how costly loans drive the tax prep industry

excerpts from the irs report on tax return preparers.

get the full report: free download here (pdf, 55 pages).
related: irs seeks to regulate tax pro’s

today, a majority of u.s. taxpayers rely on tax return preparers to assist them in meeting their federal tax filing obligations. between 1993 and 2005, the number of taxpayers who prepared their own tax returns without outside assistance fell more than two-thirds. for 2007 and 2008, over 80 percent of all federal tax returns were filed either using a tax return preparer or software. specifically, approximately 87 million federal individual income tax returns were prepared by paid tax return preparers.

additionally, the irs is projecting an increase in these numbers for 2009.

currently, any person may prepare a federal tax return for any other person for a fee. due to the lack of registration and inconsistent reporting, the number of tax return preparers is not known.

the irs estimates that there are between 900,000 and 1.2 million paid tax return preparers currently. although some tax return preparers (e.g., attorneys and certified public accountants) are licensed by their states and others are enrolled to practice by the irs, many tax return preparers do not pass any competency requirements before they prepare a federal tax return. this last category of tax return preparer is not required to have any minimum education, knowledge, training or skill before they prepare a tax return for a fee.

an estimated 20.5 million taxpayers purchase ancillary products that provide them quicker access to the amount of their expected tax refunds.16 the two primary products are refund anticipation loans (rals) and refund anticipation checks/cards (racs). rals are short-term loans from a financial institution secured by the taxpayer’s expected refund.

several tax preparation companies and tax return preparers facilitate and advertise rals to taxpayers, although the taxpayer contracts with the financial institution — not the tax return preparer — as lender for the loan. the lender may require the taxpayer to sign a consent form for the irs’ debt indicator program when the taxpayer applies for the ral. the lender uses the debt indicator to assist in its evaluation of the taxpayer’s application for the ral. the taxpayer generally receives the funds, less fees, within a day of applying for the loan. the loan is repaid when the refund is sent by the irs to a bank account specified by the lender.

racs are non-loan alternatives to rals. with a rac, the financial institution establishes a temporary account for the taxpayer to receive his or her refund. when the tax refund is deposited, the taxpayer is given a check or a debit card for the refund amount, less fees. racs are used to expedite refunds for taxpayers who do not have bank accounts and would otherwise have to wait for a paper check or for taxpayers who do not have available funds to pay the fees for tax return preparation prior to receiving the refund (or both).

use of these refund settlement products has been increasing over time. between 2001 and 2007, the number of taxpayers using these products grew from 15 million to approximately 20.5 million (or from 11 percent of individual income tax returns to nearly 14 percent).

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posted on january 5, 2010