IRS to end release of taxpayer debt information to preparers

NEW YORK -- The Internal Revenue Service said Thursday it will end its policy of releasing information about back taxes and other debts taxpayers owe in the coming tax season.

The information, called debt indicators, has been included on acknowledgments the IRS sends tax preparers when it receives returns filed electronically.

Consumer groups praised the move.

"The federal government should not be sharing taxpayers' personal information for the profit of banks and tax preparers by operating what is essentially a free credit reporting service for them," Jean Ann Fox, director of financial services for Consumer Federation of America, said in a statement.

The indicators served as a warning that some or all of a person's refund might be held to cover old debt, including back taxes, unpaid child support or delinquent federal student loans.

They are typically used by the banks that fund refund anticipation loans to decide whether to loan taxpayers money backed by their expected refunds. These short-term loans have been criticized by consumer advocates for charging high interest rates and fees in exchange for providing cash just a few days before the refund itself arrives.

In 2008, 8.4 million taxpayers paid more than $738 million in fees for such loans, according to the National Consumer Law Center. That figure was down slightly from the previous year.

Debt indicators were created by the IRS about 10 years ago to encourage electronic filing, which is faster and more efficient and reduces mistakes, IRS commissioner Doug Shulman said in an interview.

Now that about 70 percent of returns are filed electronically, there's no longer any reason for the IRS to release the information, he said.

"The world where there was only one way where you could get access to your money quickly is over," he said, noting that with direct deposit it takes 10 days or less to get a refund these days. "I think it's unfortunate that there's a lot of hardworking Americans that are in a financial situation where they have to pay a substantial fee to access their refunds a week or two before they can get it from the IRS."

Shulman said refund anticipation loans are often targeted at low-income taxpayers.

Companies that facilitate refund anticipation loans -- such as H&R Block Inc., Jackson Hewitt Tax Services Inc. and Liberty Tax Service -- argue that taxpayers who are strapped for cash benefit from being able to get their money faster. The companies say these customers also benefit from not having to pay tax preparers up front because preparers are willing to deduct their fees from a customer's refund when it arrives.

"We serve a lot of clients who seek this product every year," said Kate Fulton, Block's senior vice president of government relations.

Block facilitated 2.1 million refund anticipation loans this year. Fulton said that shows people want their money faster than the IRS sends it out.

Refund anticipation loans, known as RALs, are also popular for those who don't have bank accounts. About 40 percent of Block's refund loan customers use accounts the company sets up with cards that act like debit cards.

"We don't think this action eliminates the need for a RAL," Fulton said. "It doesn't address the impact on the unbanked."

Liberty Tax CEO John Hewitt said eliminating the debt indicators could make refund anticipation loans more expensive, because it increases the risk banks take in underwriting the loans offered by tax preparers. The banks typically do credit checks, but that doesn't offer detail on back taxes and other government debt.

"The demand for refund anticipation loans is customer-driven," Hewitt said. "This really isn't the time to take financial options away from those who choose them and -- more importantly -- need them."

Jackson Hewitt share dropped sharply after the IRS news was released. The shares fell 20 cents, or 19 percent, to 86 cents late Thursday afternoon.

H&R Block shares also dipped, giving up 37 cents, or 2.5 percent, to $15.03.