first time in order to stop unscrupulous and untrained preparers from scamming taxpayers and the government. The agency has been concerned that refund loans encourage fraud, and the announcement Thursday would force banks to assume more risk when making the loans.
“There’s no question” costs for the loans will rise if the IRS withholds the information, Steve Trager, president of Republic Bancorp, said in an interview. “Without the debt indicator the demand will remain, but the pricing will reflect the risk.”
Sixty-one percent of the 144 million individual tax returns filed are handled by paid preparers, according to IRS Taxpayer Advocate Nina Olson, the chief ombudsman for U.S. taxpayers. About 10 million Americans purchased refund loans in 2008, said a report by the Treasury Inspector General for Tax Administration.
The loans, which typically last between five and 14 days, are contracts between the taxpayer and the lending banks and cannot be rejected by the IRS. The debt indicator tells banks issuing the loans that the borrower’s tax refund won’t be withheld to satisfy government debts or unpaid child support.
London-based HSBC issues loans to customers of Kansas City, Mo.-based H&R Block, the nation’s largest tax preparer, under an agreement that runs through 2012. H&R Block said Thursday the decision would reduce earnings by about 5 cents per share in 2011.
Other sellers of the loans include Louisville-based River City Bank and the Santa Barbara Tax Products Group LLC. Both are privately held.
Advocacy groups such as the National Consumer Law Center and lawmakers including Sen. Charles Schumer, a New York Democrat, have criticized the loans as predatory because they can carry triple-digit interest rates on an annualized basis. Some taxpayers who take the loans pay as much as 25 percent of their tax refund in fees to get their money a week earlier than they would have otherwise, the inspector general said.
“The decision Thursday by the IRS to stop underwriting these loan scams will go a long way toward protecting American taxpayers from having their income tax refunds reduced by these insidious loan products,” Schumer said Thursday.
