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US Consumer Groups Say Free Tax E-Filing Will Benefit Loan Sharks

by Leroy James, Tax-News.com, New York

23 September 2002


In late July the US Treasury announced a program under which as many as 78 million Americans will be able to file their taxes online at no cost next year under an agreement with the Office of Management and Budget (OMB). But now consumer groups are saying that the program will increase the risk that low-income taxpayers will be exposed to loan sharks who offer short-term loans at high interest rates in anticipation of tax refunds.

According to the proposed agreement, a consortium of private sector companies will work together to offer free online tax filing services, an option that could benefit some 60 percent of taxpayers. Taxpayers will find links to the online tax filing services through a single, centrally-located Web portal at www.irs.gov and available through www.firstgov.gov.

"Our current tax code is needlessly time consuming and confusing. We need to make it easier to understand and easier to comply. This new e-filing partnership is one positive step forward. We’re taking advantage of technology to reduce the cost and the hassle of filing for millions of taxpayers," stated Treasury Secretary Paul O’Neill.

The Consumer Federation of America, Consumers Union, the National Consumer Law Center and the US Public Interest Research Group have written to the Treasury during the consultation period on the proposal.

"The IRS appears more interested in meeting the Congressional mandate for 80% electronic filing by 2007 than it is in serving the best interests of taxpayers who most need access to free tax preparation services and e-filing," the groups said in their letter to the IRS. "Taxpayers need to be able to receive their refunds and tax credits quickly without becoming trapped in usurious loans."

Currently, taxpayers who choose to file online can pay an average of $12.50 in filing fees in addition to the cost of purchasing tax preparation software. The new free tax filing consortium Web page is slated to be online by December 31, in anticipation of the 2003 filing season. Each company interested in participating must offer the service free to at least 10% of the US population, based on regional, income or demographic sectors of its choosing. The companies may overlap, but the proposal requires that the group as a whole cover at least 60% of taxpayers.

The consumer groups are worried that e-filing would be used to ensnare low-income taxpayers in the so-called refund anticipation loans, or RALs, which are often guaranteed by the taxpayer's refund check. It's estimated that consumers paid $810 million in fees related to RALs in 2000 and that 40% of taxpayers who take out the loans are recipients of the earned income tax credit.

The groups said the proposed agreement should be changed to prohibit e-filing consortium members from offering RALs, but leading tax-preparer H&R Block says this is unnecessary, pointing out that the proposed agreement explicitly prohibits conditional sales.

The Treasury's Pam Olson, acting assistant secretary for tax policy, claims that increased electronic filing would reduce the need for RALs, saying: "Taxpayers who e-file get their refunds twice as fast, reducing the need for tax refund loans, which often carry significant fees, and customer surveys consistently show that taxpayers prefer e-filing."


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