Some may already be familiar with this…
The Treasury Department has proposed some new regulations, which, if they become effective in their current form, appear to completely prohibit tax pros from offering RALs, RACs, or “audit insurance.”
There is a “public comment” window that is open until April 7, 2008.
The value and impact of submitting formal comments, critique, and criticism during this period should not be underestimated. Many organizations and firms have already submitted comments. But even individuals can submit comments, and they can be submitted electronically. If they are well written, they can have an impact, regardless of who actually did the writing.
I know for a fact that public comments, from formal groups as well as individuals, had an effect on the final version of the regulations that govern the enforcement and implementation of the USA Patriot Act.
The subject of RALs has been discussed ad nauseam in this community, and I am certainly not trying to re-hash the issue. I don’t have a strong opinion on “audit insurance,” although I suspect that this issue is not the real problem that Treasury thinks it is.
What interests me is the notion that Treasury may try to prohibit even the RAC, which is a simple mechanism that allows the tax pro to get paid from the refund. It is not a loan, and there is no interest. There is a reasonable processing fee by the bank that collects the tax refund and withholds the fee, and then delivers the rest of the money to the client.
It’s probably not going to happen, but if this mechanism is outlawed, the consequences could be pretty dramatic. In my practice we do a lot of these, and the simple fact is that these clients are financially unstable and undisciplined. Without the RAC mechanism, they simply won’t be able to pay us.
My wild speculation is that if the RAC process, along with the RAL, disappear from the tax practice, something else will take its place, out of necessity, and it may actually get uglier. The proposal refers to “separating the tax preparation process from the lending process,” because the IRS believes that when the tax pro offers these products, it creates an incentive to inflate the refund.
So what may well happen is that if even the RAC is prohibited, we will see external lenders popping up. Clients will come in, have us do the return, and will be unable to pay our fee. We will be asked for some sort of summary, or stripped down version of the tax form, that cannot be filed, that the client will use as evidence of the amount of the refund that they are expecting. Then they will walk across the street to a payday lender, take out a loan based on the expected refund, and come back in and pay our fee.
But unlike a RAL or RAC, this loan product will be unsecured, and the cost is likely to be much higher.
The other result we are likely to see is a significant drop in the actual number of returns that are filed. If people can’t pay for the service from the refund, some will simply not file, or delay filing until much later in the season.
My personal take is that the RAC is not an abusive or exploitative product. Without it, many taxpayers will experience great difficulty filing their return. You can moan about how irresponsible these folks are that they can’t come up with a couple hundred dollars, or less, to pay our fee, but these are folks who literally have trouble putting food on the table, or are literally on the verge of an eviction every month. Killing off a convenient, reasonable process like the RAC is not going to solve their financial crisis; it will make it worse.
And the Treasury Department is overreaching. The RAC does not create an environment in which tax pros construct bogus returns to pump up the refund. Even when the client pays cash up front, there is always an “incentive” for the tax pro to produce a return with a “better” refund, because this leads to a more satisfied client, who is less likely to bail out and demand that we return their documents without completing the return. Ethical tax pros manage to do the return correctly, even if it sometimes means losing the client. It doesn’t matter how the client is paying us; a dishonest or unethical tax pro is not more likely to prepare a fraudulent return when the client pays with a RAC.
Finally, I would point out that to the extent that some sliver of conflict of interest can be said to exist in the RAC, the same issue arises in many other contexts that we have learned to live with. Most people who buy a car do so with a loan, and many buyers obtain the loan through financing that is arranged by the dealer that is selling the car. The same potential conflict of interest exists here. The dealer has an incentive to manipulate the loan process, in order to qualify the buyer. The dealer may also persuade the buyer to purchase something that they cannot really afford, simply because they qualify for a big enough loan.
And yet we are not regulating auto loans out of existence. If we tried to “separate the car buying process from the lending process,” and prohibit auto dealers from offering any type of financing, it would paralyze the industry. It simply wouldn’t happen. The vested interests would prevent it.
For an extra $20 or $30, clients can pay our fees from their refund, and there really isn’t anything wrong with this idea. If this process is eliminated, it is likely to cause some real chaos, for at least one or two seasons, until some other more predatory process replaces it.
Even if you strongly disagree with me on this, I would encourage you to submit formal comments to the Treasury Department. The sheer volume of comments, especially if many are saying the same thing, really can make a difference in the final regulations.
Here’s the link to the proposal. Instructions for submitting comments are in the proposal itself.
FYI #1: Your comment may have more cumulative impact if you identify yourself as a tax professional.
FYI #2: All comments submitted eventually become public records, which presumably includes the name and address of the party that submitted the comments.
The Treasury Department has proposed some new regulations, which, if they become effective in their current form, appear to completely prohibit tax pros from offering RALs, RACs, or “audit insurance.”
There is a “public comment” window that is open until April 7, 2008.
The value and impact of submitting formal comments, critique, and criticism during this period should not be underestimated. Many organizations and firms have already submitted comments. But even individuals can submit comments, and they can be submitted electronically. If they are well written, they can have an impact, regardless of who actually did the writing.
I know for a fact that public comments, from formal groups as well as individuals, had an effect on the final version of the regulations that govern the enforcement and implementation of the USA Patriot Act.
The subject of RALs has been discussed ad nauseam in this community, and I am certainly not trying to re-hash the issue. I don’t have a strong opinion on “audit insurance,” although I suspect that this issue is not the real problem that Treasury thinks it is.
What interests me is the notion that Treasury may try to prohibit even the RAC, which is a simple mechanism that allows the tax pro to get paid from the refund. It is not a loan, and there is no interest. There is a reasonable processing fee by the bank that collects the tax refund and withholds the fee, and then delivers the rest of the money to the client.
It’s probably not going to happen, but if this mechanism is outlawed, the consequences could be pretty dramatic. In my practice we do a lot of these, and the simple fact is that these clients are financially unstable and undisciplined. Without the RAC mechanism, they simply won’t be able to pay us.
My wild speculation is that if the RAC process, along with the RAL, disappear from the tax practice, something else will take its place, out of necessity, and it may actually get uglier. The proposal refers to “separating the tax preparation process from the lending process,” because the IRS believes that when the tax pro offers these products, it creates an incentive to inflate the refund.
So what may well happen is that if even the RAC is prohibited, we will see external lenders popping up. Clients will come in, have us do the return, and will be unable to pay our fee. We will be asked for some sort of summary, or stripped down version of the tax form, that cannot be filed, that the client will use as evidence of the amount of the refund that they are expecting. Then they will walk across the street to a payday lender, take out a loan based on the expected refund, and come back in and pay our fee.
But unlike a RAL or RAC, this loan product will be unsecured, and the cost is likely to be much higher.
The other result we are likely to see is a significant drop in the actual number of returns that are filed. If people can’t pay for the service from the refund, some will simply not file, or delay filing until much later in the season.
My personal take is that the RAC is not an abusive or exploitative product. Without it, many taxpayers will experience great difficulty filing their return. You can moan about how irresponsible these folks are that they can’t come up with a couple hundred dollars, or less, to pay our fee, but these are folks who literally have trouble putting food on the table, or are literally on the verge of an eviction every month. Killing off a convenient, reasonable process like the RAC is not going to solve their financial crisis; it will make it worse.
And the Treasury Department is overreaching. The RAC does not create an environment in which tax pros construct bogus returns to pump up the refund. Even when the client pays cash up front, there is always an “incentive” for the tax pro to produce a return with a “better” refund, because this leads to a more satisfied client, who is less likely to bail out and demand that we return their documents without completing the return. Ethical tax pros manage to do the return correctly, even if it sometimes means losing the client. It doesn’t matter how the client is paying us; a dishonest or unethical tax pro is not more likely to prepare a fraudulent return when the client pays with a RAC.
Finally, I would point out that to the extent that some sliver of conflict of interest can be said to exist in the RAC, the same issue arises in many other contexts that we have learned to live with. Most people who buy a car do so with a loan, and many buyers obtain the loan through financing that is arranged by the dealer that is selling the car. The same potential conflict of interest exists here. The dealer has an incentive to manipulate the loan process, in order to qualify the buyer. The dealer may also persuade the buyer to purchase something that they cannot really afford, simply because they qualify for a big enough loan.
And yet we are not regulating auto loans out of existence. If we tried to “separate the car buying process from the lending process,” and prohibit auto dealers from offering any type of financing, it would paralyze the industry. It simply wouldn’t happen. The vested interests would prevent it.
For an extra $20 or $30, clients can pay our fees from their refund, and there really isn’t anything wrong with this idea. If this process is eliminated, it is likely to cause some real chaos, for at least one or two seasons, until some other more predatory process replaces it.
Even if you strongly disagree with me on this, I would encourage you to submit formal comments to the Treasury Department. The sheer volume of comments, especially if many are saying the same thing, really can make a difference in the final regulations.
Here’s the link to the proposal. Instructions for submitting comments are in the proposal itself.
FYI #1: Your comment may have more cumulative impact if you identify yourself as a tax professional.
FYI #2: All comments submitted eventually become public records, which presumably includes the name and address of the party that submitted the comments.
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