IRS Considering Restrictions on Refund Loans
Proposed regulations would impact other products offered by tax preparers

The IRS is considering a regulation proposal that would significantly limit the ability of tax preparers to offer refund loans and other products to their customers. 
The Treasury Department and the IRS are concerned that Refund Anticipation Loans (RALs) and similar products may provide preparers with a financial incentive to take improper tax return positions in order to inflate refund claims.
IRS director of electronic tax administration David Williams stated in Bloomberg news that the IRS has only anecdotal evidence of fraud linked to the financial products. Due to the nature of the evidence, it may take awhile to collect enough information to decide how to act. He states, “We do not know that this is a widespread problem; even when we get comments from the public, we may have to do more research.”1 
Specifically, the IRS is concerned that tax preparers who offer RALs to customers may benefit financially if they fail to fully comply with Circular 230 requirements. In other words, profits from RALs may entice some preparers to sidestep tax laws.
As a result, the IRS is considering adding restrictions under Circular 230, similar to contingent fees. The proposed restrictions require the tax preparer to disclose all financial incentives the preparer received as a result of the RAL to any RAL client.  
Regulations under section 7216 generally provide that preparers may use or disclose tax return information if the taxpayer gives consent. The IRS has reiterated its commitment that, as a general rule, taxpayers should have the ability to control the use or disclosure of their tax return information.
To address the tax administration concerns described above, the Treasury Department and the IRS are considering proposing regulations that would create an exception from the general consent framework prescribed by §301.7216-3 for RALs, RACs, audit insurance, and similar products. The proposed exception effectively separates the act of preparing returns from the act of marketing or purchasing certain financial products. It would prohibit the use of information obtained during the tax-preparation process for the non-tax administration purpose of marketing: (i) a RAL or a substantially similar product or service; (ii) a RAC or a substantially similar product or service; or (iii) audit insurance or a substantially similar product or service.
In order to give the public an opportunity to comment on this issue, the Treasury Department and the IRS are issuing an Advance Notice of Proposed Rulemaking (ANPRM) that announces they are considering a proposal that tax return preparers be prohibited from disclosing or using taxpayer return information for the purpose of selling products such as RALs and similar products.
The ANPRM has a 90-day written comment period after its publication in the Federal Register. Comments should be submitted no later than April 8, 2008. Thereafter, the Treasury Department and the IRS will consider what steps, if any, to take with respect to RALs and similar products.
If you would like to make your voice heard on this issue, you may submit your comments electronically at www.regulations.gov/search/index.jsp. 
While the proposed regulations had not been posted to the Federal Register as of press time, we anticipate this will occur in the next few days.
The IRS has requested that comments generally address the following issues:
1. If RALs and certain other products create a direct financial incentive for preparers to inflate tax refunds, are there alternative approaches that would eliminate or reduce this incentive?
2. If the marketing of RALs and certain other products exploit or have the potential to exploit certain taxpayers, is the approach described in this ANPRM better viewed as protecting taxpayers from exploitation or as restricting taxpayers’ ability to control their tax return information? If the latter, is there an alternative approach that would address the concerns described above?
3. Should RACs be treated the same way as RALs and audit insurance, or do RACs present lesser concerns?
4. Are there other products that present significant concerns for tax compliance or taxpayer exploitation that should be addressed by regulation? The complete text of the proposed regulatory changes can be found at www.irs.gov/pub/irs-drop/reg-136596-07_anprm.pdf.

From February 2008

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