Expect Excessive Refund Delays, Particularly for Filers Claiming the Earned Income and Child Tax Credits
It is important to counsel taxpayers not to have false hopes of receiving this year their tax refunds promptly. Federal law requires the IRS to delay refunds for filers claiming certain refundable tax credits, such as the Earned Income Tax Credit (EITC), at least until February 15. In 2018, refunds for these filers were held up for several more months, harshly impacting the very families most in need of the refunds. This year the partial government shutdown has impacted IRS, so these filers and others should plan on worse delays than last year.
On top of that, many taxpayers appear to be filing later this year than usual. Through February 2, taxpayers filed 12% fewer returns than as of that time last year. The IRS processed 26% few returns than it did in the same period last year, signaling a Service-wide struggle to keep up with even the lower rate of filings for the same period this year.
One reason for the drop in filings may be the large number of outstanding questions taxpayers have. As noted in the National Taxpayer Advocate’s most recent annual report to Congress, the IRS has been largely unresponsive to taxpayer questions and requests for forms and information about the major new changes to the tax code. This may have resulted in taxpayers holding off on filing or turning to paid tax preparers.
The Office of the National Taxpayer Advocate found that during the shutdown 5 million pieces of mail went unanswered. The week after the shutdown, less than half of calls to the IRS were answered, compared with 90% at the same time last year, and hold times quadrupled from a year ago. Just when taxpayers have to deal with major changes in the tax code, they are left with no help from a financially crippled IRS. Sources of free help other than the IRS are described below at “A Number of Free Alternatives Are Available to Help Consumers File Their Tax Returns.”
Taxpayers Should Be Wary of RACs That in 2017 Cost Consumers Half a Billion Dollars
Over 20 million households in 2017 opted for Refund Anticipation Checks (RACs), also called “Refund Transfers” in conjunction with their tax preparation services. If confusion concerning the new tax code and the IRS’s failure to respond to taxpayer questions are any indication, the numbers in 2019 could be much higher as more taxpayers turn to paid tax preparation services.
Tax preparers offer RACs to their clients so that the consumer need not pay the preparer on the spot. Instead the tax refund is sent to a temporary bank account set up by the preparer. The preparer then deducts the tax preparation fee and an additional $30 to $40 RAC fee from the refund, and disburses the balance of the refund to the consumer via a prepaid card or check. Many taxpayers don’t understand that this transaction is a high-cost loan of the tax preparation fees.
Consumers may believe that the RAC will get them the refund early, but this is not the case. It may even delay the consumer’s access to the refund, because the tax preparer must either cut a check or sent a prepaid card to the consumer, whereas consumers with bank accounts could receive the refund directly. Instead, consumers are paying $30 to $40 just to defer payment to their tax preparer. A consumer who pays $40 to defer a tax preparation fee of $300 for three weeks could be seen as paying an annual percentage rate (APR) of 232%. For more information on RACs, see NCLC’s Consumer Credit Regulation Chapter 15.
Consumers can avoid the $30 to $40 fee and the hundreds of dollars in tax preparation fees by using available free tax preparation resources, as described below at “A Number of Free Alternatives Are Available to Help Consumers File Their Tax Returns.”
Refund Anticipation Loans (RALs) Are Rearing Their Ugly Heads Again
Refund anticipation loans (RALs) in former years were a widespread form of predatory lending, providing loans to be repaid through a tax refund and carrying interest rates of several hundred percent. While regulatory and litigation pressures almost made RALs extinct, they reappeared a few years ago in the form of the “no fee” RAL. We may see an increased demand for RALs this year due to fears that tax refunds may be even delayed longer than usual. With the “no fee” RAL, a consumer borrows a limited amount of cash when the tax return is prepared. The loan is repaid out of the refund when it is disbursed to the preparer. There is allegedly no fee to the consumer for the loan and no obligation to repay if the actual refund is insufficient to pay off the loan.
While these are advertised as “no fee,” the preparer does in fact pay a fee to the lender. This provides a strong incentive to the preparer to pass it on in the form of higher tax preparation fees or add-on junk fees. A preparer could also offer the consumer both a RAC and a no-fee RAL, but increase the RAC fee to pay for the RAL. In that case, the consumer receives some cash at the time of filing and delays payment of the tax preparation fee until the refund is received. When the refund is disbursed, the preparer deducts the loan amount, the tax preparation fee, and the RAC fee before disbursing the balance to the taxpayer. This may seem like an attractive proposition to cash-strapped consumers, but it actually results in an even higher effective APR for what is just a costly short-term loan.
The old version of RALs is also making a comeback—where an explicit fee, i.e., interest, is charged for the loan. Most national tax preparation chains appear to be pushing interest-bearing RALs, and are using various gimmicks to move consumers from no-fee RALs to interest-bearing RALs. Because of this and the potential for increased delays in receiving refunds, we may see a spike in the use of interest-bearing RALs this year. Unlike RALs in the past that charged interest in the hundreds of percent, these RALs charge closer to 36%. Consumers should nevertheless proceed with caution, because certain additional fees can make the effective interest rate even higher.
For more on both “no fee” and interest-bearing RALs and other tax-time financial products, see NCLC’s Consumer Credit Regulation Chapter 15.
Tax Preparation Chains Make It Hard to Know How Much Their Services Cost
As mentioned above, the significant changes to the tax code in effect this tax filing season and the government shutdown may drive increasing numbers of consumers to paid tax preparation services. Already more than half of taxpayers use a paid preparer to do their taxes, and those seeking the EITC use paid preparers in an even higher percentage.
Paid preparers can be expensive, in part because the industry has managed to avoid price competition. With one exception, the major tax preparation chains hide their pricing in essentially a black box, preventing consumers from comparing pricing or knowing beforehand the price they are paying, and also allowing these chains to obscure the cost of RACs and no-fee RALs.
The one exception is H&R Block, which launched a transparent pricing program this year. A first of its kind in the industry, the H&R Block initiative discloses an up-front base price for certain categories of returns. An in-store price list discloses the cost of additional services, permitting consumers for the first time to get a full price quote before work begins on their tax return.
A Number of Free Alternatives Are Available to Help Consumers File Their Tax Returns
The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $55,000 or less, persons with disabilities, and limited English speaking taxpayers who need assistance in preparing their own tax returns. IRS-certified volunteers provide free basic tax return preparation with electronic filing to qualified individuals. Many VITA sites also assist with opening bank accounts or applying for low-cost prepaid cards to reduce wait time for refunds, as well as renewing or applying for ITINs.
The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older, specializing in questions about pensions and retirement-related issues unique to seniors. The IRS-certified volunteers who provide tax counseling are often retired individuals associated with non-profit organizations that receive grants from the IRS.
VITA and TCE sites are generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations across the country. To locate the nearest VITA or TCE site near you, use the VITA Locator Tool or call 800-906-9887.
When looking for a TCE site keep in mind that a majority of the TCE sites are operated by the AARP Foundation’s Tax Aide program. To locate the nearest AARP TCE Tax-Aide site between January and April use the AARP Site Locator Tool or call 888-227-7669.
At select tax sites, taxpayers also have an option to prepare their own basic federal and state tax return for free using Web-based tax preparation software with an IRS-certified volunteer to help guide them through the process. This option is only available at locations that list “Self-Prep” in the site listing.
Taxpayers making up to $66,000 may also choose to prepare and electronically file their own tax returns online using software made available for free to eligible taxpayers through the IRS Free-File Program.
Big Increase in Use of Private Debt Collectors to Collect IRS Debt
Having been authorized in 2015 to do so, the IRS increasingly is relying on private debt collectors to collect federal tax debts. As of September 2018, 600,000 taxpayer accounts had been referred to private collectors. That number is steadily increasing as the IRS continues to transfer taxpayer accounts to private collectors on a weekly schedule.
During the shutdown, taxpayers calling the balance-due line at the IRS in hopes of making payment arrangements found their calls unanswered—only 7% of calls were answered and wait times stretched over 80 minutes. Some of these taxpayers may well end up on the receiving end of a phone call from a private collector offering terms harsher than what they could have received if the IRS had answered the phone.
Many taxpayers being subjected to collection from private collectors are those against whom the IRS itself, according to its own procedures, would not collect. Included in this group during 2018 were natural disaster survivors and Social Security Disability Income and Supplemental Security Income recipients. Private collectors are squeezing installment payments from these taxpayers and others those who are below the poverty line and cannot afford to pay their basic living expenses, such as food, clothing, and medicines.
Advise taxpayers that they need not talk to these private debt collectors and instead can demand in writing (recommended) or orally that their tax debt be returned to the IRS immediately. In addition, the federal Fair Debt Collection Practices Act (FDCPA) does apply to private collectors engaged in collecting on behalf of the IRS. This may be a fruitful area of litigation because history indicates these collectors engage regularly in debt collection violations, leading to actual and statutory damages and attorney fees. For more on the IRS’s use of private debt collectors, and for FDCPA and other remedies for abuses by such private collectors, see NCLC’s Fair Debt Collection § 14.10.
Pointers on Dealing with Unaffordable Taxes
Lower income consumers who cannot afford to pay their tax debt can be advised:
- • Always file the return on time, even if the taxpayer cannot pay the taxes owed. Penalties and interest will be lower.
- • Taxpayers have the right to an installment agreement they can afford. They can apply online, over the phone, or by mail using Form 9465.
- • If financial circumstances warrant, the taxpayer can apply for an offer-in-compromise to settle the tax debt for a reduced amount.
- • If a taxpayer does not have sufficient assets or income to pay their basic living expenses, the taxpayer can request “Currently Not Collectible” status, which stops all collection efforts.
- • Low-Income Taxpayer Clinics based at law schools and legal services offices can help with these options. Clinic locations can be searched online.
- • Another possible source of assistance is the IRS Taxpayer Advocate Service, an independent organization within the IRS. Call 1-877-777-4778.
For more details, see NCLC’s Surviving Debt Chapter 23.
Individual Taxpayer Identification Number (ITIN) Renewals Were at a Full Stop
ITINs are used by anyone required to file a tax return or pay taxes under U.S. law who is not eligible for a Social Security number, including undocumented immigrants. The PATH Act mandated the expiration of all ITINs issued before 2013, permitting their renewal on a rolling basis.
Under the new law, millions of ITINs have already expired, with 2.7 million more expiring on December 31, 2018. These include:
- • Any ITIN with middle digits of 73, 74, 75, 76, 77, 81 or 82 (e.g., XXX-71-XXXX).
- • Any ITIN not used on a tax return at least once in the past three years.
Taxpayers who did not take advantage of early renewal procedures this summer could be among the casualties of the protracted government shutdown. The IRS employees who process these applications were furloughed during the shutdown. Taxpayers who file returns with expired ITINs will have their refunds held until their numbers are renewed.
The IRS website has more information on ITIN renewals. Many VITA sites can also help with ITIN renewals.