Tax Preparers Confuse and Abuse Mystery Shoppers: Consumer Advocates Urge IRS to Stop Tax Preparers from Using Confidential Tax Returns to Sell Refund Anticipation Loans and Other Products

PHILADELPHIA, April 8, 2008 - The 70 million taxpayers who pay commercial firms to prepare tax returns are at risk of confusion, abuse, and errors by tax preparers selling costly refund anticipation loans (RALs), according to a new report and comments filed with the Internal Revenue Service. This week, advocacy groups released a report on mystery shopper testing, entitled “Tax Preparers Take a Bite out of Refunds: Mystery Shopper Test Exposes Refund Anticipation Loan Abuses in Durham and Philadelphia.” The report was also sent to the Internal Revenue Service as part of consumer comments filed in the IRS rulemaking on use of tax returns to market RALs.

The mystery shopper tests portray an industry that imposes high costs on vulnerable low-income filers and fails to provide high quality tax preparation. Preparers in Philadelphia failed to tell taxpayers about free filing options, and some failed to disclose that RALs are loans. Preparers made serious errors on some testers’ returns, which would have resulted in inflated refunds, and failed to correctly handle education credits or investment income. Many preparers did not give clear price information about RALs, other products, and tax preparation fees, leaving testers confused and unable to comparison shop.

Seventeen “mystery shopper” tests were conducted at H&R Block, Jackson Hewitt, Liberty Tax service and independent preparers by the Community Reinvestment Association of North Carolina (CRA-NC) in Durham and by Community Legal Services of Philadelphia (CLS) and the Philadelphia Campaign for Working Families. The National Consumer Law Center (NCLC) analyzed test results for the report.

Twelve tests were conducted in Durham; five tests were conducted in Philadelphia. All of the testers had their taxes prepared by commercial preparers. Fifteen of these testers received RALs or a refund anticipation check (RAC). (One of these testers had to withdraw because of incompetent tax preparation, and another tester was not given a RAL or RAC).

With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund check. After the refund is deposited, the bank issues the consumer a check and closes the temporary account.

In Philadelphia, the results showed that:

• None of the testers were informed about the right to receive a refund in 8-15 days if they e-filed and used direct deposit, the best way to get a quick refund without incurring additional fees.

• Only one of the five preparers was provided a price quote for tax preparation and other charges.  Without pricing information, it is almost impossible for filers to shop around for the best deal.

• Two of the five preparers did not explain that a RAL was a loan, and two more did so only after questioning by testers.

• Two preparers made serious errors that significantly affected tax liability, causing two testers to file amended returns to fix errors.  One preparer inflated the tester's refund by over $600.  

Community Legal Services (CLS) of Philadelphia has conducted its own mystery shopper tests of commercial tax preparers for the past three years, and joined with other groups this year to expand the test. "Year after year, our mystery shoppers' experiences reveal that some commercial tax prep companies confuse and abuse their customers with poor disclosures, high fees and costly miscalculations," said Kerry Smith, an attorney with CLS. "It's time for the IRS to take action to ban the marketing of expensive, risky refund anticipation loans." CLS is a partner with The Campaign for Working Families, which operates 16 free tax sites in Philadelphia.

“When someone takes out a RAL, they are borrowing their own money and paying a high cost to do it. The practice of making money off of RAL’s should be banned,” said Jean Hunt, executive director, The Campaign for Working Families. “Don’t give away your hard earned money. Come file for free at one of the 16 free tax sites throughout Philadelphia operated by The Campaign for Working Families.”

Advocates from NCLC and Consumer Federation of America (CFA) sent the mystery shopper report to the IRS Monday as part of their submission to the agency’s rulemaking on RALs. The IRS is considering issuing a proposal to prohibit tax preparers from sharing tax return information to sell RALs, RACs, and other products. The IRS specifically asked for feedback on whether RALs and other products provide an incentive to inflate tax refunds, and whether these products exploit low-income taxpayers.

A copy of the report, Tax Preparers Take a Bite out of Refunds: Mystery Shopper Test Exposes Refund Anticipation Loan Abuses in Durham and Philadelphia, is available here.

More information on the financial impact of RALs on taxpayers is available at http://www.consumerlaw.org/issues/refund_anticipation/content/RAL_2008PressRelease.pdf

A copy of consumer advocates’ comments to the IRS is at http://www.nclc.org/issues/refund_anticipation/content/comments_040708.pdf

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For over 40 years, Community Legal Services Inc. (CLS) of Philadelphia has provided the highest quality legal assistance to low-income Philadelphians who cannot afford legal counsel when they most need it.

The Campaign for Working Families operates 16 free tax sites throughout Philadelphia (prepare and e-file federal and state income tax returns), and connects individuals to the federal Earned Income Tax Credit (EITC), other tax credits, public benefits, and asset-building resources. Over the past six years, The Campaign for Working Families has brought $102.5 million directly into the homes of low-income working families.  And it has saved these families an additional estimated $16 million in interest, fees, and charges for tax preparation and check cashing, and loans. www.phillyfreetaxes.org or 215-686-2599