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GAO-08-800R: 

United States Government Accountability Office: 
Washington, DC 20548: 

June 5, 2008: 

The Honorable John Lewis:
Chairman:
Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives: 

Subject: Refund Anticipation Loans: 

Dear Mr. Chairman: 

Taxpayers who do not want to wait for their tax refunds from the 
Internal Revenue Service (IRS) may choose to obtain refund anticipation 
loans (RAL). RALs are short-term, high-interest bank loans that are 
advertised and brokered by both national chain and local tax 
preparation companies. Although the annual percentage rate (APR) on 
RALs can be over 500 percent,[Footnote 1] they allow taxpayers to 
receive cash refunds quickly--sometimes within the same day and even 
within an hour of filing their tax returns. After filing a taxpayer's 
return electronically, the tax preparer works in cooperation with a 
bank to advance the refund as a loan minus tax preparation costs, other 
fees, and a finance charge. As part of the RAL process, the taxpayer 
provides authorization to IRS to send the refund directly to the bank 
to repay the loan. 

Despite the benefits of receiving cash quickly based on an expected 
refund, IRS officials and others have raised concerns about whether 
taxpayers are fully aware of the costs involved and their tax filing 
alternatives. For example, in a 2007 report to Congress, the IRS 
National Taxpayer Advocate questioned whether RAL consumers actually 
understand the nature of the loan product they are receiving. According 
to the Advocate, while tax preparers offering RALs are required to 
obtain taxpayers' signatures on written disclosure forms, there are no 
requirements that such disclosures be made orally. The Advocate wrote 
that despite the written disclosures provided to them, consumers may 
not fully understand that the RAL is in fact a loan and not simply a 
way to receive a faster refund from IRS. Further, without an oral 
explanation, consumers may lack a general understanding of the nature 
of the product and its impact on credit reports, as well as other 
consequences of default. In January 2008, in order to address this 
issue, IRS and the Department of the Treasury (Treasury) indicated in a 
Federal Register notice that they were considering rules to prohibit 
tax preparers from marketing RALs based on information gathered during 
the tax preparation process. In their notice, IRS and Treasury cite 
concerns about tax preparers improperly inflating refunds in order to 
market RALs, particularly when working with customers eligible for the 
earned income tax credit (EITC).[Footnote 2] IRS studies have found 
that this credit is particularly susceptible to fraud, in many cases 
perpetuated by paid tax preparers. In 1999, an IRS compliance study 
found $10.4 billion[Footnote 3] of overclaims on the EITC, of which 
$7.2 billion (70 percent) was attributed to tax returns completed by 
paid preparers. 

Based on continuing concerns over how RALs are marketed to taxpayers, 
you requested that we perform a limited investigation to identify 
examples of where RALs are marketed and the types of information tax 
preparers disclose to potential RAL applicants. 

To identify where tax preparation and RALs are marketed to taxpayers, 
we used Internet searches to identify a nonrepresentative selection of 
22 different tax preparers across the country that advertised both tax 
preparation and RALs. We called these preparers to confirm the 
availability of the RALs they offered, as well as any incentives or 
discounts connected with tax preparation and RALs. We confirmed that 
these tax preparers were located in an existing business, but we did 
not attempt to investigate the types of business arrangements between 
the tax preparers and the colocated business. Posing as taxpayers, our 
investigators also visited a nonrepresentative selection of 18 
different tax preparers in proximity to GAO, specifically preparers in 
the Washington, D.C., and Baltimore, Maryland, metropolitan areas. We 
took photographs of the offices used by the tax preparers where 
appropriate. We selected national chain preparers and small, local 
companies for our site visits. 

To determine what types of information tax preparers disclose to 
potential RAL applicants, our undercover investigators had bogus paper 
tax returns prepared at five of the preparers they visited. 
Investigators used fictitious names, cover stories, and income 
information. It was not in the scope of our work to test a scenario in 
which we qualified for the EITC and we did not allow our bogus returns 
to be filed with IRS--the final requirement for obtaining a RAL. 
[Footnote 4] We therefore attempted to collect information about fees 
and charges associated with RALs through our interactions with the tax 
preparers, displays in the tax preparation offices, information on the 
preparers' Web sites, and any literature the preparers offered us on 
RALs. Using this information, we calculated the APR associated with the 
RALs where possible. 

We conducted this investigation from January 2008 through March 2008 in 
accordance with standards prescribed by the President's Council on 
Integrity and Efficiency. Since we did not apply for a RAL as part of 
this investigation, we were not able to evaluate whether the tax 
preparers gave legally sufficient written disclosure. We also did not 
use an EITC scenario and therefore were not able to test whether tax 
preparers would use the credit to improperly inflate our refunds. 
Because we selected a nonrepresentative selection of tax preparers 
across the country for this investigation, it is not possible to 
generalize the results of our work and draw conclusions about all tax 
preparers. 

In summary, we found that RALs are marketed by tax preparers that 
operate in a wide variety of businesses, ranging from major retail 
stores to automobile dealers and shoe stores. Of the 40 tax preparers 
we called or visited, 37 offered RALs. 13 tax preparers offered year- 
round tax preparation in their own stand-alone offices, while 27 were 
open only during the tax season and operated at tables or desks within 
existing businesses offering other products and services. Of these 27 
preparers, 13 were located in businesses that target low-income 
customers, such as check cashers, payday loan vendors, rent-to-own 
stores, and pawn shops, and 9 offered incentives to encourage tax 
customers to spend their refunds on the businesses' primary goods and 
services. For example, an auto dealer we visited told us that if we 
didn't have enough money for the down payment on a car, we could get 
our taxes done by its tax preparer and use the refund as a down 
payment. 14 tax preparers took advantage of the low overhead costs of 
operating in an existing business, but did not appear to target low- 
income populations. 

The tax preparers we visited were generally willing to provide 
information about RALs, though because of the limited nature of our 
investigation, we were not able to assess the legal sufficiency of all 
tax preparers' advertisements and written disclosures. All five 
preparers that completed federal and state tax returns for our 
fictitious individuals gave an estimate of the fees and finance charges 
associated with a RAL, and most calculated the refund amount available 
after deducting fees. However, we found that tax preparers did not use 
a consistent method to calculate the APRs in their advertisements and 
at least one preparer did not calculate its advertised APR according to 
Truth in Lending Act requirements. For example, the APR on a $1,000 RAL 
at this tax preparer was represented in advertisements as 36 percent. 
However, when a $30 account fee is included in the APR calculation in 
accordance with the act, the APR is actually 135 percent. The preparer 
included this fee in an advertisement showing the various fees and 
finance charges associated with a RAL, but noted in small print that 
the account fee is not actually included in the calculated APR shown in 
the advertisement. 

Background: 

According to IRS data, the average individual tax refund for calendar 
year 2006 tax returns was $2,324 on approximately 106 million tax 
returns.[Footnote 5] According to the IRS National Taxpayer Advocate, 
during the 2005 filing season, 9.6 million taxpayers eligible for 
refunds that all together totaled $28.7 billion applied for RALs. 

Previous GAO reports have found that fees for RALs vary widely and, 
when combined with tax preparation fees, may considerably reduce a 
taxpayer's refund.[Footnote 6] However, these loans remain popular, 
especially among low-income taxpayers. IRS data show that RALs are 
disproportionately purchased by low-income taxpayers, especially those 
receiving the EITC. The EITC is a refundable federal income tax credit 
for low-income working individuals and families designed to offset the 
burden of Social Security taxes and to provide an incentive to work. To 
qualify, taxpayers must meet certain requirements and file tax returns. 
According to IRS 2004 filing season data, 56 percent of taxpayers who 
obtained RALs also received the EITC, even though EITC recipients made 
up only 17 percent of the general population of taxpayers. In its 2007 
Objectives Report to Congress, the National Taxpayer Advocate 
identified several reasons taxpayers purchase RALs: 

* need for immediate cash; 

* lack of information about the product or alternatives; 

* immediate access to a large sum of money, typically the EITC; 

* inability to pay preparation and filing fees out of pocket, and; 

* experience of friends and family. 

Refund anticipation loans are subject to the Truth in Lending Act 
[Footnote 7], which is intended to help consumers avoid the uninformed 
use of credit through meaningful disclosure of credit terms by lenders 
and to protect consumers against inaccurate and unfair credit 
practices. Under regulations issued to implement this act, if a RAL 
vendor advertises an APR, it must be the calculated according to 
specific formulas and must include certain fees in the finance charge. 
The finance charge is defined as the cost of consumer credit as a 
dollar amount and includes any charge payable directly or indirectly by 
the consumer and imposed directly or indirectly by the creditor as 
incident to or as a condition of credit.[Footnote 8] Finance charges 
include interest; service, transaction, activity, and carrying charges; 
and loan fees. Any additional fees imposed as a result of the customer 
taking a RAL must be included as part of the finance charge.[Footnote 
9] Finance charges do not include application fees charged to all 
applicants or late payment charges. 

If a consumer asks about the cost of a RAL, the creditor is required to 
disclose the APR, unless it cannot be determined in advance. In this 
case, the creditor is required to state the APR for a sample 
transaction. Before the transaction is consummated, the creditor must 
disclose certain information in writing to the borrower. This 
information must be disclosed clearly and conspicuously in a form that 
the consumer may keep[Footnote 10] and includes the following:[Footnote 
11] 

* itemization of the amount provided to the borrower, minus prepaid 
finance charges (fees); 

* finance charges, or "the dollar amount the credit will cost you"; 

* the APR, or "the cost of your credit as a yearly rate;" and; 

* total of payments, or "the amount you will have paid when you have 
made all scheduled payments." 

Tax preparers providing electronic filing services must comply with 
rules in the IRS Handbook for Authorized IRS e-file Providers of 
Individual Income Tax Returns, which requires tax return preparers that 
sell RALs to their clients to: 

* ensure that taxpayers understand that by agreeing to a RAL or other 
financial product they will not receive their refunds from IRS as IRS 
will send their refunds to the financial institutions; 

* advise taxpayers that RALs are interest-bearing loans and not a 
quicker way of receiving their refunds from IRS; 

* advise taxpayers that if a direct deposit is not received within the 
expected time frame for whatever reason, the taxpayers may be liable to 
the lender for additional interest and other fees, as applicable for 
the RAL or other financial product; 

* advise taxpayers of all fees and other known deductions to be paid 
from their refunds and the remaining amounts the taxpayers will 
actually receive; 

* secure the taxpayers' written consent to disclose tax information to 
the lending financial institutions in connection with applications for 
RALs or other financial products; and; 

* adhere to fee restrictions and advertising standards prohibiting tax 
preparers from accepting fees contingent upon the amount of the RAL or 
using improper or misleading advertising in relation to time frames for 
refunds and RALs. 

Results of Investigation: 

RALs are marketed by tax preparers that operate in a wide variety of 
businesses, ranging from major retail stores to automobile dealers and 
shoe stores. Of the 40 tax preparers we called or visited, 37 offered 
RALs. 13 tax preparers offered year-round tax preparation in their own 
stand-alone offices, while 27 were open only during the tax season and 
operated at tables or desks within existing businesses offering other 
products and services. Of these 27 preparers, 13 were located in 
businesses that target low-income customers; however, 14 chose the 
locations of their businesses because of low overhead costs. One tax 
preparer we observed minimized overhead costs by operating out of a 
trailer in the parking lot of a gas station. Tax preparers we visited 
were generally willing to provide information about RALs, but did not 
use a consistent method to calculate their advertised APRs. 

See table 1 for examples of seasonal tax preparers that we identified 
during our investigation. 

Table 1: Selected Businesses Marketing Tax Preparation and RALs: 

Primary services: Auto dealer; 
Location: Virginia; 
Incentive (if offered): Free tax preparation with purchase of car. 

Primary services: Check cashing; 
Location: Maryland; 
Incentive (if offered): [Empty]. 

Primary services: Check cashing; 
Location: Mississippi; 
Incentive (if offered): Will cash refund check for 1.5 percent 
(regularly 3 percent). 

Primary services: Equipment trailer;
Location: Maryland; 
Incentive (if offered): [Empty]. 

Primary services: Discount shoe store; 
Location: Maryland; 
Incentive (if offered): Free pair of shoes with tax preparation. 

Primary services: Pawn shop; 
Location: Alabama; 
Incentive (if offered): [Empty]. 

Primary services: Pawn shop; 
Location: Alabama; 
Incentive (if offered): [Empty]. 

Primary services: Pawn shop; 
Location: New Hampshire; 
Incentive (if offered): A $5 to $10 discount on buying back previously 
pawned item. 

Primary services: Pawn shop; 
Location: North Carolina; 
Incentive (if offered): [Empty]. 

Primary services: Pawn shop; 
Location: Virginia; 
Incentive (if offered): A $50 gift certificate to use in the store. 

Primary services: Pawn shop, rent to own; 
Location: Mississippi; 
Incentive (if offered): Willing to negotiate a discount on rental 
items. 

Primary services: Payday loans; 
Location: Missouri; 
Incentive (if offered): [Empty]. 

Primary services: Real estate; 
Location: Alabama; 
Incentive (if offered): [Empty]. 

Primary services: Rent to own; 
Location: Virginia; 
Incentive (if offered): Tax customers eligible for reduced prices on 
selected merchandise for sale and rental. 

Primary services: Rent to own; 
Primary services: 
Location: Mississippi; 
Incentive (if offered): Willing to negotiate a discount on rental 
items. 

Primary services: Retail store; Kentucky; 
Location: Kentucky; 
Incentive (if offered): [Empty]. 

Primary services: Small business services; 
Location: Kentucky; 
Incentive (if offered): [Empty]. 

Primary services: Van rental; 
Location: Mississippi; 
Incentive (if offered): [Empty]. 

Primary services: Vending machine service; 
Location: North Carolina; 
Incentive (if offered): [Empty]. 

Source: GAO. 

[End of table] 

See figure 1 for a photograph of a tax preparer located in the parking 
lot of a former gas station in Maryland. 

Figure 1: Seasonal Tax Preparation Service Operating Out of a Trailer: 

[See PDF for image] 

Photograph of tax preparation trailer. 

Source: GAO. 

[End of figure] 

27 of the tax preparers we called or visited were located in existing 
businesses in order to market to the businesses' customer base, and 13 
of these were located in businesses targeting low-income customers. IRS 
data show that RALs are disproportionately purchased by low-income 
taxpayers, and some seasonal tax preparers market to this population by 
operating within businesses that serve low-income customers, such as 
check cashers, payday loan vendors, rent-to-own stores, and pawn shops. 
See figure 2 for a photograph of one check cashing business offering 
tax preparation. 

Figure 2: Check Cashing Service Offering Tax Preparation: 

[See PDF for image] 

Photograph of check cashing service store front. 

Source: GAO. 

[End of figure] 

We called or visited 9 businesses that had partnered with seasonal tax 
preparers to use tax preparation and RALs to offer customers incentives 
to purchase the businesses' primary goods or services. In some cases, 
RAL customers are able to receive their cash refunds in as little as an 
hour after filing their returns, while they are still inside the 
business or store where the seasonal tax preparer is located. Some of 
these businesses encourage customers to spend the refund immediately, 
by offering discounts on their products and services. For example, an 
auto dealer we visited told us that if we didn't have enough money for 
the down payment on a car, we could get our taxes done by its tax 
preparer and use the refund as a down payment. See figure 3 for a 
photograph of this business. 

Figure 3: Auto Dealer Encouraging Customers to "Bring Your W2 Form" for 
Credit toward a Car Purchase: 

[See PDF for image] 

Photograph of auto dealership store front. 

Source: GAO. 

[End of figure] 

Furthermore, a rent-to-own store advertised that it "will put money in 
your hands in as little as 4 hours!" and that getting your taxes done 
at the store "results in greater buying power. All tax customers are 
eligible for reduced prices on selected merchandise." We visited two 
shoe stores that offered customers a free pair of shoes as an incentive 
to use the in-store tax preparation services. See figure 4 for a 
photograph of one of these business. 

Figure 4: Shoe Store Offering a Free Pair of Shoes with Tax 
Preparation: 

[See PDF for image] 

Photograph of shoe store front. 

Source: GAO. 

Note: Name of tax preparer obscured in this photo. 

[End of figure] 

We found 14 tax preparers that operated within existing businesses in 
order to take advantage of low overhead costs but did not specifically 
target low-income customers. These included those in a vending service 
company, a small business services company, and a van rental store. In 
general, these businesses did not offer any incentives to attract tax 
customers to their primary products. Some national tax preparers also 
market RALs by offering tax preparation in major retail chains. Tax 
preparation services in these retail stores are seasonal and generally 
close around April 15. Several of the businesses we observed offered 
multiple services unrelated to tax preparation. See figure 5 for a 
photograph of a business that offers various services in addition to 
tax preparation and RALs. 

Figure 5: Business Offering Insurance, Travel, Notary, and Payroll 
Services in Addition to Tax Preparation and RALs: 

[See PDF for image] 

Photograph of business offerings sign. 

Source: GAO. 

[End of figure] 

See figure 6 for a photograph of an immigration services business with 
a sign encouraging customers to file taxes and "Get Money Fast" with a 
RAL. 

Figure 6: Immigration Services Business Encouraging Customers to "Get 
Money Fast" with a RAL: 

[See PDF for image] 

Photograph of store front. 

Source: GAO. 

Note: Name of tax preparer obscured in this photo. 

[End of figure] 

We found that tax preparers were generally willing to provide 
information about RALs during the tax preparation process. All 5 
preparers that completed federal and state tax returns for our 
fictitious taxpayers gave an estimate of the fees and finance charges 
associated with a RAL based on our refund amounts. Four of the 
preparers calculated the refund amount available after deducting fees 
and 4 others warned us that RALs are subject to bank approval. Three 
preparers explained the average time required to receive a direct 
deposit refund from IRS compared to the time to receive a RAL and 3 
others ensured that we understood that a RAL is a loan, not a quick 
refund. However, only 2 of the tax preparers we visited had RAL fees or 
APRs posted prominently in their offices and none were willing or able 
to give us written materials on fees or APRs unless we applied for a 
RAL.[Footnote 12] During our visits, we did not experience any pressure 
to apply for a RAL. Of the 40 tax preparers we called or visited, 6 
discouraged us from applying for RALs because of the high interest 
rates or the short time it actually takes to receive a refund directly 
from IRS. 

Tax preparers offering refund anticipation loans must abide by the 
requirements of the Truth in Lending Act and the IRS Handbook for 
Authorized IRS e-file Providers of Individual Income Tax Returns. Under 
the Truth in Lending Act, if a tax preparer chooses to advertise the 
APR for a RAL, it must be calculated with a finance charge that 
includes all fees exceeding the fees charged for the same tax 
preparation service without a RAL.[Footnote 13] During our limited 
investigation, we collected information from advertisements posted in 
the tax preparation offices we visited. Some of these advertisements 
gave sufficient information on APRs, finance charges, and other fees to 
determine how the preparer had arrived at its advertised APR, while 
others gave only limited information. The examples discussed below are 
based on two preparers whose calculations we were able to replicate. 
Tax preparers offering RALs are also required to provide a written 
disclosure, but because we did not complete the RAL application 
process, we did not receive written disclosures and were not able to 
evaluate the legal sufficiency of these statements under the Truth in 
Lending Act. 

We found that tax preparers did not use a consistent method to 
calculate the APRs presented in advertisements, and at least one 
preparer did not calculate its advertised APR according to Truth in 
Lending Act requirements. One preparer included all fees in its 
advertised APR, while another did not include an account fee, which 
substantially understates the actual APR for the RAL. The inclusion of 
these fees, known as account fees, standard fees, or handling fees, and 
which are charged to open a bank account into which IRS will eventually 
deposit the taxpayer's refund, is required by the Truth in Lending Act 
because consumers are required to pay the fee in connection with 
obtaining RALs and do not have the option of using existing accounts to 
obtain their tax refunds. Such fees can significantly affect the APR. 
For example, the APR on a $1,000 RAL at one tax preparer was 
represented in advertisements as 36 percent. However, when a $30 
account fee is included in the APR calculation in accordance with the 
act, the APR is actually 135 percent.[Footnote 14] The preparer 
included this fee in an advertisement showing the various fees and 
finance charges associated with a RAL, but noted in small print that 
the account fee is not actually included in the calculated APR shown in 
the advertisement. The advertisement's small print also notes that all 
published APRs are estimates. Since we did not actually file our tax 
returns, we did not obtain Truth in Lending written disclosures to 
verify whether the APRs in the required disclosures included all fees, 
in contrast to the APRs presented in the preparers' advertisements. 
Table 2 shows sample APRs from two of the preparers we visited that use 
different methods to calculate their advertised APRs. 

Table 2: Example of How Omission of Fees Affects APR Calculations: 

Amount of refund: 
Preparer 1, Advertised: $1,000; 
Preparer 1, GAO calculated: $1,000; 
Preparer 2, Advertised: $1,250; 
Preparer 2, GAO calculated: $1,250. 

Finance charge: 
Preparer 1, Advertised: $10.73; 
Preparer 1, GAO calculated: $10.73; 
Preparer 2, Advertised: $80; 
Preparer 2, GAO calculated: $80. 

Account fee: 
Preparer 1, Advertised: Not included in calculation; 
Preparer 1, GAO calculated: $30; 
Preparer 2, Advertised: None; 
Preparer 2, GAO calculated: None. 

Total fees used to find APR: 
Preparer 1, Advertised: $10.73; 
Preparer 1, GAO calculated: $40.68; 
Preparer 2, Advertised: $80; 
Preparer 2, GAO calculated: $80. 

APR: 35.6%: 
Preparer 1, Advertised: 35.6%; 
Preparer 1, GAO calculated: 135.0%; 
Preparer 2, Advertised: 212.4%; 
Preparer 2, GAO calculated: 212.4%. 

Sources: Tax preparers and GAO analysis. 

Note: According to GAO analysis, these preparers calculate the APR 
using a loan period of 11 days, and therefore we also used an 11-day 
loan period for our calculations. 

[End of table] 

We are sending a copy of this report to the Commissioner of IRS. In 
addition, this report will be available at no charge on our Web site at 
[hyperlink, http://www.gao.gov. If you or your staff have any questions 
about this report, please contact me at (202) 512-6722 or 
kutzg@gao.gov. Contact points for our Offices of Public Affairs and 
Congressional Relations may be found on the last page of this report. 
GAO staff who made major contributions to this report include Matthew 
Harris, Assistant Director; Ken Hill; Jeffrey McDermott; Andrew 
McIntosh; Sandra Moore; and Philip Reiff. 

Sincerely yours, 

Signed by: 

Gregory D. Kutz, Managing Director:
Forensic Audits and Special Investigations: 

[End of section] 

Footnotes: 

[1] At the tax preparers we visited, we found APRs ranging from 36% to 
over 500%. 

[2] 73 Fed. Reg. 1131 (Jan. 7, 2008). 

[3] IRS estimates that $31.9 billion in EITC claims was paid to 19.3 
million taxpayers for the 1999 filing season. 

[4] In order to avoid electronically filing our returns, we paid cash 
for our paper tax returns. However, the tax preparers we visited 
automatically included tax preparation fees in the cost of the RAL, 
allowing customers to avoid paying cash up front for tax preparation. 

[5] Out of approximately140 million tax returns filed during this 
filing season. 

[6] See GAO, Tax Administration: Most Taxpayers Believe They Benefit 
from Paid Tax Preparers, but Oversight for IRS Is a Challenge, GAO-04- 
70 (Washington, D.C.: Oct. 31, 2003); and GAO, Paid Tax Preparers: Most 
Taypayers Believe They Benefit, but Some Are Poorly Served, GAO-03-610T 
(Washington, D.C.: April 1, 2003). 

[7] 15 U.S.C. § 1601 et seq. 

[8] 12 C.F.R. § 226.4. 

[9] This requirement is included in the official staff interpretation 
of the regulations; compliance with these interpretations affords a 
creditor relief from certain civil liabilities. 12 C.F.R. 226 
supplement I. 

[10] 12 C.F.R. § 226.17. 

[11] 12 C.F.R. § 226.18. 

[12] One tax preparer has a table of RAL fees and APRs posted on its 
Web site, but did not offer us written materials in the tax preparation 
office. 

[13] This requirement is included in the official staff interpretation 
of the regulations; compliance with these interpretations affords a 
creditor relief from certain civil liabilities. 12 C.F.R. 226 
supplement I. 

[14] This APR calculation includes all fees that apply only to RAL 
customers, such as finance charges on the RAL and any account fees. It 
does not include the tax preparation fees, which apply to all customers 
regardless of whether they obtain RALs. 

[End of section] 

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