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Consumer groups ask IRS to close privacy loophole

Loophole lets tax preparers give tax information to refund anticipation lenders


These comments are submitted by the National Consumer Law Center (NCLC) (on behalf of its low-income clients), Consumer Federation of America (CFA), Consumer Action, Consumers Union, and U.S. Public Interest Research Group. These comments respond to the IRS notice that it is considering issuing a proposal to prohibit tax preparers from sharing tax return information to make refund anticipation loans (RALs), refund anticipation checks (RACs), and similar products. We strongly support this proposal, and we urge the IRS to issue its notice of proposed rulemaking.

A. Summary of Comment

Currently, IRS rules at 301 C.F.R. § 301.7216-3 permit tax preparers to use confidential taxpayer return information to sell products, such as RALs, RACs and similar products, to consumers. All that the tax preparer needs to obtain for this marketing is the taxpayer’s signature on a piece of paper, which is easily obtained. The preparer is then free to use the information in the taxpayer’s return to promote RALs, and to share the taxpayer’s return with the RAL lender in order to make the loan. It is this consent exception that has enabled the nearly $1 billion RAL industry.

Without this exception, preparers could not offer RALs to taxpayers. As discussed in Part V, without this exception, only taxpayers who actively sought a RAL and were willing to physically themselves hand over their tax returns would receive a loan. In general, we believe that the IRS should close this consent loophole to the strict privacy protections of Section 7216. This is especially true with respect to RALs for the reasons raised in its Advanced Notice of Proposed Rulemaking (ANPR) and discussed in this Comment, i.e., that RALs exploit low- income taxpayers and encourage or abet tax fraud.

For the full comments click here (PDF format).