Tax season is over, except for those who didn’t file on time (you know who you are).
But issues with the tax-collecting Internal Revenue Service never die.
Among those are how “tax-time financial products” hit low-income taxpayers.
What are tax-time products?
Generally, they are offered by banks, pushed by tax preparation services and include items such as refund advances, refund anticipation loans and refund transfers. For example, with refund transfers, a bank account is opened to receive the IRS refund. When the refund is available, tax preparation and other fees are paid from the account.
Sounds okay — except for the fees.
Democratic Sens. Elizabeth Warren (Mass.) and Tammy Duckworth (Ill.) asked the Government Accountability Office to review the products and the transparency, or lack of it, from tax preparation companies about the fees they charge.
These products “place additional financial burdens on lower-wealth populations,” the senators wrote Friday in a letter to IRS Commissioner Charles P. Rettig.
“The findings of the GAO report are alarming, showing that low-income taxpayers — those with the greatest need for additional funds — are forced to buy expensive tax-time products because they need to pay bills due before refunds arrive,” the letter said. “The report also reveals inadequate disclosures of product costs by tax preparation providers. As the distributor of tax refunds, the IRS plays a role in perpetuating this problem.” The senators asked for a reply by April 26.
The GAO study found that less-affluent and African American taxpayers were more likely to use the tax-time products than wealthier folks.
“Specifically, taxpayers who made less than $40,000 were significantly more likely to use the products than those who made more. African American households were 36 percent more likely to use the products than white households,” GAO said. “Product users tend to have immediate cash needs, according to studies GAO reviewed. For these users, tax-time financial products generally provide easier access to cash and more cash at a lower cost than alternatives such as payday, pawnshop, or car title loans.”
That’s a low bar.
The problem with these services is that poorer people are pushed to pay more for services than more-affluent people because of a variety of circumstances. Furthermore, the fees for the tax-time products too often are not known until it is too late.
According to GAO:
• Tax preparers "present taxpayers with almost all of the documents with fee information after their tax returns have been prepared and the preparers determined the taxpayers qualified for a tax-time financial product. The timing of these disclosures would pose a challenge for taxpayers looking to compare prices for different providers.
• “During six of nine undercover visits, GAO investigators explicitly requested literature on product fees but were not provided such information."
• “Refund transfer fee information on websites GAO reviewed sometimes was presented only after the tax preparation process started, was in small print, or could be found only after navigating several pages. As a result, taxpayers may face challenges comparing prices.”
Christopher L. Peterson, director of financial services for the Consumer Federation of America, criticized companies such as H&R Block and Liberty Tax Service that he said “have played tax-time shell games hiding the fees or interest from consumers who are just trying to follow the rules. Many of the tax-time products marketed to low- and moderate-income households are loaded with a variety of junk fees and hidden costs that do not reflect the complexity of their tax filings.”
Liberty did not respond to a request for comment, but H&R Block defended its service with this statement: “We are proud to have introduced upfront, transparent pricing this tax season and to offer products that give our clients greater financial flexibility, providing value at tax time and throughout the year. Fees for tax time financial products are prominently disclosed to clients and all our tax preparation pricing is upfront and transparent.”
Taxpayers can avoid the fees by using free IRS assistance. But the government moves slowly compared with the commercial services — taking from three to eight weeks to deliver refunds. “In contrast, users of tax-time products can obtain cash very quickly,” according to GAO. “For example, refund advance recipients generally receive loan funds within 24 hours of applying, and in some instances within the same hour they apply.”
Warren and Duckworth want to know “what steps the IRS could take to speed up the process of providing taxpayers with their refunds — thus reducing, in part, low-income taxpayers’ reliance on expensive tax-time financial product.”
The IRS said it is reviewing the letter.
Unfortunately, instead of making it easier for low-income and other taxpayers to take advantage of IRS services, the agency made it harder by closing some of its taxpayer assistance centers. These are walk-in locations providing help to taxpayers. Out of 358 sites, 33 did not open, according to the Treasury Inspector General for Tax Administration, “because they have not been staffed as of March 1, 2019.”
This represents the “fading ability of the IRS to meet the needs of taxpayers who don’t or can’t communicate by telephone or computer,” complained the National Treasury Employees Union.
“Congress and the administration should provide the funding and resources necessary to fully staff" the taxpayer assistance centers, added NTEU President Tony Reardon, “and restore the IRS’ ability to help those taxpayers who can’t afford high-priced private accountants.”
The IRS did not directly address the points raised by Reardon. Instead it issued a generic, nonresponsive statement that said “the IRS is committed to providing the best customer service to all taxpayers. The IRS provides taxpayer service using a variety of channels to help taxpayers understand and meet their tax responsibilities.”
Rep. Mike Quigley (D-Ill.), chairman of the House Appropriations financial services subcommittee, knows from experience about nonresponsive IRS answers. He shares the NTEU’s concerns about IRS staff shortages.
“I raised the issue with IRS Commissioner Rettig when he testified before my subcommittee about the agency’s budget request. Unfortunately, his answers were less than satisfactory,” he said by email. “Funding for the IRS has been grossly inadequate for nearly a decade, hampering the agency’s ability to provide proper customer service to taxpayers.”