"IRS Scrutinizes Tax Refund Loans"

STEVE INSKEEP, host:

We turn now to taxes and the people who look forward to tax time because they're expecting refund checks from the IRS. And this is a story about people who can't wait. Millions of Americans get their money a couple of weeks faster than the government can send it by taking out refund anticipation loans. These are high-interest loans. Consumer advocates and state attorneys general have long complained about them. And now the IRS may be joining the fight.

Frank Morris reports from member station KCUR.

FRANK MORRIS: Tax season just started this week. But in midtown Kansas City, Gary Lee(ph) is already out on the street, dressed as the statue of liberty, drumming up business.

Mr. GARY LEE: Tax time, baby, taxes. Come on here and get your taxes done. Tax time, Liberty Tax Service. Come on in and get your taxes done. Right here, baby, right here.

MORRIS: Inside this strip mall shop, it's quiet. No customers right now. Hardly anyone has their W2s yet.

So franchise owner Andrew Banker(ph) is running one of the new hires through the basic script.

Mr. ANDREW BANKER (Franchise Owner): The fastest way we can get your money is the refund anticipation loan. It is a loan based off of your anticipated refund. And then your check will print off at our office within 24 to 48 hours.

Ms. JESSICA WILLIAMS: Oh, great.

MORRIS: This trainee, Jessica Williams, is pretending to be the customer here. But it's a pretty natural role. She says each year she takes a refund anticipation loan and pays typically 150 bucks in fees and interest to get the rest of her return a couple of weeks sooner.

Ms. WILLIAMS: I usually need my money back as soon as possible. I mean, it's usually spent before I even get it.

MORRIS: This kind of attitude drives consumer advocates nuts.

Ms. JEAN ANN FOX (Consumer Federation of America): Don't pay the borrower your own tax refund.

MORRIS: Jean Ann Fox is with the Consumer Federation of America.

Ms. FOX: This is high-cost, high-risk credit extended to consumers who can least afford it.

MORRIS: The fees and interest on these short-term loans can amount to what would be triple-digit annual interest rates. But that's not the part that concerns the IRS. It's not worried about what the loans cost low-income taxpayers; rather what they might cost the Treasury. The agency has opened a 90-day study and comment period to see if tax preparers systematically jack up their clients' returns in order to sell them bigger loans.

David Williams, director of electronic tax administration for the IRS, says there's evidence some do.

Mr. DAVID WILLIAMS (Internal Revenue Service): Are there isolated incidents where people are - have incentives to inflate loans and create a tax problem and encourage cheating? Or is this a widespread problem that requires the IRS to take some action?

MORRIS: Like stopping preparers from sharing tax returns with companies that make the loans.

Mr. JOHN HEWITT (Liberty Tax Service): No, I just don't think it's going to happen.

MORRIS: John Hewitt worked for H&R Block before quitting the lead Jackson Hewitt, then leaving there to launch Liberty Tax Service. He says these loans account for a big chunk of his revenue, but notes that tax preparers are paid a flat fee for selling them. That's federal law. He denies that companies use backdoor incentives to boost tax return figures and loan revenue. And Hewitt says if the IRS stops tax preparers from sharing information with banks, which in turn set up refund loans, that business will go elsewhere.

Mr. HEWITT: It could go to a bank. It could go to a check cashier. It could go to a finance company. It could go to a pool hall or a back alley. But there are taxpayers who want that money and they want it today. They need it. And they're going to do whatever it takes, go wherever they can to get it as soon as possible.

MORRIS: Whether these people can get their refund anticipation loan lined up by the person who does their taxes a couple of years from now may hinge on whether the IRS believes that that preparer is motivated by simply figuring the biggest legitimate refund or by selling the taxpayer the biggest possible loan.

For NPR News, I'm Frank Morris in Kansas City.