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IRS Bans Refund Loans from Free File Program

By Martin H. Bosworth
ConsumerAffairs.com

December 6, 2006

Tax Refund Loans • Mystery Shoppers Find Deceit, Incompetence Among Tax Preparers • Consumers Taking Out Fewer Instant Tax Loans • California Sues H&R Block • 'Instant Refund' Loans an Avoidable Expense • IRS May Limit 'Instant Refund' Loans • Tax Refund Loans Gouge Taxpayers Despite Reforms • IRS Promises Improved Free File Program • Jackson Hewitt Pays $5 Million to Settle California Charges • IRS Bans Refund Loans from Free File Program • IRS Promotes Refund Loans, Consumer Group Charges • Taxpayers: Beware of Instant Refunds • Instant Tax Refunds: Fast But Expensive • Tax Anticipation Loans Victimize Cash-Strapped Consumers --- • More about tax preparation ...

The Internal Revenue Service (IRS) has agreed to prohibit the marketing of refund anticipation loans (RALs) to taxpayers using the "Free File" online tax filing system.

Third-party tax preparers such as H&R Block have promoted RALs as side offers to customers using the Free File program for the past five years. RALs essentially offer taxpayers an expensive advance loan on their anticipated refund check.

Consumer advocates and tax experts have criticized RALs for many reasons. The loans come with excessive interest rates and many hidden fees that are deducted from the final refund before the taxpayer gets it.

RALs are heavily targeted towards low-income taxpayers, which made the Free File program especially enticing to tax preparation firms to push the product.

The IRS imposed income limits of $50,000 or less to use the Free File program in 2006, but agreed to raise the income limit to $52,000 for the 2007 tax season.

The income limits contributed to a 22 percent decrease of participation in the "Free File" program, with 3.8 million taxpayers using it for 2006.

Low-income taxpayers coughed up over $900 million in fees and charges just to get the loans for the 2004 tax year, leading Children's Defense Fund president Marian Edelman to call the practice "indefensible." Edelman demanded better assistance for helping children and working families receive their tax benefits without strings attached.

H&R Block had the market cornered on the expensive refund loans, leading to a lawsuit filed in California by Attorney General Bill Lockyer.

Lockyer charged that the financial services giant not only engaged in deceptive business by charging so many additional fees at exorbitant rates for the loans, but by sharing the taxpayers' personal and financial information with partner companies without their permission.

H&R Block faces multiple consumer class action lawsuits over the loans, leading to proposed total settlements of $95 million across multiple states. Lockyer has said that potential damage from the California suit could reach into the "hundreds of millions."

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