Consumer Law

Mystery Shopping Test on RALs; IRS Comments

By Jon Sheldon

A new report analyzes the results of a mystery shopping test relating to Refund Anticipation Loans (RALs),  entitled "Tax Preparers Take a Bite out of Refunds:  Mystery Shopper Test Exposes Refund Anticipation Loan Abuses in Durham and Philadelphia."  The mystery shopper testing was conducted by Community Reinvestment Association of North Carolina (CRA-NC) in Durham and by Community Legal Services of Philadelphia (CLS) and the Philadelphia Campaign for Working Families.   NCLC analyzed test results for the report.  The report is found here and summarized below.

NCLC, Consumer Federation of America and other consumer groups also submitted their comments to the IRS in response to its proposal to prohibit tax preparers from sharing return information to make RALs.  Those comments are available here.

For more information, contact
Chi Chi Wu, NCLC, 617-542-8010
Jean Ann Fox, CFA, 928-772-0674
Robin Robinowitz, Philadelphia Campaign for Working Families/CLS, 267-973-1064 
Peter Skillern, CRA-NC, 919-667-1557, x 22

The mystery shopper tests portray an industry that imposes high costs on vulnerable low-income filers and fails to provide high quality tax preparation.  Preparers in Philadelphia and Durham, NC, failed to tell taxpayers about free filing options, and some failed to disclose that RALs are loans.  Preparers made serious errors on some testers' returns, which would have resulted in inflated refunds, and failed to correctly handle education credits or investment income.  Many preparers did not give clear price information about RALs, other products, and tax preparation fees, leaving testers confused and unable to comparison shop. Several preparers made serious errors that significantly affected tax liability, causing two testers to file amended returns to fix errors.  One tester withdrew after a preparer advised him to essentially engage in tax fraud. Several of these preparers, including a gift shop and a small loan company, charged multiple ancillary fees, including one preparer who charged $324 in such fees. 

Advocates from NCLC and Consumer Federation of America (CFA) sent the mystery shopper report to the IRS as part of their submission to the agency's rulemaking on RALs.  The IRS is considering issuing a proposal to prohibit tax preparers from sharing tax return information to sell RALs, RACs, and other products. 

The consumer comments provide extensive documentation that RALs do indeed exploit low-income taxpayers, promote tax fraud, and expose confidential tax returns to prying eyes.  RALs carry high costs and risks, and drain hundreds of millions from the Earned Income Tax Credit (EITC), a special tax benefit to working poor families.  RALs cost between $32 to $130 in loan fees, plus the ancillary fees, and can translate into high Annual Percentage Rates (APRs) of 50% to 500%.  RALs drained $900 million from the refunds of American taxpayers in 2006, plus $90 million in other fees.  Nearly two-thirds of RAL borrowers are EITC recipients, despite the fact that only 17% of taxpayers get the EITC.  (More information on the financial impact of RALs on taxpayers is available here.

RALs also promote the existence of fringe tax preparers, who are attracted by the financial incentives for RALs and/or taxpayers' ability to use loan proceeds to buy merchandise.  A review of IRS authorized e-file providers from five states found hundreds of fringe preparers, including payday lenders, pawn shops, rent-to-own stores, auto title lenders, used car dealers, travel agents, beauty salons, furniture stores, grocery stores, jewelry stores, liquor stores, and a "therapy" office.

    Consumer advocates also noted the privacy risks posed by RALs and other financial products sold at tax time.  Tax preparers share confidential return information with RAL banks by getting the taxpayer to sign a consent form, which is easily slipped into the stack of documents that taxpayers are told to sign.

Full post as published by CL&P Blog on April 09, 2008 (boomark / email).