Meddlesome government regulations are nothing new. Last year’s Federal Register — the regulator’s daily bible — spanned an eye-glazing 74,408 pages. But here’s a new twist on the regulatory one-two punch: Congress makes required citizen-to-government transactions more arduous, then regulators float proposals to ban private-sector products that aim to relieve some of that frustration.
That’s exactly what’s happening right now with commercial tax-refund delivery services.
After Congress put off approving a massive tax change until the end of 2007 — thereby delaying the delivery of forthcoming refunds by as much as two months — the IRS is considering an effective ban on voluntary refund-anticipation loans (RALs), which allow cash-strapped taxpayers access to their refund amounts, minus a fee.
For two years in a row, Congress has postponed passing extensions of popular tax breaks (e.g., tuition deductions) until after the IRS starts printing tax forms for the coming filing season. This time around, Congress waited until late December to approve a “patch” for the alternative minimum tax, which otherwise would have snared 20 million taxpayers with higher bills. Adapting to this change required about seven weeks of computer reprogramming for the IRS. As a result, 38 million taxpayers will see nearly $87 billion in refunds delayed at least an additional month. And with checks averaging more than $2,500, that’s a long period of privation for the families that count on refunds in January or February to pay off holiday bills.
It’s likely that the usage of refund-anticipation loans will rise this year as late charges and interest on past-due credit-card accounts exceed the fees associated with the loans, which average about $100. RAL usage numbers had been dropping in recent years (from 12.4 million in 2004 to 9.6 million in 2005). But Congress’s own laziness is likely to cause a spike for the 2007 filing period.
Dutifully prodded by market-loathing “activists,” IRS officials announced in early January that they were considering regulations prohibiting tax preparers from sending client return information to lenders. Since most RALs are issued by banks after being okayed by taxpayers and arranged by tax preparers, the real impact of this regulatory action would be to shut down the industry. Understandably, few lenders could or would offer a loan without any securitizing data.
The IRS claims that RALs may provide preparers with the incentive to inappropriately inflate refund claims. The logic behind this concern is odd, considering the IRS pursues tax cheats and forbids RAL providers from basing loan fees on refund amounts. (All fees must be identical for all customers, regardless of loan size.) It’s worth noting that this rule is a source for the high annual percentage rates that self-styled consumer groups gleefully trash. Unvarying fees mean that shorter and smaller loans will naturally have higher APRs than those with longer terms and higher loan amounts.
It is true that refund-anticipation loans aren’t for everybody, and that they don’t make much sense if you’re on sound financial footing and can afford to wait the “normal” two-to-six weeks for your refund check. Taxpayers with bank-account and Internet access can come out on the low end of the delivery-time estimate by using e-file and direct-deposit options.
But paper filers and check recipients can expect to wait that full six weeks and then some. And it’s clear that many taxpayers in general value quicker access to refunds in exchange for receiving a smaller amount.
If this were not the case, it would be hard to explain why 70 percent of respondents in a 2005 study conducted by the Credit Research Center at Georgetown University noted that they had obtained a voluntary RAL more than once. High repeat rates indicate that users are either pleased with these services or at least prefer them over waiting for the IRS. Indeed, 85 percent of surveyed borrowers were satisfied with their refund-anticipation loans.
If approved, the info-sharing ban wouldn’t take effect until 2009 — after this year’s troubles are over. But with many popular tax cuts expiring over the next few years, it wouldn’t be surprising if Congress ends up delaying future filing seasons with late-year tax-law changes.
Rather than shutting down in-demand products, the IRS should concentrate on improving internal performance. According to its own e-file “Refund Cycle Charts,” the IRS hasn’t posted any turnaround-time improvements in the past two years. IRS officials, meanwhile, aren’t projecting any for 2008. If the tax agency could match the one- to two-day turnaround offered by refund lenders, the loan market would dry up.
Considering their own questionable behavior, Congress and the IRS shouldn’t be cutting access to commercial products that seek to ameliorate government-created tax-refund headaches. RALs should continue to be a safe, legitimate solution for the millions of taxpayers who rely on them.
Here’s hoping that RAL-killing regulations stay out of the Federal Register. Denying taxpayers needed relief from financial migraines amounts to government-sponsored malpractice.