H&R Block Voices Concerns With Proposed Rules That Would Limit Solicitation of Refund Anticipation Loans

Dear Commissioner Shulman:

Enclosed please find the comments of H&R Block on the captioned proceeding. Please call if you need any further information.

H&R Block Services, Inc. and its affiliates ("H&R Block") appreciate the opportunity to submit these comments in response to the Advanced Notice of Proposed Rulemaking (ANPR), 73 Fed Reg. 1131 (Jan. 7, 2008), IRS REG-136596-07.

H&R Block has been assisting tens of millions of Americans meet their tax filing obligations since 1955, and today we assist in the preparation of one out of every seven individual income tax returns filed with the Internal Revenue Service (IRS). Since the company was founded, we have assisted in the filing of more than 400 million tax returns.

Our assistance enables millions of families to file complete and accurate tax returns in a timely manner. Protecting the privacy of our client's personal tax return information is critical for H&R Block, along with helping our clients minimize their tax burden by utilizing the deductions and credits legitimately available to them. In addition to providing our TaxCut ® software for those who prepare their own taxes at home, and online Web-based filing assistance, H&R Block operates a network of approximately 13,000 company and franchised offices nationwide. Including our franchisees, we have more than 120,000 tax professionals who are dedicated to serving the best interests of our clients.

Many of our 20 million U.S. clients are among the more than 106 million individual taxpayers who will receive $250 billion in refunds because of overpaid taxes this year. These refunds are a major personal financial asset held by the Government, and taxpayers have a strong interest in deciding, and a basic right to choose, how best to receive and use those funds.

We help our clients understand all their options for recovering their overpaid taxes. As described in greater detail herein, we always inform our clients of the alternatives available for receiving either paper checks or direct deposit from the IRS without any added fee. Unfortunately, this may require some clients to wait as much as 6-8 weeks to receive a mailed check from the IRS. Clients without traditional banking facilities may also be forced to use quite expensive check-cashing services in order to convert a paper IRS check into cash.

Roughly 80% of our clients elect to take refund payments directly from the IRS without incurring the costs or fees of a refund anticipation loan. Since our primary focus is the preparation of the tax return itself, we are completely supportive of clients that elect to wait to recover their overpayments.

At the same time, we also help our clients understand the tax-related financial products available to accelerate receipt of funds associated with their eventual IRS refund. We carefully disclose all the fees and other costs associated with these alternatives for accelerated receipt of cash. These products include an Emerald Prepaid MasterCard®, which allows the taxpayer to have direct deposit of either an IRS refund or the proceeds of a loan based on his refund. This year we issued more than 2.5 million Emerald Cards®, which allow even clients without a traditional bank account to access cash through ATM machines, thereby eliminating the cost of check-cashing services. In addition, our Emerald Card® can provide clients a low-cost unsecured line of credit unrelated to the client's refund, as well as savings alternatives.

While the preparation of tax returns is our primary business, we also offer the three products under consideration in the ANPR. Refund Anticipation Loans (RALs) are loans secured by a tax refund. Refund Anticipation Checks (RACs) are accounts that enable taxpayers to receive refunds directly deposited in such accounts, with all bank and tax preparation fees deducted from the eventual tax refund rather than paid at the time of tax preparation. Peace of Mind® (POM) is an extended service plan that provides audit representation by a licensed tax professional.

Our personnel are not compensated with additional fees or salary when customers elect to take a RAL or RAC. We also do everything possible to make sure that our marketing is professional and informative. The cost of a $3,000 average RAL at H&R Block is $62.14. We have not seen any analysis that suggests that our millions of clients cannot make fully informed decisions on the expenditure of $62.

Indeed, it is most likely that every one of our clients routinely makes decisions concerning financial and other products that are far more costly than a RAL. For example, the $29.95 fee to establish a RAL or RAC account is less than a typical $35 bank fee for a single late monthly credit card payment. The interest cost of approximately 1% of the principal amount for an H&R Block RAL is also actually less than many cash advance fees on credit cards, tuition late fees, penalty interest rates, and other costs consumers may be forced to pay if they cannot borrow against their expected tax refund.

The current system allows taxpayers to decide how to utilize the refunds that they are entitled to receive from the IRS. By contrast, the ANPR appears to envision the IRS sharply limiting the current alternatives available to taxpayers, apparently out of the view that the IRS can make better decisions on behalf of taxpayers than they can make for themselves.

The IRS has historically shown respect and sensitivity in supporting the principle that overpayments belong to the taxpayer, not the Government. Like any other family financial asset, taxpayers have traditionally been allowed to decide for themselves how to dispose of their expected tax refund. Families can elect to receive direct IRS payments, or they can select loans or other financial products that allow faster receipt of cash. Families make many analogous, and typically larger, financial decisions every day.

H&R Block appreciates that there have been abuses in the marketplace associated with RALs in particular. Some providers may have offered products without clear disclosure of the nature of the loan, and its costs and other terms and conditions. Others may have utilized inappropriate marketing practices, including misleading disclosure or hidden fees and costs. We fully support efforts to set standards to provide clear disclosure of the nature and cost of these products. We also strongly support efforts to halt unfair or deceptive practices in the marketing or sale of these products.

At the same time, there are widespread examples of financial products where federal regulation is targeted against abusive practices in connection with the marketing and sale of products, rather than outlawing entire categories of financial products or dictating their prices or other terms. Techniques such as disclosure standards, suitability requirements, or direct regulation of marketing practices allow regulators to make sure that consumers receive accurate and comprehensible information to allow them to make informed decisions on which products may be best in their individual circumstances.

Products such as personal loans and mortgage loans often involve the taxpayer providing copies of tax returns to the bank or other lender making a credit decision. The system today allows the taxpayer and only the taxpayer to decide when to share tax return information with lenders, without restricting the right to do so.

We believe that targeting abuses in connection with RALs, RACs or similar products is far better public policy than trying to eliminate the products entirely. Identifying and banning inappropriate or abusive practices will enable the IRS to protect taxpayers without removing their choice in how fast they can turn their overpayments into cash. Therefore, our comments explain why we do not believe the IRS should create an exception to 26 CFR 301.7216-3 in order to prohibit the use or disclosure of tax return information to facilitate RALs, RACs, "audit insurance," or other "substantially similar" financial products or services connected to the preparation or filing of income tax returns. Similarly, we do not believe that these products create pressure on providers to inflate tax refund claims, although there is a long history of tax fraud by both taxpayers and tax advisors with or without the presence of RALs or RACs.

If there are documented abuses that this ANPR seeks to address, then we urge the Service to address them in the same careful manner that the Service and other parts of the federal Government have traditionally acted when establishing regulations. We believe that the first objective should be to carefully consider the costs and benefits of various alternatives. Once that is done through creating a thorough and unbiased administrative record, the Service will be in a position to choose the most cost-effective approach, and the one that imposes the least burden on society.

In our view, however, the ANPR is based on faulty assumptions and unproven suspicions that should not be the basis for careful and fair regulation. Proposing and adopting a rule along the lines suggested would be unwarranted and would effectively:

• deprive taxpayers of the ability to make informed and voluntary choices to protect their interests and serve their needs;

• deny taxpayers valuable tools to compensate for IRS delays in refund processing and to protect taxpayers' rights to competent representation at an IRS tax audit;

• prevent many taxpayers from being able to obtain professional tax preparation services to ensure that they comply with tax laws and receive all benefits to which they are entitled; and

• inflict unnecessary financial and emotional harm on taxpayers injured by such a rule.

In our comments below, we begin by briefly answering the four sets of ANPR questions. We then provide background on federal laws governing the use of consumer information by financial services providers and tax return preparers. We then describe the three financial products that are the subject of the ANPR, why taxpayers use them, the best practices used by H&R Block in facilitating them, and some of H&R Block's initiatives to develop better options. Next, we respond to the IRS's specific concerns, also discussing the broader implications of effectively "blacklisting" certain products to provide the larger context and implications of what is being considered. Finally, to the extent that evidence may develop that supports the IRS concerns, we suggest alternative approaches and recommend a set of reforms.

2. Summary: Response to the ANPR's Questions

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  A.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?

• We don't believe there is any evidence to prove a causal relationship between these products and improper refund inflation -- which is tax fraud. Therefore we do not believe a ban on information sharing in connection with facilitating these products is justified or appropriate. But we do suggest below several reforms in the way the IRS regulates RALs to ensure taxpayers are well informed and protected.

• We do not believe any alternative measures are needed or appropriate for RACs or extended service plans (ESPs). We have not been able to find any "audit protection insurance" products in the marketplace, or any ESPs that might arguably incentivize tax fraud by protecting against audits or covering tax liability that results from taxpayer fraud.

• B. If the marketing of RALs and certain other products exploit or have the potential to exploit certain taxpayers, is the approach described in this ANPR 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?

• We believe that the ANPR does more to restrict taxpayer rights than to protect against any perceived exploitation. The alternatives we suggest below to reform RAL rules and expand the Government's role in financial education would address any concerns that are fact-based. In particular, if unfair or deceptive marketing exists, enforcement of existing rules would address those practices. If needed, any new rules should be narrowly crafted to address specific gaps in regulation aimed at improper practices rather than banning valuable products that most providers market responsibly.

• Taxpayers have a fundamental right to control their own tax information. There is no precedent under any federal or state privacy law that would support eliminating a consumer's choice to share his tax information as he sees fit.

• C. Should RACs be treated the same way as RALs and audit insurance, or do RACs present lesser concerns?

• RACs have been noncontroversial, and their benefits to the IRS and consumers -- in speeding refund proceeds to those without permanent bank accounts and in enabling taxpayers to obtain professional tax preparation without providing upfront payment -- outweigh any risks to consumers or tax administration.

• D. Are there other products that present significant concerns for tax compliance or taxpayer exploitation that should be addressed by regulation?

• Since the ANPR offers no principled standard for determining which "similar products" are targeted for elimination, it is hard to know which other products might be candidates for restriction. We note that the IRS authorizes up to a 3.93% convenience fee for the use of credit cards to pay a balance due, which, not counting credit-card interest, is approximately double the cost of the average RAL at H&R Block.¹ If "high" prices are a concern, this convenience fee would seem to be a better candidate for restriction than the products identified in the ANPR. But we are not aware of any systemic evidence of taxpayer exploitation or contribution to tax noncompliance. Because we believe that tax return preparers should be allowed to offer clients tax and financial advice, products, and services, we believe that a thorough and rigorous study should precede any discussion of regulation.

The rule contemplated by the ANPR would effectively prevent a taxpayer from authorizing his return preparer to use or disclose his tax information to facilitate a RAL, RAC, or "audit insurance." Because the proposal would not ban the products outright but instead attack them indirectly by preventing the return preparer from using client information, it is important to understand the policy reasons for, and consumer benefits of, enabling tax preparers to facilitate these and other financial products and services, and the dangers of banning certain products based on unprovable "concerns."

We urge the IRS not to depart from the widely followed principles for use of non-public consumer financial information of notice, choice, and consent. We also urge the IRS to recognize the existing benefits of financial services delivery through tax preparers consistent with strong privacy protections and consumer benefits.

Because there is no unifying formula that creates a hierarchy based on the sensitivity of the information protected, inconsistencies exist among these laws. Some different standards govern use of the same information when provided in different contexts.³ But there is nonetheless a general recognition that some information deserves more protection and must meet higher standards for use than other information -- for example, sensitive personal financial information or medical information.

It is also generally recognized that consumers may benefit from the use or disclosure of their information, and that those benefits may in some circumstances outweigh privacy risks.⁴ As a result, virtually all federal privacy laws are based on consumer notice, choice, consent, and control of non-public personal information. This principle of consumer choice and control was upheld -- quite appropriately, we believe -- in the IRS's recent revision of rules under Section 7216 of the tax code.⁵ In this revision, the IRS acknowledges that the taxpayer, not the Government, "owns" the personal information on a taxpayer's tax return. In addition, it is also understood in our economy that businesses may communicate more readily and without restriction with their own customers with whom they have an established relationship than when communicating with strangers.⁶

We do not advocate an easier standard for tax return information. Rather, we cite this contrast in the legal treatment of consumer financial information and taxpayer information to highlight the fact that tax return information already enjoys the highest level of protection in federal law. To push it to the extreme -- banning the ability of a taxpayer to have his return preparer use or disclose the information when facilitating certain beneficial products, even when the taxpayer chooses to do otherwise -- would be inconsistent with basic principles of privacy protection, consumer sovereignty, and taxpayer rights. Indeed, there is no precedent under any federal or state privacy law that would support eliminating a consumer's choice to share his tax information as he sees fit, as the IRS itself acknowledges in the preamble preceding the new regulations under Section 7216.¹⁰

Information Use Provides Consumer Benefits. GLB recognizes that the ability to use customer information is a key advantage in improving consumer financial services. An Ernst & Young study prepared for the Financial Services Roundtable, for example, found customer households saved on average $195 and four hours a year because of convenience provided by information sharing by financial services companies.¹¹

The use and disclosure of tax return information, subject to taxpayer control, also provides the same types of consumer benefits. For example, H&R Block uses taxpayer information, with consent, to allow taxpayers to receive their refund or bank product on the H&R Block Emerald Card®, which opens the equivalent of a low-cost bank account. When used in combination with direct deposit of paychecks and other reloading, it can save a typical unbanked client almost $600 yearly in check-cashing and transaction fees.

Tax return preparation is inevitably linked to family financial planning, which has implications for the sale of financial products. For many families, the tax return represents a once-a-year "financial check-up," the only time families take stock of their financial situation and make adjustments. Tax refunds, which currently go to more than 76% of taxpayers and average over $2,300, provide many taxpayers -- especially those living from paycheck to paycheck -- an opportunity to save for key family goals, including education, home ownership, and retirement.

Tax-advantaged savings vehicles -- IRAs, or employer-based 401(k)s, for example -- may be supplemented by the Retirement Saver's Credit. The tax system also encourages saving for higher education through Section 529 College Savings Plans. The IRS's recent decision to allow taxpayers to split refunds into as many as three bank accounts facilitates such multiple uses.¹² The ability to make certain savings contributions up to April 15, with credit for the prior tax year, also gives taxpayers the opportunity to allocate refunds both for short-term needs and long-term asset building. It creates the incentive and opportunity for millions of taxpayers to address the need to save once they know the size of the asset available from the Government.

Numerous studies have underlined that tax incentives can work best when advice is coupled with the means of acting on it, such as opening a transaction or a savings account.¹³ H&R Block provides tax tips and financial advice to clients as part of its Block Advantage Report delivered at the conclusion of tax return preparation. The statement contains advice derived from over 500 sources that relate to a client's occupation, tax, and financial situation. Consistent with the studies cited above, we have found that customers are much more likely to value and act on our advice if, at or near the same time, they can also take action rather than having to wait for a check and go elsewhere to search for a financial services provider.

This is especially true since the average low-to-moderate-income taxpayers served by H&R Block -- nearly 60% of whom have adjusted gross incomes below the national median of $30,881 -- currently are underserved by the financial system.¹⁴ Many do not have bank accounts and rely on "fringe" financial services providers throughout the year, including check cashers and payday lenders. These taxpayers face many high-cost alternatives compared to the "prime" customers sought by most financial institutions.

It clearly is in the interest of clients like ours to be able to connect them to financial education, non-tax government benefit programs, a bank account, a savings plan, or affordable short-term credit at the only time of the year when they review their financial status and often have a significant tax refund awaiting them.

In order for H&R Block to meet the advisory and transactional needs of our 20 million U.S. customers, we rely on customer consent to use their information internally and on occasion to share it with third parties to enable the purchase of financial products. Information enables us to assist our clients by opening bank accounts, starting emergency or tax-advantaged savings accounts, alerting them to their eligibility for underutilized government benefits like Food Stamps, and blending in-person and online services when clients seek added help to ensure we serve them when and how they prefer.¹⁵

Financial Services Delivery Is Growing. The trend for tax professionals to offer financial products and services is growing and is popular with clients across the economic spectrum. Just as regulators find tax return preparation to be a financial service "closely related" to banking, the provision of financial services can more broadly be viewed as closely related to tax return preparation.¹⁶

The American Association of Certified Public Accountants (AICPA) is advancing the trend of accounting firms facilitating financial services by offering a credential for "Personal Financial Specialist." The AICPA also has created a specialized practice section offering marketing toolkits and other practice aids to better serve clients.¹⁷ Firms like H.D. Vest Financial Services, a subsidiary of Wells Fargo & Company, market "financial solutions" primarily through accounting and insurance firms, including insurance products (fixed and variable annuities, life insurance, disability and long-term care); mutual funds and individual stocks and bonds (fixed income investments, unit investment trusts, foreign securities, ADRs, limited partnerships, options, etc. via a full-service brokerage account); money management; and planning services for retirement, college savings, or estates, etc.¹⁸ The IRS should recognize that this service menu, which is typical of other financial service providers, involves products of far greater sophistication than those subject to the ANPR.

Equal Treatment for Information Use. Our point is that it appears illogical to single out and consider banning these three financial products at the same time accountants are being advised to build their practices by not only preparing taxes but also selling financial and retirement plans, asset management, and investment products, including annuities and life insurance.¹⁹ The difference between RALs, RACs, and "audit insurance" and those products jointly being offered by accounting firms is a difference in degree and not kind. As a result, there is no basis for a difference in the way information is treated in the two contexts.

This is especially so where it is clear that the joint provision of tax preparation and other services directly benefits consumers. In the case of a RAL, for example, credit secured by a tax refund is likely to be less costly to consumers than unsecured credit -- if unsecured credit is even available for those consumers.²⁰ RALs delivered on an H&R Block Emerald Card® also are significantly less costly than some competing products or services also used to borrow funds quickly or convert loans or tax refunds into cash or purchased goods -- payday loans, credit-card cash advances, bank overdrafts, or check-cashing services.

We are concerned that an IRS effective ban on RALs, RACs, and "audit insurance" based on unsubstantiated concerns could establish an unprincipled basis for banning any financial product or service other than tax advice or return preparation. It might suggest the possibility that other financial products facilitated by tax return preparers could next be subject to IRS review based on unproven concerns that they improperly influence the tax preparation process sufficiently to justify overriding informed consumer choice, and, despite the products being already regulated by other expert agencies, the IRS could establish itself as a review body. Given the range of existing laws and enforcement agencies, however, this would appear unnecessary and inappropriate. It could have a chilling effect on the delivery of competitive financial services without advancing the cause of better tax administration.

4. The Origin, Benefits, Costs of, and Alternatives to, the Products in Question

It is important to understand why taxpayers use these products and the implications of banning them before addressing the ANPR's concerns about refund inflation or taxpayer exploitation.

Because H&R Block facilitates about 45% of the RALs used in the U.S., it may be helpful to understand the procedures we use and the precautions we take to ensure full consumer information and protection. We believe that any fair-minded review of these procedures and precautions, which H&R Block professionals are trained to scrupulously follow, would conclude that the RALs that we provide are being fairly and legitimately provided. The fact that customer demand for RALs from us has consistently remained strong over the years is testimony to this fact. A summary of the RAL facilitation process and a copy of the text of the Loan Application are attached as Appendix B.

As we discuss below, the costs of RALs that H&R Block offers are reasonable when compared the fees for similar convenience services. In any event, the terms for RALs are already heavily regulated -- by bank regulators and the IRS itself. Further, the IRS itself was heavily involved in the development of RALs, and has benefited from the fact that RALs have helped to promote electronic filing, which saves the Service and taxpayers money.

Refund Loan Basics. A RAL is money borrowed from a lender based on the taxpayer's anticipated income tax refund. Banks make the loans, which are facilitated by tax return preparers. The loans are lawful, federally-sanctioned, and popular with consumers, though criticized by some activist groups.

Refund loans were developed in 1969 by Beneficial National Bank, whose employees also prepared tax returns. Modern RALs became popular in conjunction with the start of the IRS's e-filing program in the late-1980s, with the full cooperation and encouragement of IRS officials and the involvement of major U.S. banks. The availability of RALs helped both to spur electronic return filing and halt illegal refund discounting, adding value by enabling taxpayers to obtain funds more quickly.²¹

In the late 1980s, IRS refund check mail delivery could take as long as 8-10 weeks. When e-filing started, it cost an added $35 and reduced the delivery time to 3-4 weeks. For an added $29-$34, RALs cut that time by half again, initially to 10-14 days and, by 1992, to 1-2 days. With e-filing, the IRS was eventually able to direct deposit refunds into bank accounts in as few as 8-15 days.

RALs also helped jumpstart the involvement of the tax preparer community and broader use of the EITC. As many as 90% of early e-filed returns included a RAL.²² Early e-filing was costly. For a small added fee, RALs dramatically enhanced the value of e-filing, making it economically viable for many practitioners and attractive for taxpayers. Even today, 20 years later, a quarter of taxpayers who e-file use a refund-related bank product.

By enabling RALs, the IRS achieved a number of objectives: (1) it honored the taxpayer's choice; (2) it provided a clean, regulated alternative to back-alley discounting of tax refunds (a practice, widespread before the advent of RALs, in which undisclosed interest rates could exceed 3,000% APR with no consumer protections); (3) it enhanced customer service; and (4) it helped make progress toward the Congressionally-mandated goal of 80% of all tax returns being e-filed by 2007, since obtaining a faster refund is a compelling incentive for taxpayers to e-file, and RALs deliver funds even faster.²³

For taxpayers, the benefits of RALs include speed, convenience, and security:

• Speed. Taxpayers value speed to meet immediate needs or family emergencies. Those without a bank transaction account (nearly half of RAL borrowers), or unable to secure a conventional loan, use RALs to expedite the receipt of funds. This can save the taxpayer 3-8 weeks compared to IRS refund delivery. Those who have bank accounts and who e-file can save about 2 weeks.

• Convenience. RALs are convenient because tax preparation and bank fees are deducted and taxpayers can receive accurate, professionally-prepared returns, with work guaranteed and year-round support available, without having to pay upfront for preparation services.

• Security. Delivery of the check at the tax office or via a prepaid card helps those concerned about lost checks or mail security, which can be a significant problem in many urban neighborhoods during the tax season, as well as incorrect Direct Deposit bank routing or account numbers.²⁴

Faster IRS refund processing, through the IRS's Customer Account Data Engine (CADE), which we strongly support, will reduce the need for RALs.²⁶ Added regulation may help ensure that the product is offered responsibly by all RAL facilitators, which is why we support higher uniform federal standards. Better enforcement of federal regulations can curb any abuses that may occur.²⁷

Informed Consumer Choices and Refund Options. Most taxpayers receive sizeable refunds. Nationally, 76% of taxpayers received refunds averaging $2,324 in 2007, according to the IRS. Taxpayers have several options for receipt of funds. H&R Block tax professionals are trained to highlight the "no-added-fee" IRS refund options, and to present options in order from the lowest to the highest cost:²⁸

• Paper Filing. Taxpayers who elect to file their returns on paper can receive their IRS refund check via mail in 6-8 weeks or via direct deposit to their bank account in 5-7 weeks.

• E-Filing. Taxpayers who e-file can receive their IRS check in half that time, about 3 weeks by mail or an average of 12 days by direct deposit if they have a bank account.²⁹

• RACs. Taxpayers who e-file through a paid tax preparer can receive funds in 8-15 days from a bank, after tax preparation and bank fees have been deducted, through a Refund Anticipation Check (RAC). The RAC is attractive to those who do not have a bank account but want a speedy refund without a loan or who may be unable to pay the preparation fee at the time of filing.

• RALs. Taxpayers who e-file via a paid tax preparer can receive funds in 1-2 days (or within an hour for qualified borrowers) with a RAL from a bank. Fees for the loan, as well as tax preparation, are deducted from the loan proceeds. Some return preparers charge their own administration fee, although H&R Block offices do not.

• A Client Service Agreement.

• Computer screens facing the consumer and the tax preparer, showing side-by-side comparison of each option's features, including tradeoffs between cost and speed.

• A plain language "Facts About Refund Anticipation Loans" two-sided document at the tax desk.

• A detailed RAL Application, which uses the term "loan" or "RAL" (clearly defined as a loan) over 100 times and which includes the bold, unmistakable word "LOAN" in the background on each page in clear capital letters measuring 2 x 7 1/2 inches,³¹ and a Truth in Lending Act Statement reporting fees and interest rates in prescribed format.

• The Block Advantage Report, following the completed tax return, which includes tax and financial tips and which advises clients how planning can avoid RALs and keep more of their refund in their pocket.³²

• he can file his federal income tax return electronically without obtaining a RAL without additional charges;

• the IRS will send him a refund check or electronically deposit their refund to his existing bank account without additional charges;

• the IRS normally makes and electronic deposit in an average of about 12 days after an electronic filing;

• the bank tries to make proceeds of an Instant RAL available on the day of application and a Classic RAL available on the first business day after application;

• the bank cannot guarantee when any proceeds of a RAL or an IRS refund will be available to the client; and

• a RAL may cost substantially more than other sources of credit, and the client may want to consider using other sources of credit.³⁴

Under the IRS's revised 7216 rules adopted in January, to obtain a RAL --

Surveys show very high levels of customer satisfaction, while regulators and lenders receive few complaints.³⁶ RAL clients return the following year in higher percentages than those with similar incomes who do not take a RAL.³⁷

RAL Benefits. Why do clients request RALs? Beyond speed, convenience, and security:

• RALs meet seasonal needs. For many consumers RALs provide a once-a-year chance to get caught up and pay pressing medical, holiday, heating, car repair, or tuition bills, loans, or overdue rent, to avoid late charges, or to take advantage of sales discounts. The inability to obtain refunds quickly can impose significant hardships on taxpayers.³⁸

• RALs help relieve emotional stress at tax time, providing a sense of control and closure. They also provide a greater sense of security for those who may not trust the IRS with bank account numbers or mail delivery.

• RALs serve the unbanked, for whom other forms of credit may not be available to meet emergency needs. Most banks or thrifts will only make longer-term loans, usually for existing customers, often after charging for a credit check or application fee. Nearly half of H&R Block's RAL customers do not have checking accounts, most do not qualify for a conventional bank loan, and many do not have credit cards.³⁹

Critics argue that RALs are very costly, based on the annualized percentage interest rate over the 11 days of the average RAL. But RALs are a specialized credit product -- a loan on average for 11 days, not 365 days -- that is expensive to deliver, given the amounts involved, and for which all fees are fully disclosed.⁴²

Bank lenders say several factors influence RAL terms:

• High Costs. Costs of originating RALs are high, relative to the amount of the typical loan. The cost of processing the RAL application, setting up a bank account, training customer-service personnel, and originating and administering the loan is similar whether a loan is for one day or one year.

• Refund Offsets. There is a risk of default if the IRS reduces the refund by offsetting delinquent federal or state taxes, unpaid student loans or child support, or nonpayment of other federal debts. The risk is reduced when the IRS advises of pending offsets through a Debt Indicator, but the IRS does not guarantee that all offsets have been identified and some are not.

• Pre-Refund Audits. There is an additional risk of default when refunds are frozen, only partially paid, or denied as eligibility and fraud issues are resolved. Over 1.2 million returns were resequenced -- or delayed for review -- in 2005 under the IRS Revenue Protection Program. First time e-filers and Earned Income Tax Credit claimants receive special scrutiny. Because over a quarter of claims are considered questionable, 400,000 EITC returns underwent pre-refund audits. Lenders have no advance notification of these delays or denials.⁴³

• IRS, FMS Errors. There is added risk of disruption and loss because most RALs are made at the start of a tax season when more IRS processing problems occur. For example, in 2001, the IRS erroneously dropped the two last digits of taxpayers' Social Security numbers in administering the Debt Indicator, a mistake that took two weeks to fix and that tripled the amount of bad debt compared to the rest of the tax filing season.⁴⁴ This year, for example, early in the tax season, the Financial Management Service erroneously dropped several numbers from each client's deposit account number in connection with all refund proceeds that were transmitted to RAL-issuing banks, causing loan losses.

• Customer Relationship. A RAL is a once-a-year transaction in which the bank does not have personal contact with the borrower and the borrower may be difficult to locate in case of default. One bank reported loan losses, that when spread out over all loans made, averaged $20per RAL.⁴⁵

Cost Comparisons. The costs of RALs are also reasonable compared to various alternatives. For "Classic RALs" of $200 to $9,999, H&R Block's lending bank partner has a fixed $29.95 refund account fee and a finance charge ranging from $2.15 to $107.28. A typical $3,000 Classic RAL delivered on an H&R Block Emerald Card® costs a total of $62.14. This can be compared to alternative credit transactions, some of which have the added penalty of impairing a consumer's credit rating:⁴⁶

• a credit-card cash advance for $3,000 can cost $90 or more, not including finance charges;

• three credit-card late fees for $3,000 in arrears can cost $117, not counting finance charges or triggering new interest rates that can jump to over 30%;

• three bounced checks, with bank and merchant fees, can cost $165; and

• payday loans (which cost between $15 and $20 per-hundred-dollars borrowed) can cost 7-9 times more than the average RAL at H&R Block measured similarly.

 

Cost per $100 Loaned Avg Days Outstanding: 11

 

 

 

Added fees for speed or convenience are a well established feature of our economy, as all-night convenience stores, ATMs, and one-hour photo services illustrate. Consumers can reasonably choose more to pay for convenience. For example --

• millions of Americans wanting fast delivery choose to send a letter by United States Postal Service overnight delivery for $16.25 rather than by regular mail for 41 cents, about 40 times more expensively;

• the wire transfer of funds via Western Union -- for a service fee and with zero credit risk -- can cost more than double a RAL ($145 for $2,999);

• the IRS itself charges up to $105 to set up an Installment Agreement to enable delayed monthly payments (not including interest or penalties), and a $150 user fee to process Offers in Compromise;

• for taxpayers using a credit card to pay a balance due to the IRS, the authorized convenience fee can be as high as 3.93%, or $117.90 (not including credit card interest), for a $3,000 balance due, which is nearly double the $62.14 a $3,000 RAL would cost at H&R Block;

• the U.S. Passport Agency charges $100 for regular 6-week delivery of a new passport but nearly double that, $192.50, for expedited 2-week service (including recommended overnight delivery), and private-sector expediters can charge $299 extra for same-day service; and

• the U.S. Transportation Security Administration (TSA) authorizes a private firm to charge $128 annually, including TSA's vetting fee, to enable registered travelers to get expedited passage through airport security lines.⁴⁷

The fees for RALs at H&R Block are relatively modest when compared to the costs of similar services for convenience.

Multiple Laws Regulate RALs. As detailed in Appendix A, at least 10 federal laws and 13 state laws regulate refund lending. Fees and interest rates charged by refund anticipation lenders are regulated under the National Bank Act or by authorities in a financial institution's home state, which permits interest rates to be exported to other states. The Truth in Lending Act and the Federal Reserve Board's Regulation Z require full and uniform disclosure of annual percentage rates and finance charges and regulate calculations of annual interest rates, oral disclosures, and advertising of credit terms. Inconsistent state laws are preempted. The stated purpose of Reg. Z is "to promote the informed use of consumer credit by requiring disclosures about its terms and cost."⁴⁸ The banks that make refund loans are highly regulated and closely supervised by bank regulators, including the Comptroller of the Currency.

IRS Regulates RAL Facilitation. The IRS also extensively regulates RALs through Revenue Procedure 2007-40 and five IRS publications, including Publications 1345 and 3112. A tax return preparer who is an Electronic Return Originator (ERO) cannot also be the lender of his clients' RALs (which is why H&R Block partners with a financial institution offering RALs in connection with the company's tax preparation services). In addition, most e-filers undergo an FBI criminal background check, fingerprinting, verification that they have filed their individual and business tax returns and paid balances due, and a history check of any prior noncompliance with the IRS e-filing program. Violators are subject to suspension from the e-filing program by the IRS. Advertising is regulated, deceptive practices are prohibited, and RAL facilitation fees are regulated. All tax preparers are subject to laws covering diligence, fraud, misrepresentation, etc., and they can be enjoined from misconduct. Tax practitioners representing taxpayers before the IRS under Circular 230 are subject to additional rules and sanctions for violating them.⁴⁹

Specifically, IRS rules require that tax preparation provider must:

• "advise taxpayers that RALs are interest bearing loans and not a quicker way of receiving their refunds from the IRS" and "ensure that taxpayers understand that by agreeing to a RAL . . . they will not receive their refund from the IRS as the IRS will send their refund to the financial institution."

• "advise taxpayers that if a Direct Deposit is not received within the expected time frame for whatever reason, the taxpayer may be liable to the lender for additional interest and other fees, as applicable for the RAL . . . ."

• "advise taxpayers of all fees and known deductions to be paid from their refund and the remaining amount the taxpayer will actually receive."

• Fees charged by EROs. Fees must be the same for all customers and not related to the refund amount or RAL or any figure from the tax return; separate fees may not be charged for direct deposits.

• Advertising, marketing and promotion. The use of any form of public communication that contains false, fraudulent, misleading, deceptive, unduly influencing, coercive or unfair statements or claims is prohibited.

• Tax preparers. Preparers who are e-filers must undergo annual suitability checks.⁵⁰

Diminishing Issue. RALs exist because of taxpayer overwithholding and Government processing of tax refunds only once a week. But the IRS has begun to reduce processing times. As part of its computer modernization program, the IRS has introduced a new Customer Account Data Engine (CADE), which has the potential through daily processing to deliver refunds more rapidly, initially to filers of the simplest returns. Over the next few years, increasing numbers of Form 1040 filers will receive their refunds more quickly. Quicker refunds will reduce the need for short-term loans, a development H&R Block supports as a solid benefit for the tax system and for taxpayers.

In addition, free online filing that speeds refunds may diminish the need for loans. Starting in 2003, a public-private partnership between the IRS and the tax software industry has reduced the cost and burden of tax preparation for millions of taxpayers yearly. Today, 70% of taxpayers can obtain free online tax preparation and filing at www.irs.gov. H&R Block's Online Tax Program is among the Free File Alliance programs featured. The Alliance participants do not offer RALs and they enable filers from home to have their refunds deposited directly into their bank accounts for faster access than receipt of mailed IRS checks.

Connecting more taxpayers to low-cost basic bank accounts, as is being done by H&R Block and some volunteer tax preparation (VITA) organizations, may also reduce the need for refund-related bank products by allowing direct deposit of refunds.⁵² H&R Block has opened more than 2.5 million low-cost Emerald Card® accounts, which provide basic transaction services. The accounts are kept open year-round, even if funds are drained, so that otherwise-unbanked clients who may have chosen a RAL or RAC on an Emerald Card® this year can get the speed of IRS direct-deposits refunds next year without paying for a new bank product.

Finally, financial education can change habits. Responsible tax preparers, who respect and "meet their clients where they are," can use the RALs or RACs their clients want as a gateway to healthier financial options. Financial education, coaching, advice, and alternatives are not always accepted instantly by tax clients but may be part of a multi-year transition. Effectively banning the products would eliminate that opportunity.⁵³

Legislation. Because of bank laws and court decisions, states cannot regulate interest rates of national or out-of-state banks and thrifts, but 13 states, four counties, and two cities have adopted laws requiring disclosures by RAL facilitators, in some cases duplicating or providing variations on federal requirements.⁵⁴ Illinois, for example, requires the annual percentage interest rate to be given for a 10-day loan period, although the federal Truth in Lending Act requires that the APR be stated for the actual, truthful time, which averages 11 days. Other states have approved or are considering RAL legislation. While H&R Block prefers uniform national standards, it has participated in drafting and supported almost all of the bills enacted by states.

Federal legislation, adopted by the Senate in May, 2004, and under current review by the Senate Finance Committee staff, would require registration of all RAL facilitators, upgraded disclosures of loan terms and alternatives, and penalties for noncompliance. We believe that approach is constructive, although several other bills have proposals, including ending the Debt Indicator, which would be counterproductive. We supported the "Taxpayer Protection Act of 2007," H.R. 1677, which would prohibit the Debt Indicator in connection with RALs the Treasury Secretary determines are predatory, because we do not believe the loans we facilitate are predatory or would be found so by any bank regulatory agency.

In 2007, Congress enacted a law capping interest on certain loans that may be offered to military service members and their families at a 36% MAPR ("Military APR") including fees that are excluded in the Truth in Lending Act APR calculation and disclosure.⁵⁵

In 2004, H&R Block recommended that the IRS strengthen its RAL rules by amending the Handbook for Authorized e-file Providers to require RAL facilitators to make a dozen key disclosures, but the request was declined. Those recommendations are similar to those in the Senate bill. We renew them in modified form in our discussion of reforms below.

H&R Block has also taken a number of deliberate steps to improve its own practices and prices with respect to RALs. It improved disclosures, eliminated its own system-administration fee to effectively lower prices by 25%-50%, improved training to ensure all options are objectively presented with IRS no-added-fee options highlighted, ended preparer compensation tied to facilitation of RALs or RACs, strengthened compliance, and, in concert with its bank partner, lowered finance charges to 36% APR on RALs taken with the H&R Block Emerald Card®, a step broadened in 2008 to include RALs delivered on checks as well. The fee reductions mean that a $3,000 RAL today costs less than half of what it did five years ago. H&R Block has also used its bank to develop alternatives to tax-time bank products, connecting clients to low-cost bank accounts, financial education, high-yield savings, a way to avoid high-cost check-cashing fees, and a year-round line-of-credit at a 9% APR when linked to a deposit in a savings account or 36% APR otherwise. The line of credit was developed with the help of consumer groups and meets FDIC guidelines for responsible lending. While these improvements benefit consumers, they have not won much public attention in comparison to the views of critics, which unfortunately has left the public record incomplete.⁵⁶

We favor high standards of disclosure and responsible practices in offering refund-related bank products, as our own multiple disclosures -- developed in consultation with consumer groups and former federal officials -- attest. We support strong IRS rules and welcome appropriate federal legislation as preferable to repetitive or conflicting disclosures from state or local governments that may confuse, more than protect, taxpayers. The IRS should continue to police EROs and tax practitioners to ensure compliance while clarifying the rules that protect consumers and the importance of uniform national standards.

This product, which costs $29.95 at H&R Block and which is provided by HSBC, has been non-controversial -- at least until publication of the ANPR. We are not aware of any evidence that this product has been abused.

RACs serve taxpayers who may prefer to receive funds in 8-15 days compared to an IRS mailed check in 3-4 weeks, or those who want professional tax preparation without upfront payment, or both. It reflects thoughtful discrimination on the part of taxpayers who elect to speed receipt of funds without taking a more costly RAL.

When H&R Block first instituted a computer screen enabling taxpayers to compare the cost and speed of various settlement options side-by-side, including an IRS refund vs. a RAC or RAL, it found that RAL numbers fell and RAC numbers rose. This experience indicates that the computer presentation helped consumers make more informed and responsible judgments about what best served their needs.

RACs Enable the Benefit of Professional Tax Assistance. RACs contribute to good tax administration because they enable many taxpayers to receive professional return preparation who otherwise might not choose that option, and thus contribute to tax returns that are more accurate and more likely to be e-filed, which serves the interest of the IRS and taxpayers more broadly. There is considerable evidence, for example, that a professionally prepared return also helps taxpayers by identifying legitimate tax benefits they might otherwise not claim.⁵⁸ The benefits of professional tax preparation include:

• the training and experience of the tax preparer: the Block tax professional seen by a typical client averages 8 years of experience and over 400 hours of training;

• state-of-the-art proprietary tax software with multiple diagnostics and compliance aids;

• multilingual professional assistance;

• guaranteed accuracy, with H&R Block paying penalties or interest in case of its error;

• convenient locations, extended hours, and year-round assistance;

• e-filing to ensure better accuracy and faster refunds;

• tax tips and financial education, planning, and advice;

• the opportunity to open a bank account, access low-cost credit, or use a tax refund in a tax-advantaged savings program; and

• eligibility alerts to, and the opportunity to enroll in, various federal, state or local government benefits programs, including Children's Health Insurance (SCHIP), Food Stamps, and the Low-Income Home Energy Assistance Program (LIHEAP).⁵⁹

Instead, we have offered a non-insurance product called "Peace of Mind®" (POM) since 1995. POM is an extended service plan similar to the extended warranties widely used by purchasers of consumer electronics, household appliances, personal computers, and automobiles. Our policies ensure that clients can make informed decisions, without pressure, about their need for added services.

While, as indicated below, POM does not meet the definition of insurance, it may nonetheless be a product affected by the ANPR. Therefore, we discuss its features, consumer demand for such an offering, and why it should not be covered by any regulation contemplated by the ANPR.

POM Basics. POM is an extension of H&R Block's Standard Guarantee of the accuracy of the tax returns that it prepares. Under the Standard Guarantee, the company, for no additional charge, will prepare an amended return and pay any penalties and interest resulting from a Block tax preparer error. Also included in the Standard Guarantee is the promise that a Block return preparer will appear at an audit with the taxpayer to explain how the taxpayer's return was prepared.

POM goes further. As a supplement to the Standard Guarantee, H&R Block offers its customers, for an additional fee (except at H&R Block Premium Offices where it is included without additional charge), a program providing that, if H&R Block makes an error in preparing the client's tax return: (1) Block will provide the taxpayer with a licensed IRS Circular 230 practitioner -- an Enrolled Agent or CPA operating under a Power of Attorney -- to assist and represent him at an IRS audit or in post-filing disputes; and (2) Block will pay up to $5,000 in additional taxes assessed resulting from Block's error on a federal, state or local tax return. H&R Block does not represent or advertise that POM protects a taxpayer from being audited.

POM is used by fewer than one in five Block clients, with the most frequent users among upper-income clients, investors, and those who file more complex tax returns. POM users are also more likely to show high levels of financial responsibility, disproportionately including homeowners and parents. POM provides financial security and solid value, easing anxieties associated with a confusing and stressful experience and protecting a taxpayer's rights.

Clients have a seven-day window to change their mind and receive a full refund of the POM fee. POM costs $30.00 at tax offices, through Online Office or the TaxCut® Online Signature tax product. For 80% of buyers, the cost is less than 1% of the refund or balance due.

Our clients see value in Peace of Mind® for several reasons: (1) consultation with an expert and the assurance of active professional representation at an audit; (2) the security of knowing that additional taxes owed due to a preparer error will be paid; and (3) reduction of the anxiety often associated with the tax filing process and the IRS's review of returns.

H&R Block offers POM consistent with keeping our clients' interests first. We have made process changes over several years as part of those efforts: enhanced training materials; fuller and clearer explanations of the product's costs and features; and a computerized process to ensure that the product is explained to all of our clients but pushed on none.

The tax professional is aided by two computer screens that allow a full explanation of the Standard Guarantee and POM. Clients are then given the choice to purchase POM. They can decline or affirm their choice by signing the POM agreement. Thus, two "opt ins" are required before any purchase and there is a 7-day money-back "opt-out" opportunity after the purchase.

This process is designed to ensure that all clients are given the choice to make a fully informed decision about POM. Our tax preparers receive a small payment when POM is chosen to compensate them for the time taken for the explanation rather than serve as an inducement or incentive. Our management has made it clear that there is no demand that tax professionals recommend or sell, rather than present, the product. Our procedures reflect changes reviewed and approved by a group of state attorneys general.⁶¹

A separate product, "Worry-free Audit Support®," is included without charge for purchasers of H&R Block TaxCut® "Premium Federal + State + e-File" tax preparation software; it does not provide reimbursement for penalties, interest, or taxes due but does provide correspondence management, audit preparation, and audit representation by an Enrolled Agent.⁶²

Warranty Is Not Insurance. POM is a warranty of the quality of the services provided by Block, made by the seller of the tax preparation services to the customer. POM is sold only to Block's tax preparation customers, for the current year and at the time Block's tax preparation services are rendered. If the tax return is prepared by someone other than Block, the POM program is not available. The warranty, in which Block guarantees its own services, restores the taxpayer to the position he would have been in had the return not been prepared in error, either as a result of the preparer's mistake or a defect in the tax preparation software.⁶³ POM would provide services -- its principal purpose -- even if Block's errors result in an additional refund to the taxpayer or a smaller balance due, in which case there would be no loss and no indemnification. Nor is this a situation where POM fees vary according to policyholders: the POM fee is constant regardless of the complexity of the return. Block does not utilize any type of underwriting process to evaluate the likelihood of an error or past loss history. POM is incidental to tax preparation.

Disincentives to Fraud; Incentives to Performance Integrity. It is important to emphasize that POM does not cover client fraud, errors, concealment, or false statements, nor does it cover changes in interpretation by tax authorities. Thus, it does not create any incentive to overstate deductions or underreport income by the taxpayer. Moreover, there are powerfully compelling and significant disincentives to fraud. Indeed, H&R Block has a strong financial incentive to prepare correct returns since a failure to do so will result in additional cost to Block if errors are identified by the IRS and POM benefits are utilized. H&R Block has to defend the return. It also has an incentive to protect its reputation and brand, and a profound incentive to be compliant in view of civil and criminal penalties for tax fraud by the taxpayer or the tax return preparer.⁶⁴

Block's tax return preparers are trained to operate in a compliant culture that emphasizes tax return accuracy, conservative interpretations, quality assurance, and zero tolerance of fraud. All associates must sign annually and adhere to H&R Block's Corporate Code of Business Ethics and Conduct. The company's explicit core values include putting the "Client First," "Excellence" and "Integrity in All That We Do," and a Compliance Department performs computerized diagnostic analyses to identify potential problems and field audits. We also work cooperatively with the IRS Criminal Investigation Division. Banks making refund loans use tools like the Fraud Service Bureau and its successors to provide robust anti-fraud screening, which supplements IRS's own revenue protection program and multiple anti-fraud screens that have improved significantly over the last decade. The banks are supervised by federal bank regulators to ensure their practices meet prudent standards for safety and soundness. H&R Block tax preparers who facilitate RALs or RACs are contractual agents of the bank and as such are supervised by them and their regulators. Electronic Return Originators must also be approved by the IRS and may undergo FBI criminal background checks, IRS tax filing checks, credit checks, and IRS e-filing suitability reviews. The IRS Office of Professional Responsibility also supervises Circular 230 practitioners.

While policies, procedures, cultures, audits, and supervision can never guarantee 100% compliance, the atmosphere in which H&R Block tax professionals work, and their futures in the field, depend on performance integrity. The POM program is specifically designed to avoid any inducement to preparing inaccurate tax returns.

Several additional points for context are also noteworthy:

• POM meets client needs. Research shows very positive taxpayer reaction to the product's features and strong purchase interest by over a quarter of taxpayers surveyed. Actual users tend to have more complex returns.

• At H&R Block, POM is offered responsibly and transparently, as demonstrated by our training program, scripts, and tax program reminders that clearly instruct our tax professionals to explain and discuss Peace of Mind® features with our clients.

• POM is a good value. The cost as a percentage of the warranty coverage is less than 1% of the maximum $5,000 in additional tax coverage, while TV and car warranties or service agreements generally cost about 15-20% of the value of what they cover. Additionally, if a client is audited, an H&R Block Enrolled Agent will represent the client, which sometimes requires up to 25 hours of additional services, without any further charge to the client. It is not unusual for Circular 230 practitioners to charge $225 an hour for representation at an audit.⁶⁵ Clients who purchase POM have a higher level of repeat business at H&R Block compared to H&R Block clients who do not, reflecting high levels of satisfaction with the product.

• Product and service warranties are a well accepted feature of American business, including purchasers of 65% of laptops, 60% of inside phone lines, 50% of washing machines, 40% of consumer electronics, and 28% of new cars. Companies marketing warranty protection after sales include merchants and manufacturers (Sears, General Electric for appliances), banks (Bank of America for mortgage payments) and credit card issuers (First USA for debt protection). Tax preparation warranties are also sold by many others.⁶⁶

• The IRS audits 1% of returns, but higher income taxpayers have an elevated chance of audit and nearly 40% of audits are of returns of low-income taxpayers claiming the Earned Income Tax Credit. The EITC is among the most complex provisions in the tax code, as the Taxpayer Advocate has highlighted in reports to Congress, and EITC returns are especially prone to error. EITC tax filers may feel intimidated by IRS letters and ill-equipped to deal with an IRS audit and they can face punishing penalties -- delays of nearly a year in receiving a refund that may be as much as 25% of their annual income. If their EITC claim is rejected, future EITC benefits may be denied unless they are recertified, which requires filing a special application and which triggers an automatic new audit. Thus, both anxiety reduction and concern over serious consequences can be key factors, even more than statistical risk, in a client's decision whether to purchase POM, as discussed below.⁶⁷

Elevated Audit Rates for EITC. While the chances of being audited by the IRS are about 1% for all taxpayers in FY2007, when an audit occurs it can be a very unsettling experience, especially for those least comfortable in dealing with the Government. As the head of American University's College of Law federal tax clinic testified, "Most [taxpayers] find the experience of being audited extremely stressful, confusing and frightening, and they often have great difficulty understanding and navigating the administrative controversy resolution system." A prominent tax attorney said of an audit, "It's like having a root canal without Novocain."⁶⁹ And the IRS Oversight Board has confirmed that more than half of taxpayers regard the fear of an audit as significant and a major influence on tax compliance.⁷⁰

IRS enforcement disparities by income and geography have been well publicized. In 2000, The New York Times reported that, since 1988, audit rates for the poor increased by a third while falling 90% for the wealthiest Americans.⁷¹ Almost half of the million returns audited in fiscal year 2004 involved an EITC.⁷² Past audit rates may not predict future IRS efforts since revenue protection plans and EITC audit numbers change yearly, sometimes by more than 50%. In fiscal years 1999, 2000, and 2001, there were 600,000, 270,000, and 400,000 EITC correspondence audits, respectively.⁷³

The latest IRS Data Book shows that, while about 17% of tax filers in calendar year 2006 claimed the EITC, EITC returns represented over 36% of all those audited and they were audited at rates higher than returns of those with incomes of $1 million or more. Audit rates for EITC claimants with incomes above $25,000 are over eight times higher than those of all filers of individual income tax returns. Eighty-one percent of field audits and 82% of correspondence audits resulted in changes, and the average additional tax per return was $6,992 for a field audit.⁷⁴

In short, low-income taxpayers have a disproportionate risk of audit.

A recent IRS multiyear pilot of an EITC pre-certification program that may affect 4-5 million "high risk" EITC claimants if fully implemented was described as requiring "the most exhaustive proof of eligibility ever demanded of any class of taxpayers." It too was much criticized.⁷⁹

For the foregoing reasons, the typical EITC recipient would have good cause for wanting the assistance and support of a trained tax professional at an IRS audit.

Representation Can Make a Critical Difference. A rule based on the ANPR would effectively end the opportunity many taxpayers have to be professionally represented at an audit. To deny a taxpayer the choice of obtaining an affordable method of audit representation is to deny a basic taxpayer right and to disadvantage a taxpayer when dealing with IRS auditors.

As Professor Spragens told the IRS Restructuring Commission, "[p]rovisions in the tax code intended to help low-income taxpayers lose their significance when the population for whom they were intended is faced with an administrative and judicial system they cannot deal with . . . ."⁸⁰ And as she told the IRS Oversight Board:

The extended service plan enables a taxpayer with limited resources to object to a Government determination he feels is unjust and not to be confused or disadvantaged in the process. A single person of modest means is simply unable to afford to fight the IRS on a dispute involving less than several thousand dollars.

In her 2007 Annual Report to Congress, the Taxpayer Advocate called for a new Taxpayer Bill of Rights. Among the 10 rights she enumerates are:

• The Right to be Informed (including adequate legal and procedural guidance and information about taxpayer rights)

• The Right to be Assisted.

• The Right to be Heard.

• The Right of Appeal (administrative and judicial).

• The Right to Certainty (including guidance, periods of limitation, no second exam, and closing agreements)

• The Right to Representation⁸³

POM may be one of the few affordable ways an average low- to middle-income taxpayer can have a reasonable chance of being represented by a competent practitioner in an audit. As the tax system grows ever more complex, and as evidence becomes clearer that the Government has discriminatory practices that single out for disproportionate rates of audits low-income workers who claim the EITC, taxpayers deserve help. Even a small inquiry can cost $350 or more. Attorneys can cost $600 an hour. Ending POM would take away the ability of low-income taxpayers to get representation they can afford.

5. Concerns and Unfounded Assumptions About the Products

We agree that tax compliance would suffer if this were the case. But there is no evidence to show that it is, and the burden of proof should not be on the tax preparation community to "prove a negative."⁸⁵

First, neither H&R Block tax return preparers nor franchisees have any financial incentive to sell a RAL. Franchisees receive no RAL compensation. H&R Block return preparers receive no RAL-related compensation nor are RAL sales a part of job performance evaluations. So there simply is no incentive to facilitate a RAL other than to meet the client's needs.⁸⁶

Second, IRS rules already address the concern about incentives to adjust returns to sell bank products. A tax return preparer who is also an Electronic Return Originator is prohibited from also being a refund lender for his client's RALs; and EROs are prohibited from charging fees related to the size of a refund.⁸⁷ The flat per-RAL fee, received by some preparers (not at H&R Block), does not create an incentive to inflate a refund. Moreover, banks that make RALs often tie additional compensation to performance: preparers do not receive funds for RALs that are not approved by the bank, and preparers receive less compensation if the IRS fails to issue refunds on RAL returns they have prepared. Thus, there are significant financial incentives to prepare accurate tax returns.

Third, there are compelling legal incentives not to inflate refunds or to fail to diligently prepare a return claiming the EITC. Section 6695(g) of the Tax Code imposes a $100 penalty on a preparer with respect to any return or claim for refund for each failure to comply with the due diligence requirements imposed by regulations for determining eligibility. A return preparer can also be sanctioned and barred from the e-filing program for failure to follow its rules. Tax fraud is a serious crime punishable by fine and imprisonment. A return preparer guilty of willful or reckless conduct, including intentional disregard of IRS rules or willful attempts to understate tax liability can be fined $5,000, or 50% of the income derived for preparing the return or claim.⁸⁸ Preparers are also subject to civil and even criminal penalties for improper conduct and the Code provides that the United States may bring a civil action to enjoin tax preparers if preparers engage in certain types of impermissible conduct. Additionally, tax preparation firms can be fined.

Fourth, preparers do have an incentive to meet their client's desire for the maximum possible refund (or the lowest tax liability) through entirely lawful means, irrespective of bank products. The tax refund remains an important icon in American culture. Even without RALs, RACs, or extended service plans, there would be an incentive for tax preparers to help clients get a refund -- entirely lawfully -- based on larger withholding.⁸⁹ Consider:

• 76% of taxpayers yearly, 84% of taxpayers in the lower half of income distribution, and 91% of filers through the end of February get a refund.

• Only 6% of respondents in a recent study of low- to moderate-income taxpayers wanted less withheld in order to have higher current income if it means they would owe more taxes at year-end, and about 80% wanted the same or more withheld to increase their refund.

• Only 3% of EITC recipients choose a monthly Advance EITC, instead preferring a larger lump-sum year-end refund.⁹⁰

• Studies show greater client satisfaction with a tax preparer when the client gets a refund.

• The federal Government may benefit when taxpayers get a refund: the fact of a pending refund creates a strong incentive for taxpayers to file a tax return, and the Government it makes money on the interest-free "loan" taxpayers give it.

Overwithholding is Common. H&R Block tax return preparers report that many clients prefer not to reduce their withholding to come closer to the likely balance due despite the availability of refund calculators and H&R Block training on the best practices of presenting withholding options and Form W-4 preparation objectively to clients. Many do not want to be surprised with a balance due and a shortage of funds at tax time. Many use tax withholding as a means of financial planning and savings, recognizing winter financial stress following the holiday season.

The question of why taxpayers so often choose to overwithhold in order to receive a lumpsum refund rather than smooth their take-home pay over the year was addressed in a paper presented at the 2006 IRS Research Conference and amplified later. Among the factors at work are that many taxpayers intentionally overwithhold, respond to uncertainty, adhere to the tax system's default rules because of inertia, and have loss aversion, but most use the withholding system as a pre-commitment device against overconsumption and as a means to save and build assets.

The study found that "nearly half of [low- to moderate-income] taxpayers prefer their current withholding patterns, under which they mostly receive refunds [and] . . . another third would like to have more withheld, further reducing current income in order to receive a larger refund. Taken together, about 80 percent of taxpayers would like to use the withholding system in order to save." Only 6% of respondents wanted less withheld in order to have higher current income if it means they would owe more taxes at year-end.⁹³

The researchers found taxpayers who most wanted a large refund and used overwithholding were least likely to pay for a RAL, exactly opposite the concern expressed by the ANPR authors.⁹⁴

Thus, many factors other than fraud are likely to operate in the case of overwithholding decisions for taxpayers who obtain RALs. Given the strong cultural preference and the ease of enabling larger refunds through adjusted withholding without resorting to fraud, it is hard to tie improper "refund inflation" to bank products.

Refund Fraud. In recent years, criminals have focused on both the refundable EITC and e-filing as vehicles for tax fraud. Because all RAL tax returns are e-filed and many taxpayers claiming the EITC also take a RAL, it may be tempting to conclude that eliminating RALs would curb fraud. But it is a classic fallacy in statistical analysis to confuse correlation with causation. In reality, dishonest taxpayers want their funds quickly as do compliant taxpayers: if RALs were not available, e-filing alone would be used; and if e-filing were not available, paper returns would be used.

If RALs connected to e-filing were an innovation of the late 1980s, online filing and other new technologies are now attracting fraud attempts and cybercrime, according to the IRS, especially those allowing quick and anonymous retrieval of information or funds.⁹⁵ Yet, while IRS investigators report a sharp increase in fraud using online filing, no one has suggested ending online tax filing. Similarly, any correlation between RALs and fraud does not itself show a causal relationship.

The Taxpayer Advocate compared audit change rates between EITC returns with and without a RAL in tax year 2004, finding higher adjustments and a higher change percentage in the returns with RALs.⁹⁶ The implication is that the RALs might have incentivized errors or fraud that resulted in the IRS recommendation for a change after audit. But as the Taxpayer Advocate herself has pointed out, only 1.8% of EITC taxpayers are represented at an audit and representation significantly increases the opportunity to prevail.⁹⁷ Moreover, looking more closely at tax year 2004, as of the end of the RAL season in late February, regular refunds for all taxpayers were $2,436 but were 11% higher, $2,713, for those electing direct deposit.⁹⁸ It is possible that taxpayers who file early, who e-file, who use professional return preparers, who choose direct deposit, and who claim the EITC all have refunds larger than the average. So it may be unfair to draw inferences from one set of data standing alone. Do taxpayers get a larger refund because of a RAL, or because of one or more of these other factors? Does a RAL lead to a large refund, or does a large refund lead to a RAL? In addition, during tax year 2004, the IRS "RAL Indicator" was flawed, covering both RALs and RACs, as the Taxpayer Advocate has recognized elsewhere, so it is not clear if the data are entirely accurate.⁹⁹

H&R Block Research. We are nonetheless very concerned about the Taxpayer Advocate's assertion that RALs may drive tax fraud. To assess the risk and identify indicators that might assist us in ensuring strong compliance, we conducted an analysis of our own data.¹⁰⁰

To investigate, H&R Block looked at rates of amended returns among various groups of clients. While we do not have direct information about which clients receive IRS letters, we believe rates of amendments on returns may be a good indicator. Over the past three years, H&R Block has prepared over 50 million returns, so the sample size is very robust. When we look at amendments within the same calendar year, the change rate is higher for non-RAL returns than for RAL returns. This is true whether EITC is present or not. Looking at amendments for prior years (which might be more indicative of IRS action), the amendment rates for RAL and non-RAL returns are equal within 1/100 of a percentage point.

To further analyze this issue, we created a predictive model to understand those factors most related to amended returns with a negative adjustment, which might indicate an adverse outcome from the IRS. We found the size of the refund, the client's adjusted gross income (AGI), and client age all to be significantly more predictive of adjustments by the IRS than the presence of a RAL.

Given this data, it seems clear that further research is necessary before determining that RALs are a causal factor for tax fraud. Any such work will need to clearly account for other factors (like AGI or age) that may be correlated with RALs and contribute a more significant portion of the variation that is being explained.

Criminal Investigations. If these products are suspected of inducing tax fraud, additional IRS enforcement activity might be warranted. In tax year 2007, overall, the IRS reviewed over 300,000 returns for questionable refunds and 400,000 out of 23 million EITC returns prior to refunds being issued. It identified over 240,000 fraudulent returns and stopped over $1.2 billion in fraudulent refunds from being made. Many of these tax returns are treated as civil matters but at least two IRS programs cover the possible criminal return preparers committing tax fraud by improperly inflating refunds: the Questionable Refund Program (QRP) and the Abusive Return Preparers Program (ARP). In addition an Office of Refund Crimes has a headquarters staff and operates 10 area Fraud Detection Centers.

The IRS's own statistics show that over the last three fiscal years, the average number of yearly investigations initiated was 270 for the QRP and 221 for the ARP -- a small number in relation to either 106 million refunds or even 19 million RALs and RACs.

While criminal prosecution is challenging and resources are limited, if the IRS is concerned about the risk that RALs, RACs, or "audit insurance" products may incentivize tax fraud, we believe a more robust program of investigation and prosecution by the Criminal Investigation Division staff of 4,400 would be in evidence. In addition, better oversight of Electronic Return Originators and continuing refinement of database screening can help. There are 259,000 authorized e-file providers but the IRS did ERO field monitoring visits at only 1,299 sites in 2007.¹⁰¹ Auditors have also criticized the IRS's failure consistently to perform background checks in approving EROs. If problems are verified, a stronger enforcement program should be considered before deciding to effectively ban these products, especially given the damage that would be inflicted by a ban on the far greater number of compliant taxpayers.¹⁰²

If there is a desire to increase enforcement, just as the IRS has elevated audits of EITC returns because of non-compliance, the IRS is able to single out every RAL or RAC return since tax preparers are required to identify whether a taxpayer is applying for a RAL or RAC via a software checkbox in e-filing a return with the IRS. IRS Criminal Investigation staff has worked cooperatively with H&R Block to combat refund fraud but, to the best of our knowledge, they have not called for an end to RALs, RACs or "audit insurance." In summary, a majority of Americans prefer a tax refund, quite independently of a tax-time bank product. Only about 6% of taxpayers get a RAL and 7% a RAC, while 76% have a refund (including 84% of those with incomes under $30,000 and 91% of early-season filers). At H&R Block, return preparers are trained to present withholding options objectively but they report strong client preferences for refunds. It is more probable that taxpayers get large refunds because they want them, not because they are manipulated by unscrupulous return preparers trying to sell RALs.

In the case of RACs, we believe the benefit of professional tax return preparation and the opportunity to use IRS direct deposit rather than receive a mailed check both aid IRS tax administration and far outweigh any risks from improbable incentives to inflate a refund.

Finally, there is no evidence that extended service plans that cover the cost of representation at an IRS audit are at all connected to refunds, and the clear disclaimers that confine the trigger for coverage to a tax preparer error, in combination with other robust disincentives to tax fraud, do not create any greater financial incentive for taxpayers or tax preparers to exploit the audit selection process. Rather, they enable taxpayers to assure themselves of competent representation in case of an audit, again benefiting tax administration.

First, RALs, RACs, and POM extended service plans are offered to all H&R Block clients, not just those who have low incomes.¹⁰³ Even assuming low incomes were a fair proxy for lack of financial sophistication -- which certainly would not be uniform even if it were usually true -- many clients who use these products or services have high incomes. Thousands of taxpayers in the top 30% of income distribution (measured by AGI) use a RAL or RAC -- approximately 8% of RAL users and 15% of RAC users at H&R Block. Over 55,000 RAL and RAC users have incomes over $100,000, and some even have incomes over $500,000. This suggests that, if income to be used as an arbitrary proxy for financial sophistication, some very financially sophisticated taxpayers use these products.

Second, a recent study of financial decision making cautioned against stereotyping and disrespecting low-income individuals as "irrational consumers." "By judging various choices as irrational, observers who are not themselves poor invoke traditional notions of rationality, which assumes that individuals make choices that maximize economic utility. . . . This thinking reflects how difficult it is for a causal observer to understand the lives and circumstances of low-income individuals" who may have different values, beliefs, cultures, and emotional needs.¹⁰⁴

Many citizens are not financially sophisticated, and America clearly needs to do a better job of financial education.¹⁰⁵ That is why various agencies engage in consumer protection activities, including bank regulators, the Federal Trade Commission, and state attorneys general. Each of the products subject to the ANPR has been reviewed or regulated by those agencies as well as the IRS, which has extensive regulations on disclosures, advertising, and fees.¹⁰⁶ Consumer protection agencies are active in policing the marketplace against unfair or deceptive trade practices.

Consumer Awareness. Studies of RAL users that ask whether consumers know what they are doing confirm that they have sufficient information to make informed decisions, that the decision process is not much different from that involved in mainstream credit products, and that the vast majority of consumers are satisfied with the product and return for it in future years.¹⁰⁷

If Americans at all income and education levels are sometimes challenged by aspects of consumer finance,¹⁰⁸ it does not necessarily mean that citizens are exploited and cannot make basic financial decisions, especially relatively simple ones that occur once a year, may repeat prior-year behavior, and may cost no more than a tank of gas. Unlike a payday loan, there is no risk that a once-a-year RAL borrower will roll over the loan and become caught in a cycle of debt. Moreover, RALs, RACs, and POM are not complicated products; rather, they were created so the average taxpayer could understand their terms. They involve none of the complexity in the lease of an apartment, purchase of insurance, or selection of employee benefits, all far more consequential tasks that consumers face. They are less complicated than most phone bills. And the high consumer satisfaction scores, combined with few complaints and higher retention rates as compared to other clients similarly situated, suggest that far from being exploitive, these products serve consumer needs and are popular.

There is nothing inherent in the products that would justify banning them rather than enforcing the existing laws and rules against anyone whose practices violate applicable rules. Enforcement tools exist. North Carolina, for example, adopted the nation's first RAL registration and disclosure law in 1990.¹⁰⁹ While the state banking regulator has the authority to find RAL fees "unconscionable," he has never found a RAL fee that is unconscionable. Out of half a million RALs sold annually in the state, he reports receiving only 15 complaints regarding RALs from 2001-2007, or about two complaints a year. The IRS also reports almost no RAL complaints, nor do other states report many, or any, consumer complaints. Despite the likelihood of some abuses and occasional press reports, this does not suggest a widespread or systemic problem -- at least as seen by consumers themselves.

6. Remedies to the Extent the Concerns Have Validity

For purposes of the ANPR, we are asked to assume that certain problems have been proven, although they have not. Indeed, the Taxpayer Advocate and the IRS itself have stated that these issues need more research.¹¹⁰

But assuming the problems could be proven to be correct -- which we do not believe is the case --the remedy would be not a complete ban of such tax-related products or services but narrowly drawn rules or targeted enforcement that addresses any practices proven to cause noncompliance or interfere with sound tax administration. H&R Block, for example, facilitates about 45% of the RALs made yearly. We believe we do so ethically and lawfully. If the objective is to attack unfair or deceptive practices, then effectively banning the products would sweep together facilitators who engage in good behavior as well as those with bad practices. Clearly, the preferred approach is to target only those who misbehave, not all providers.

• assess all costs and benefits of regulatory alternatives, including not regulating;

• choose, where they decide to regulate, the action that maximizes net benefits and that is most cost-effective; and

• tailor their regulations or rules in a manner that imposes the least burden on society.¹¹²

It is vital for the IRS to recognize that the separation of tax preparation and product sales would be unduly costly and, in practice, would inhibit taxpayers who want the convenience of a RAL or RAC from seeking these products. This is evident by considering five features of the patented RAL business process, which is highly integrated with tax e-filing to ensure ease of loan administration and repayment:

In short, disaggregating the integral RAL facilitation process would essentially destroy the product's integrated features and benefits in speed, convenience, cost, and security. Taxpayers would find it more expensive and less convenient to have to go elsewhere for the loan -- if it would still be available. Lenders would see risks and losses rise as well -- if they still wanted to make the loans. Tax return preparers would face undue costs and burdens, especially smaller firms. The IRS would see fewer professionally prepared returns and fewer e-filed returns, impairing good tax administration.

Because the majority of tax preparers who facilitate these products do so responsibly, and because the products are valuable for many consumers, we believe any problems should be addressed by focusing enforcement on the actions of a small number of abusive lenders or facilitators -- the "bad actors," not the general products. Otherwise, unintended consequence may include curtailing access to highly regulated credit and driving financially stressed borrowers to use less scrupulous lenders and higher cost alternatives.

Meaningful consumer protection involves a combination of consumer education and effective disclosures as well as enforcement.¹¹⁹ Better financial literacy and requirements for transparent transactions give consumers tools to protect themselves through informed decisions. We suggest below that disclosures could be made simple and uniform, as with the "Schumer Box" on credit card solicitations or nutrition facts labels, and that the Treasury Department could develop a brochure on RAL costs and alternatives for distribution by tax return preparers.

Industry self-regulation can also play a role. The Council of Better Business Bureaus has served as a third-party certifier of industry group performance in certain areas.¹²⁰ The IRS can use the Council for Electronic Revenue Communications Advancement (CERCA), an e-filing trade group it helped establish to promote government-industry dialogue, as a vehicle.¹²¹ Industry codes of conduct or best practices guidelines are another possibility that could be considered if the IRS expresses interest. Another group, the Coalition for Taxpayer Financial Choice, could also be a vehicle.¹²²

H&R Block has supported federal legislation to require the testing and certification of paid tax return preparers. While the IRS has not agreed, we believe it would improve the quality of tax returns and address some of the concerns identified in the ANPR.¹²³

As a means of promoting full dialogue, the IRS should consider roundtables at which taxpayers, consumer advocates, and industry representatives could all discuss these issues as a basis for more thoughtful determination of the need for regulatory intervention or other approaches, much as the Federal Trade Commission has done successfully in the past. Given the complexities of the issues, if the need for more regulation is established, a Negotiated Rulemaking could be more efficient and productive than the formal notice-and-comment approach.¹²⁴

Far from being resistant to making its products and services more consumer-friendly, H&R Block and other tax return preparers would welcome a constructive dialogue with public officials to hear their concerns and respond positively. That is why, for example, H&R Block has tried to listen to critics in the consumer advocacy community and learn from them. We believe the dialogue has been mutually beneficial in clarifying facts and perspectives and finding common ground. The IRS should recognize that the vast majority of its partners in tax compliance are in business to help their clients, not to pick their pockets, and they depend on repeat business to be successful. That creates a strong disincentive to exploitation. Most tax professionals are both honest and dedicated to serving the welfare of their clients.

• Strengthen enforcement

• Improve disclosure requirements and enable price comparisons o Improve consumer education

• Restrict certain practices

• Establish uniform national standards

• Consider industry guidelines and self-regulation

• Open pathways to better financial alternatives

Options

In sum, we do not believe the concerns identified in the ANPR justify a ban on information use or sharing by tax return preparers in connection with these three products or any similar ones. The IRS concerns seem more based on anecdote than evidence, although decisions of this significance should be data-driven and cost-justified in accordance with well accepted rules of regulation. We believe a ban would harm taxpayers who find value in the products and who have every right to use them, and it would be a sharp departure from established regulatory best practices. The products compensate for shortcomings in our tax administrative system by:

• Delivering funds speedily, securely, and conveniently to those who cannot afford to wait for IRS refund delivery in times of financial stress or family need;

• Helping those who are unbanked or underbanked get access to an IRS refund via Direct Deposit;

• Providing professional tax return preparation to deal with a complex and confusing Tax Code for those without a ready ability to pay;

• Enabling affordable representation at a tax audit, especially for those most vulnerable, and reassuring those most fearful without protecting tax fraud; and

• Upholding a taxpayer's fundamental right to control the use of his own information.

We believe that the IRS should continue to embrace principles of taxpayer control of tax information and respect consumer sovereignty and choice, which has governed our privacy laws. To the extent that abuses are proven, the IRS should target increased enforcement resources against unfair or deceptive practices. To the extent that new rules are needed (and we recommend some), they should be narrowly aimed at specific problems in the most cost-effective and least burdensome manner. Halting bad practices rather than banning valuable products is the preferred approach, especially where, as here, there are return preparers who offer the products in a lawful and responsible way, with reasonable prices, and in response to consumer demand and satisfaction. We believe the IRS can undertake certain improvements in its regulation of RALs and RACs, without adopting a formal rule, that will address some of the issues critics have raised and we make suggestions toward that end.

H&R Block appreciates the opportunity to share our views and welcomes continued discussion of ways in which we can contribute to better tax administration.

²See, e.g., the Privacy Act of 1974, 5 U.S.C. § 552a; the Fair Credit Reporting Act of 1970 (FCRA), 15 U.S.C. § 1681; the Electronic Communications Privacy Act of 1986 18 U.S.C. §§ 2510-2522, 2701-2711; the Family Educational Rights and Privacy Act of 1974, 20 U.S.C. § 1232g; the Right to Financial Privacy Act of 1978, 12 U.S.C. § 3401; the Cable Communications Policy Act of 1984, 47 U.S.C. § 551; the Video Privacy Protection Act of 1988, 18 U.S.C. § 2710; the Driver's Privacy Protection Act of 1994 ,18 U.S.C. § 2721; the Health Insurance Portability and Accountability Act of 1996, 42 U.S.C. § 1320d; the Communications Act of 1934, as amended by the Telecommunications Act of 1996, 47 U.S.C. § 222; the Children's Online Privacy Protection Act of 1998, 15 U.S.C. § 6501; and the Gramm-Leach Bliley Financial Modernization Act of 1999 Financial Privacy Rule, 15 U.S.C., Subchapter I, §§ 6801-6809.

³ The simplest example is a customer's name and address. As information on a tax return, it requires prior taxpayer written consent (an "opt in") for the return preparer to disclose it for purposes other than preparing tax returns. In contrast, after notice of its information policies, a bank may share the same information with its affiliates and those with whom it has a joint marketing agreement and, subject only to the consumer's veto (an "opt out"), with third-parties. As "credit header" information on a credit report, it is subject to a weaker standard than is actual credit data. And as customer information used by most merchants, it is largely unrestricted.

⁴ A Federal Reserve Board governor stated the benefits of information use and the need for balance: "Information about individuals' needs and preferences is the cornerstone of any system that allocates goods and services within an economy. The more information about needs and preferences that is available, the more accurately and efficiently will the economy meet these needs and preferences. But though the availability of information promotes economic efficiency, there is also a long-recognized value in permitting individuals to maintain a zone of privacy. This value must be weighed against the benefits of economic efficiency that accrue from a broad dissemination of information." Testimony of Federal Reserve Board Governor Edward M. Gramlich, "Financial Privacy Issues," Before the Subcommittee on Financial Institutions and Consumer Credit of the Committee on Banking and Financial Services, U.S. House of Representatives, July 21, 1999 at http://www.federalreserve.gov/boarddocs/testimony/1999/19990721.htm, A privacy expert has testified, "Consumers want not only more privacy, but also lower rates on mortgages and loans, higher returns on CDs and investments, and faster and more personalized service. Privacy laws can interfere with these other objectives, both by restricting the flow of information on which they depend, and by imposing high transaction costs on consumers and financial institutions alike." Statement of Fred H. Cate, Professor of Law, Indiana University, Before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Hearing on Financial Privacy And Consumer Protection, September 19, 2002, at http://www.law.indiana.edu/people/cate/Testimony/Cate.02.09.19.pdf. See also, Peter P. Swire, "The Surprising Virtues of the New Financial Privacy Law," 86 Minn. L. Rev. 1263 (2002), at http://papers.ssrn.com/so13/papers.cfm?abstractid=347402# PaperDownload.

⁵ In the preamble preceding the new 7216 regulations, the IRS itself states that: ". . . the final regulations retain the general rule that has been in place for more than 30 years recognizing that taxpayers should have control over their own tax return information and that taxpayers should, with appropriate limits and safeguards, be able to direct tax return preparers to disclose tax return information as taxpayers see fit." 73 Fed. Reg. 1058-1075 (Jan. 7, 2008) and Rev. Proc. 2008-12. For general principles of information practices, see Federal Trade Commission, Privacy Online: Report to Congress (June 1998), at www.ftc.gov/reports/privacy3/toc.shtm. The ANPR's direction would be directly contrary to "consumer empowerment" described by the Federal Trade Commission. Protecting Consumers in the Next Tech-ode: A Report by the Staff of the Federal Trade Commission (March 2008), at http://www.ftc.gov/os/2008/03/P064101tech.pdf

⁶ The Federal Trade Commission's "do not call" rules, for example, provide an exception for customers with whom businesses have ongoing business relationships. FTC, Q&A: The National Do Not Call Registry (October 2007), at http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt107.pdf.

⁷ The Gramm-Leach Bliley Financial Modernization Act of 1999, P.L. 106-1, enabled consolidation and integration of financial services firms and permitted sales of financial products by different types of financial firms in recognition of the benefit to consumers and competition. The Act's Financial Privacy Rule, Subtitle A: Disclosure of Nonpublic Personal Information, is codified at at 15 U.S.C. Subchapter I, §§ 6801-6809. Implementing rules were adopted by various agencies including the CFTC, FDIC, FRB, FTC, NCUA, OCC, and OTS.

⁸ 26 CFR 301.7216-1, et seq., and amendments adopted in 2008, at 73 Fed. Reg. 1058-1075 (Jan. 7, 2008).

⁹ GLB also applies to tax return preparers but where the Section 7216 rules conflict with GLB the higher standard prevails under an IRS agreement with the FTC. "Opt-in" rules generally yield dramatically lower consent rates than do "opt-out" rules. Typically about 95-99% of customers do not object, or opt-out, of having their financial information sent to a third party. Swire, op. cit., note 4 supra, at 151. "Congress reserved 'opt in' -- the most burdensome and costly of privacy protections -- for the narrowest of circumstances, when privacy interests and the risk of harm to individuals might legitimately be thought to be at their highest: the use of medical information in a credit report furnished in connection with employment, credit, insurance, or direct marketing; the use of credit reports for employment purposes; and the procurement or preparation of 'investigative reports.' 15 U.S.C. §§ 1681b(g), 1681b(b), 1681 d(a)." Fred H. Cate, Robert E. Litan, Michael Staten, and Peter Wallison, Financial Privacy, Consumer Prosperity, and the Public Good (2003), p. 54, note 15. So strict is the opt-in model that, in the context of credit reporting, the authors concluded that, "Put simply, the consensus of studies and company experience to date is that conditioning the use of information on opt-in consent is tantamount to banning the use outright." Id., at p. 35-36.

¹⁰ Quoted in footnote 5 supra.

¹¹ Cynthia A. Glassman, et al., Ernst & Young LLP, "Customer Benefits from Current Information Sharing by Financial Services Companies" (December 2000), at http://www.privacyalliance.org/resources/glassman.pdf (information use enabled relationship pricing, centralized call centers, better fraud detection, reductions in junk mail.

¹² Splitting refunds is accomplished by Form 8888. It was proposed initially by President Bush and first used in 2007. It recognizes that the lump-sum delivery of a tax refund that averages nearly 8% of a median tax filer's adjusted gross income is a great opportunity to open or fund savings accounts.

¹³See, e.g., Anne Stuhldreher, "Tax Time -- The Right Time: Federal Policy Recommendations to Help all Americans Save and Build Assets," New America Foundation Asset Building Program Issue Brief #5, December 2004; Federal Reserve Bank of San Francisco, "From Refunds to Assets: Leveraging the Benefits of the Earned Income Tax Credit," May, 2005, at http://www.frbsf.org/publications/community/ investments/0505/refunds.pdf: Reid Cramer, "Splitting Refunds: A Proposal to Leverage the Tax Filing Process to Promote Savings and Asset Building," New America Foundation, Oct. 12, 2005, at http://www.community-wealth.org/ pdfs/articles-publications/individuals/ paper-cramer.pdf; J. Mark Iwry, "Using Tax Refunds to Increase Savings and Retirement Security," The Retirement Security Project (supported by The Pew Charitable Trusts in partnership with Georgetown University's Public Policy Institute and the Brookings Institution) 2005-9 (January 2006), at http://www.pewtrusts.org/uploadedFiles/ wwwpewtrustsorg/Reports/Retirement security/RSPSplitRefund0106.pdf; Peter Tufano and Daniel Schneider, "Using Financial Innovation to Support Savers: From Coercion to Excitement," Working Paper 08-075, Feb. 20, 2008 draft, prepared for the National Poverty Center Conference on "Access, Assets and Poverty," see esp., pp. 23-27 (tax-preparation sites as a distribution channel); Esther Duflo, William Gale, Jeffrey Liebman, Peter Orszag, and Emmanuel Saez, "Saving Incentives for Low- and Middle-Income Families: Evidence from a Field Experiment with H&R Block," 121 Quarterly Journal of Economics 1311-46 (November 2006).

¹⁴ Median AGI is from IRS "Tax Stats at a Glance," preliminary for tax year 2005, at http://www.irs.gov/taxstats/ article/0‚id=102886,00.html. The Board of Governors of the Federal Reserve System, in its Survey of Consumer Finances, reported that from 9% to 13% of U.S. households lack transaction accounts. See Federal Reserve Bulletins January 1997, January 2000, January 2001, and January 2004.

¹⁵ For example, when H&R Block began to use income information to alert clients to their possible eligibility for Food Stamps and provide the 800-toll-free number for the Government's "hot line," Food Stamp officials reported that their calls "skyrocketed." More recently, with client consent, we have tested filling in and electronically filing Food Stamp applications to the Kansas Department of Social and Rehabilitation Services. In another test, with client consent, we have used client information to assist in filling in the Free Application for Federal Student Aid (FISA) form, which is required for students seeking various forms of financial assistance for education expenses.

¹⁶ Bank holding companies, national banks, and many state banks are permitted to prepare income tax returns as a service incidental to banking. See Bank Holding Company Act, § 4(k)(4)(G); see also, 12 CFR 7.1008; Bank Holding Company Act, Reg. Y, 12 CFR 225.28(b)(6)(vi) (deemed closely related to banking and properly incident thereto under Federal Reserve Board and FDIC rules); and e.g. Illinois Office of Banks and Real Estate Interpretive Letter 97-1 (January 21, 1997) (concluding that a state bank may offer tax preparation services to its customers and to the general public because tax preparation services are financial services that are incidental to the business of banking).

¹⁷See e.g., the AICPA Website at http://pfp.aicpa.org/Memberships/Personal+Financial+Specialist.htm.

¹⁸ "H.D. Vest is a leader in the growing market for comprehensive financial services. Over 5,300 independent H.D. Vest Advisors collectively manage over $30 billion in assets and provide investment and tax advice to over 3 million individuals and small businesses in all 50 states." See, http://www.hdvest.com/main.html. Wells Fargo has a goal of selling an average of 8 financial products to each customer in each business segment. Wells Fargo & Company Annual Report 2007, p. 67, at https://www.wellsfargo.com/downloads/pdf/investrelations/wf2007annualreport.pdf.

¹⁹ Accountants are advised that there is a new world in financial services delivery. "The traditional stovepipe world in which brokers handled stock, insurance agents sold life insurance, bankers made loans, lawyers designed estate plans, and accountants took care of taxes has given way to a world in which each routinely offers other financial products and services, and accountants sell investment products as well as advice and manage assets as well as prepare tax returns." Russ Alan Prince, Douglas D. Wright, and Richard C. Urbealis, Jr., Accountants As Wealth Managers: The New Paradigm for Providing Financial Services (2003), at viii. The book reports high client satisfaction, promising strong retention and referrals. Id., pp. 46-50. Interestingly, only about 3% of individuals surveyed said they were reluctant to obtain investment products from an accountant because of possible conflicts of interest, although that had been, a concern of 95% of accountants who did not offer or expect to offer financial services. Id., pp. 36, 52.

²⁰ Small-dollar, affordable consumer loans are often not accessible to low- to middle-income consumers. Regulators have encouraged financial institutions to respond more innovatively to consumer needs. See, e.g., the Federal Deposit Insurance Corporation's two-year Affordable and Responsible Consumer Credit Initiative (small-dollar loan pilot), FDIC: Press Releases -- PR-51-2007 06/19/2007, and guidelines at http://www.fdic.gov/smalldollarloans/, for which participating institutions can win Community Reinvestment Act credit. While RALs are often labeled "high-cost" credit, in fact they may be cheaper and more convenient than unsecured short-term loans that may realistically be available to borrowers; in this sense, they actually may be "low-cost" credit. H&R Block is among those trying to develop lower cost alternatives.

²¹ RALs themselves also were a reform. They were provided by regulated financial institutions in contrast to the far high cost unregulated practice of discounting in which taxpayers were given cash in return for a W-2 by unscrupulous individuals who filed a return in their name, a practice that violated tax, usury, and truth-in-lending laws.

²² "RALs, arguably, are the chief incentive driving the volume of [electronically filed] returns filed to date." Report of speech by Peggy Rule, IRS Director for Electronic Filing Programs, before the AICPA Tax Division" (Dec. 6, 1994), at http://www.nysscpa.org/proflibrary/Briefingbook/Spring96/tax2.tbb.htm. Many tax preparers found e-filing technically feasible but not economically viable: it required a considerable investment of time, money, and equipment to build the infrastructure on the part of tax preparers, and, despite the incentive of a faster refund, many clients did not want to pay the added e-filing fee. Preparers had to input four times more data than the IRS itself did for paper returns; an intermediary transmitter was needed; additional IRS paper forms were required for each return (including Form 8453s with a paper W-2 attached); clients still needed paper copies of their return; tax preparers had to undergo background checks and File forms to become Electronic Return Originators; and EROs had the burden of finding and correcting errors on the many rejected returns to get them e-filed instead of relying on the IRS to correct paper return errors with notification later to the taxpayer.

²³ An added benefit to the IRS is enhanced fraud fighting by RAL banks and facilitators. Among the metrics in evaluating the Debt Indicator Pilot was the cooperation of lenders and tax practitioners in fraud screening and reporting potential fraud to the IRS, efforts which have continued. See "IRS Offering Tax Refund Offset Information In Exchange for Fraud Screening, Reporting," BNA Daily Tax Report, Dec. 2, 1999, pp. G2, and L1. Today, the Debt Indicator is provided to all e-filers as a benefit of e-filing. It can be shared, at the request of taxpayers, with refund lenders. The debt information reduces loan losses and permits lower loan prices. Lenders, transmitters, EROs, and return preparers have continued to strengthen fraud screens, compliance programs, and cooperation with IRS criminal investigators.

²⁴ "Checks can be lost or stolen and cashed over fraudulent endorsements. In 2005, approximately 65,000 Treasury checks were stolen resulting in a loss to the government of over $60 million." IRS Report to Congress on Refund Anticipation Loans in Response to a Directive in the FY06 Treasury Appropriations Act Conference Report (November 2006), p. 24. Focus groups on TeleFile surfaced consumer concerns about incorrect Direct Deposit routing numbers. See Schulman, Ronca, and Bucuvalas, Inc., "Qualitative Research on TeleFile Users and Non-users," IRS Pub. 3831 (4-2001), April 6, 2001.

²⁵See, Appendix A, "Multiple Federal Laws and IRS Rules Already Extensively Regulate RAL Lenders and Facilitators." These laws include the Truth in Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, Federal Trade Commission Act, Fair Debt Collection Practices Act, Electronic Funds Transfer Act, Gramm-Leach-Bliley Act, National Bank Act (for national banks), USA Patriot Act, John Warner National Defense Appropriations Act of 2007, and Internal Revenue Code (IRC).

²⁶ CADE is expected to speed refunds within 5-7 business days as a result of daily, not weekly, processing, although more complex returns will take longer to integrate. As of March 7, 2008, the IRS reports that CADE successfully processed 15.1 million individual tax returns. IRS press release, IR-2008-39 (March 12, 2008), at http://www.irs.gov/newsroom/article/0,,id=180038.00.html. Because some taxpayers may still value even faster delivery of funds, RALs may not completely disappear, although analysts project a decrease.

²⁷ Lending banks, IRS officials, and state regulators report few or no customer complaints about RALs.

²⁸ Times are based on information from www.irs.gov and the IRS e-file Refund Cycle Chart, Pub. 2043 (10-07), at http://www.irs.gov/pub/irs-pdf/p2043.pdf

²⁹ The 12-day average for direct deposit of IRS refunds for e-filed returns is confirmed by Treasury Inspector General for Tax Administration, Individual Income Tax Return Transactions Were Timely and Accurately Recorded to Taxpayer Accounts, Report 2004-40-035 (January 2004), p. 6. The refund cycle chart (Pub. 2043) shows direct deposit for e-filed returns in 8-15 days and mailed checks in 15-22 days; it also cautions that, "The IRS does not guarantee a specific date that a refund will be deposited into the taxpayer's financial institution account or mailed." IRS checks are mailed on Fridays and about 3 days are required for mail delivery.

³⁰ Jodie Bernstein, of counsel to the law firm of Bryan Cave, who served for six years as head of the FTC's Bureau of Consumer Protection., assisted in developing H&R Block's "Facts About Refund Anticipation Loans" simplified disclosures.

³¹ The bold background word "LOAN" was moved from the top to the bottom of the page and the color was darkened at the suggestion of House Financial Services Committee Chairman Barney Frank who reviewed the form to investigate allegations that borrowers did not know they were applying for a loan.

³² RAL clients without a bank account receive this advice: "Getting Money Quickly: Plan to keep more of your refund next year: A Refund Anticipation Loan (RAL) is fast and easy, but it's also expensive because the lending bank charges you for this service. In addition, other institutions may charge you to cash your RAL check. Next year, why not file electronically and ask for your refund by direct deposit or IRS check? That way, you can avoid RAL fees and still get your money in approximately 8-15 days (direct deposit) to 3 weeks (check). If you don't have a bank account, many banks, savings institutions and credit unions have low-cost solutions available. You'll gain better control of your finances, avoid check-cashing fees, and keep more of your refund in your own pocket."

³³Handbook for IRS Authorized e-file Providers, Publication 1345 (rev. 11-2004), p. 44, at http://www.irs.gov/pub/irs-pdf/p1345.pdf

³⁴ HSBC "Application for a Refund Anticipation Loan and a Refund Account," p. 2. See Appendix B.

³⁵ For the influence of defaults that can nudge or steer but not force individuals to make certain choices, see Richard H. Thaler and Shlomo Benartzi, "Save More Tomorrow™: Using Behavioral Economics to Increase Employee Savings," 112 Journal of Political Economy, pp. S164-S187 (February 2004), at http://faculty.chicagogsb.edu/richard.thaler/research/SMarTJPE.pdf, and Richard Thaler and Cass Sunstein, Nudge (2008).

³⁶ Satisfaction rates exceed 90% in surveys done by lenders and were 85% in a study done by the Georgetown University Business School's Credit Research Center, and over 70% of RAL users return as customers, again suggesting high satisfaction. Gregory Elliehausen, "Consumer Use of Tax Refund Anticipation Loans," (April 2005), pp. vii and 67, at http://www.business.gwu.edu/research/centers/fsrp/pdf/M37.pdf ("Georgetown study"). Because of high consumer demand for and satisfaction with RALs, H&R Block notified some of its RAL clients of the ANPR so they could comment, and many have. One was a taxpayer who said the RAL had "probably helped to save my life." He used his RAL to pay for a medical test that uncovered cancer, enabling him to start chemotherapy two weeks sooner. Another was a taxpayer who used her RAL to avoid college tuition late payment fees that started at $150 and went up over time. Some advocacy groups encouraged comments in favor of the ANPR. See, e.g., e-mail from Chi Chi Wu to the Yahoo Tax Roundtable ListServe, March 31, 2008, 1:02 PM, providing a template for comments, and the March 28, 2008 "Action Alert" from Americans for Fairness in Lending that provided text for letters, at http://www.affil.org/get active/action-alerts.

³⁷ H&R Block research.

³⁸ As the Taxpayer Advocate has written, "Tax refunds are particularly important to low-income taxpayers . . . A taxpayer for whom the refund is so significant often makes financial plans based on when he or she anticipates receiving the refund and may view the refund as a lifeline. For some taxpayers, a delay of two to four weeks in receiving the refund could mean eviction, inability to pay the high heating bills that arise during winter, or defaulting on credit card bills from the holiday season." National Taxpayer Advocate 2007 Annual Report to Congress, Volume I, p. 5, at http://www.irs.gov/pub/irs-utl/arc 2007vol1covermsps.pdf. That was certainly the case in 2008. "Tax refunds will be delayed for millions of middle-income taxpayers next year because of late action by Congress to limit the widening reach of the so-called alternative minimum tax, the Internal Revenue Service said Thursday." Kathy M. Kristof, "A Late Tax Tweak Will Delay Refunds for Millions," Los Angeles Times, December 28, 2007, at http://www.latimes.com/business/la-fi-refunds28dec28,1,2996270.column. Underlining the urgent needs, one study found that RAL clients were more credit constrained and spent a greater fraction of their RAL (when using the H&R Block Emerald Card®) on day-to-day necessities, with over half of merchant spending on grocery store and gasoline purchases and utility and healthcare payments. The authors cautioned that, "The data we report are fairly sobering, as they show these loans seem to be used to obtain necessities, especially funds spent in the first few days of the loans. Consumer advocates who seek to ban these products should consider how a ban would affect households' ability to consume." Shawn Cole, John Thompson, and Peter Tufano, "Where Does it Go? Spending by the Financially Constrained," Joint Center for Housing Studies, Harvard University, UCC08-3 (January 31, 2008), pp. 16, 20. "Studies have shown that overwhelmingly consumers fall behind on their debts because something unexpected and catastrophic happened -- a serious illness, a death in the family, the loss of a job . . . When a consumer is being harassed by a debt collector, even a few weeks delay can cause unbelievable stress and anxiety on his or her family." "Testimony of Chi Chi Wu on behalf of National Consumer Law Center and Consumer Federation of America on Use of Private Collection Agencies to Improve IRS Debt Collection," before the House Ways & Means Committee Oversight Subcommittee, May 13, 2003, pp. 5, 7. The Georgetown study, op. cit., note 36 supra, found abut 79% of borrowers used RALs to pay bills or unexpected expenses, take advantage of a short-term purchase opportunity, or make planned purchases. Some taxpayers have used RALs to repay payday loans that are 7-9 times more costly than an average RAL on a per-$100 basis. "According to research by Roper-ASW, . . . only 38% [of Americans] can pay off their credit cards each month, and only 28% say they have enough saved to weather a financial hardship." Jean Chatzky, "Know That You Owe," Money Magazine (April 2004), p. 143.

³⁹ H&R Block research.

⁴⁰ Two important points about the APR are worth noting. First, the annual percentage interest rate (APR) is computed on the finance charge portion of the RAL fee, not the bank account set-up fee. Some advocates contend that the refund-account fee should be included in the APR calculation. But banks say this would violate the Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et seq., and the Federal Reserve Board's Regulation Z (12 CFR § 226.4(a)), because the refund account fee is also charged in a "reasonably equivalent cash transaction," that is, a non-loan transaction like a RAC, whether or not credit is extended. Bank regulators approve this method of calculation, and consumer advocates acknowledge that their view differs. See, Chi Chi Wu and Jean Ann Fox, The NCLC/CFA 2004 Refund Anticipation Loan Report (January 2004), pp. 5-6, at http://www.consumerlaw.org/issues/refundanticipation/content/2004RALReportFinalpdf. Recent legislation also reflects Congress' recognition that the APR under TILA does not require inclusion of all fees. The John Warner National Defense Authorization Act of 2007, P.L. 109-36, 10 U.S.C. § 987(i)(4), requires creditors to disclose to borrowers who are members of the military or their dependents both the APR under TILA and a "Military Annual Percentage Rate" (MAPR) that includes all fees. The IRS has also noted that APRs are not the loan interest rate but a comparative tool and questioned whether APRs are the best way to disclose RAL costs. See IRS Report to Congress on Refund Anticipation Loans in Response to a Directive in the FY06 Treasury Appropriations Act Conference Report (November 2006), pp. 10-13. In any case, to ensure full disclosure, TILA also requires that all fees be listed for consumers. Note that lenders are equally forbidden to overstate the cost of a loan as well as understate it, under TILA. Second, while APRs must be stated in annual 365-day terms, they actually average 11-day loans. A consumer would have to pay for 33 RALs to actually reach the full 365-day annual fee. But, in reality, he only pays for one RAL. Even if the IRS fails to pay the refund, the APR rate does not persist. Santa Barbara Bank & Trust does not charge more than the initial, one-time RAL fee, while HSBC reverts to a credit card rate of 18% APR. Thus, annual interest, whose rates sometimes critics label very high, is in fact never paid. A more meaningful measure of cost might be the example of 2.1% of a $3,000 RAL that consumers would pay at H&R Block, although lenders comply with the TILA requirement that the APR be used. In addition, as we noted earlier and explain in the next section, RALs are loans secured by tax refunds and therefore less costly than many unsecured loans would be (if they are even available); in that sense, a RAL may actually be a low-cost loan. For a discussion of the importance of clear and effective disclosures that enable comparison and the limitations of APRs as currently interpreted, see Elizabeth Renuart and Diane E. Thompson, 'The Truth, the Whole Truth, and Nothing but the Truth: Fulfilling the Promise of Truth in Lending" (Oct. 12, 2007) National Consumer Law Center Working Paper, at http://papers.ssrn.com/so13/papers.cfm?abstractid=1021318.

⁴¹ A $3,000 military RAL at H&R Block delivered on the Emerald Card® costs $32.19, which represents 1.07% of the refund amount. Final Defense Department regulations applying the law to RALs became effective Oct. 1, 2007. See 72 Fed. Reg. 50579-50594 (Aug. 31, 2007); 32 CFR 232. The MAPR is limited to 36% including the bank's refund account fee.

⁴² For the IRS 12-day average direct deposit time, see Treasury Inspector General for Tax Administration, Individual Income Tax Return Transactions Were Timely and Accurately Recorded to Taxpayer Accounts, 2004-40-035 (January 2004), p. 6, at http://www.treas.gov/tigta/2004reports/200440035fr.pdf. 12 days less one for delivery = 11 days. See also, IRS e-file Refund Cycle Chart, Pub. 2043 (10-07), at http://www.irs.gov/pub/irs-pdf/p2043.pdf. While the loan is for an average of 11 days, until the IRS direct deposit is received, the time savings for a taxpayer who otherwise does not have a bank account to accept direct deposit and must therefore wait for IRS mail delivery of his refund check is 3-4 weeks with an e-filed return and 6-8 weeks for a paper filed return.

⁴³ To give dimension to the significant risks not revealed by the Debt Indicator, see IRS Revenue Protection Strategy for 2005 and 2007. See also, National Taxpayer Advocate 2005 Annual Report to Congress, Volume II, "Criminal Investigation Refund Freeze Study" (Dec. 31, 2005), which found that about 75% of taxpayers whose refunds were frozen claimed the EITC, about a third showed evidence of fraud, and about 20% received no refund; those taxpayers who did receive a refund had to wait an average of 9 months. The Debt Indicator mitigates some but not all RAL risk. In 2005, for example, of the $28.7 million in refunds claimed by 9.6 million taxpayers whose returns had a RAL Indicator, $28.1 million in refunds was paid (98%). Of the $602 million withheld, $429 million (71%) was offset because of debt reflected in the Debt Indicator on 844,569 RAL returns (8.8%) and $173 million (29%) was offset because of return errors, compliance, or fraud checks where the Debt Indicator showed no outstanding government debts. IRS Report to Congress on Refund Anticipation Loans in Response to a Directive in the FY06 Treasury Appropriations Act Conference Report (November 2006), pp. 16-17. In 2007, the amount withheld by the IRS jumped to $1.3 billion, which had a significant impact on banks making refund loans.

⁴⁴ IRS officials are familiar with these problems, including changing direct deposits for EITC returns subject to pre-refund audit to paper checks, without taxpayer authorization, and examination of more e-filed returns than planned with a resulting backlog of delayed refunds. For a discussion of some filing season issues, see "Statement of Mark A. Ernst, President and Chief Executive Officer, H&R Block, Before the Ways & Means Oversight Subcommittee on the Tax Return Filing Season and the IRS Budget," April 3, 2001, p. 3, at http://waysandmeans.house.gov/legacy/oversite/107cong/4-3-01/4-3erns.htm. Ernst testified that, while the Debt Indicator had worked well in its first pilot year, 2000, resulting in significantly lower bank fees, lenders suffered because the DI did not become fully operative until well into packaged discounts, targeted marketing, pre-filled applications, prescreening, faster credit, and proactive offers). See also, Fred H. Cate, "Personal Information in Financial Services," Financial Services Coordinating Council (March 2000). the filing season. In 2001, "Social Security numbers ending in 00 to 32 were not included in IRS offset screens until February 1. Returns reported as having no offsets had offsets taken when refunds were processed. The result was unhappy taxpayers and significant losses for participating firms." He concluded that, "When it works well, the DI program benefits taxpayers, tax preparers, lenders, and the IRS. Unfortunately, when errors occur, all suffer." The recurrent history of glitches has made lenders wary of risks.

⁴⁵ Pacific Capital Bankcorp's Chief Financial Officer cited in Todd Davenport "Scratching A Niche -- OCC Tackles Refund Loans," American Banker, March 27, 2003, at http://www.americanbanker.com/article search.html?articlequeryid=l032901067&hitnum=1. The Comptroller of the Currency required Pacific Capital to maintain 100% risk-weighted capital levels for its RALs, rather than the 20% allowed for loans conditionally guaranteed by the U.S. Government, citing Pacific Capital's March 2002 10Q report filed with the SEC, which said "the charge off rate for RALs still remains approximately five times higher than for the rest of the Company's loan portfolios."

⁴⁶ AARP's credit card charges a 3% convenience fee for a cash advance, not including interest. See Pricing & Terms (accessed April 4, 2008). See also, Governmental Accountability Office, Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosure to Consumers, GAO-06-929 (September 2006). "Maxing out your credit card and failing to pay the bill on time are the two leading ways to lower your credit score. The lower your credit score, the more you have to pay for credit in the future." Michelle Singletary, "Hitting the Books on Personal Finance," Washington Post, Aug. 25, 2005, p. D2. One study found that improving credit scores by only 30-points on a 300-850-point scale translated into saving an average of $76 annually on credit card finance charges. "The best way to raise a credit score is to pay bills regularly and on time . . . ." Christopher Conkey, "Improved Credit Scores Could Save Billions," Wall St. J., Sept. 21, 2005, p. D2, http://online.wsj.com/article/0‚SBl12726232469346842.00.html.

⁴⁷ User fees for entering into a non-direct debit installment agreement were increased from $43 to $105, and the fee for direct debit installment agreements from $43 to $52 in 2007 except for those meeting poverty guidelines. About 2.8 million taxpayers have installment agreements. See http://www.irs.gov/irs/article/0..id=165543.00.html and Form 9465. Offers in Compromise at http://www.irs.gov/businesses/small/article/0..id= 109622.00.html. USPS rates at http://www.usps.com/rates/welcome.htm. Passport fees at http://www.us-passport-service-guide.com/passport-fees.html. Expedited airport security program at http://www-flyclear.com/news,pr/pr/pr_021108.html.

⁴⁸ The Truth in Lending Act (15 U.S.C. § 1601 et seq.) and the Federal Reserve Board's Regulation Z (12 CFR part 226) require full and uniform disclosure of loan terms and conditions as part of the application process including the annual percentage rates, finance charges, total of payments, required deposits or security interests, demand feature, prepayment charges, and late fees. They regulate calculations of annual interest rates, oral disclosures, and advertising of credit terms.

⁴⁹ "Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers before the Internal Revenue Service," 31 CFR Subtitle A, Part 10.

⁵⁰ While the IRS regulates RALs and could do more administratively, it has not done so. ". . . . IRS believes primary regulatory oversight of RALs, is provided in the banking law and therefore not administered by the IRS." IRS Report to Congress on Refund Anticipation Loans in Response to a Directive in the FY06 Treasury Appropriations Act Conference Report (November 2006), p. 8.

⁵¹See Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, Publication 1345 (Rev. 11-04), at http://www.irs.gov/pub/irs-pdf/p131345.pdf.

⁵² Several IRS-sponsored VITA sites now offer RALs or RAL-like credit products, including locations in New York City, Ithaca, San Antonio, Minneapolis, St. Paul, Duluth, and Newark, some at full commercial rates that are reimbursed. New Jersey Citizens Action advertises that you can "Get your federal refund in as little as 2 days!! NJCA provides an alternative to high cost RALs (refund anticipation loans). Qualified tax filers are reimbursed for all fees." See, http://www.njcitizenaction.org/index.html. The City of San Antonio and coalition partners offering free tax return preparation offer "a zero percent interest Refund Express loan" at 13 VITA sites through the City Employees Federal Credit Union "for taxpayers wanting to obtain their refund in as few as two business days. Individuals who opt for the Refund Express loan will pay only a $10 application fee." City of San Antonio News Release, "City Opens VITA Sites, (January 7, 2008), at http://www.sanantonio.gov/news/NewsReleases/nr2008VITAOpen.asp?res=1280&ver=true. Accountability Minnesota advertises, "FREE Express Refund Loans. Get your refund in 24-48 hours. Loans are completely free: 0% interest, no fees, and you get a free savings account." See, http://www.accountabilitymn.org/files/2008TaxSiteBrochure.pdf. (These may violate IRS rules that prohibit characterizing RALs as a faster way of obtaining a tax refund.) Alternatives Federal Credit Union, which operates a VITA site in Ithaca, has a "Refund Express" line of credit product at 12.95% APR with a $20 loan fee. See, http://www.altematives.org/refundexpress.html. The National Community Tax Coalition calls these "good RALs" suggesting a recognition that there is consumer demand for the product, that free tax preparation sites can attract clients by offering RALs, and that tying them to a savings account and be a pathway to mainstream banking. http://www.tax-coalition.org/affiliatesProgram ProfilesMinnesota.cfm. The National Consumer Law Center posted information about the Alternatives program on its Website; see "Building a Better Refund Anticipation Loan: Options for VITA Sites," (November 2004), at http://www.consumerlaw.org/issues/refund anticipation/content/ BuildingBetterRAL.pdf. Some of these programs have been active for several years without IRS objection.

⁵³ Unbanked households are twice as likely to take out a RAL (62% vs. 30%), and are 11 percentage points more likely than banked households to take out a RAL in order to pay their tax preparer. Michael S. Barr and Jane K. Dokko, "Tax Filing Experiences and Withholding Preferences of Low- and Moderate-Income Households: Preliminary Evidence from a New Survey," Paper Delivered at IRS Research Conference (June 14-15, 2006), p. 193, at 200-202, at http://www.irs.gov/taxstats/productsandpubs/art)cle/Q‚id=l51642.00.html. To help bridge unbanked clients into ainstream banking services, H&R Block developed the Emerald Card®, a prepaid debit card that can function as a low-cost bank account. More than 2.5 million clients had accounts in 2008, an estimated 60% of whom had previously been unbanked. The card was loaded with a tax refund or a RAL. Use of the card enabled taxpayers to save refund check-cashing costs that average 3% or higher ($70-$100 for the average tax refund) and, if used in combination with payroll direct deposit and other reloading, can save a taxpayer an average of nearly $600 annually in check-cashing and transaction fees -- far more than the cost of a RAL.

⁵⁴ California, Cal. Bus. & Prof. Code § 222.51 et seq.; Connecticut, Conn. Gen. Stat. § 42-480(d) and (e); Illinois, III. Stat. Ann. Ch. 815, § 177/1 et seq.; Minnesota 1, Minn. Stat. § 270C.445; Nevada, Nev. Rev. Stat, Title 52, §§ 2 to 18; New Jersey, N.J. State. §§ 17:11D-1 to 17:11D-7; North Carolina, N.C. Gen. Stat. §§ 53-245-53-254; Oregon, Ore. Rev. Stat. § 673.605; Tennessee, Tenn. Code §§ 62-29-201 to 62-29-205; Texas, Tex. Fin. Code §§ 350.001 to 350.008; Virginia, Va. St. § 6.2-474; Washington State, Revised Code of Washington, 19.265.010 et seq.; Wisconsin, Wis. Stat. §§ 421,301 and 422.310. See also. Administrative Code of New York, § 20-739.

⁵⁵See discussion in note 40, supra.

⁵⁶ Public information about RALs has been dominated by critical reports issued by advocacy groups that are often inaccurate. Some have misstated the number and cost of RALs, mistakenly combined counts of RALs and RACs, misleadingly presented IRS refund times, miscalculated APRs, failed to update information, and (until recently by the Consumer Federation and National Consumer Law Center) not differentiated among providers to recognize progress made through improved disclosures, marketing practices, and pricing. Because RAL providers have not responded fully, the public record is asymmetric. One exception is the Web site of the Coalition for Consumer Financial Choice, which highlights myths vs. facts in the debate.

⁵⁷ Estimates from IRS RAL/RAC Indicator counts as of March 27, 2008, with industry approval rate estimates applied. Because RAL applicants provide the lending bank's routing number for their refund to pay off the loan, if the loan is denied, the refund still is deposited into the account, as specified in the loan agreement. Only the account fee is charged and the taxpayer gets his refund in 8-15 days, with fees subtracted, once the IRS refund is deposited.

⁵⁸ An Urban Institute study found that, among taxpayers aware of the EITC, those who used a paid preparer were about 14% more likely to claim the benefit. Elaine Maag, "Low-Income Parents and the Use of Paid Tax Preparers," Urban Institute New Federalism Program (February 2005), p. 5, at http://www.urban.org/UploadedPDF/41\145B-64.pdf. Another study also found that the availability of e-filing through paid return preparers boosted EITC uptake. Woijczek Kopczuk and Christian Pop-Eleches, "Electronic Filing, Tax Preparers, and Participation in the Earned Income Tax Credit, National Bureau of Economic Research Working Paper 11768 (November 2005), published at 91 Journal of Public Economics 1351-1367 (2007). The IRS reports that over 70% of EITC recipients use a paid preparer. Given the complexity of the EITC, it is doubtful that as many taxpayers would receive the benefit, or the full amount of the benefit, without professional assistance. Studies suggest about 15-25% of those eligible do not receive the EITC, which compares favorably to other government benefit programs administered outside the tax system. Kathy M. Kristoff, "Making Use of Earned Income Tax Credit; An Estimated Quarter of Those Eligible Still are Unaware of the Potential Windfall," Los Angeles Times, February 10, 2008, at http://www.latimes.com/business/la-fi-perfin10febl0,1,6817987.column. Two Government Accountability Office studies illustrate the value of a professional tax preparer to ensure tax is determined correctly: one found that 2.2 million taxpayers failed to claim deductions they were entitled to receive, and another found small business taxpayers overpaid $18 billion because of calculation errors. Tax Deductions: Further Estimates of Taxpayers Who May Have Overpaid Federal Taxes by Not Itemizing, GAO-02-509 (March 29, 2002) at http://www.unclefed.com/GAOReports/gaoQ2-509.pdf: Tax Abatements: Better IRS Data Could Benefit Small Businesses and IRS, GAO-02-336, January 31, 2002, at http://www.gao.gov/new.items/d02336.pdf. A Treasury Inspector General report found that in TY06, 2 million eligible taxpayers missed the opportunity to claim the sales tax deduction averaging $1,718, potentially $3.6 billion in missed deductions. The 2007 Tax Filing Season Was Generally Successful, and Most Returns Were Timely and Accurately Processed, 2007-40-187, Sept. 21, 2007. p. 12, at http://www.treas.gov/tigta/anditreports/2007reports/200740187fr.pdf. Studies of the Retirement Saver's Credit by economists at the Joint Committee on Taxation found that "qualified taxpayers were 70% more likely to claim the Saver's Credit if they used a professional preparer or a computer software program." Gary Koenig and Robert Harvey, Utilization of the Saver's Credit: An Analysis of the First Year," 58 National Tax Journal 787, at 803 (December 2005). And a study of retirement savings using H&R Block clients at 60 St. Louis offices found take-up rates doubled as a result of a high-experience tax professional compared to a low-experience professional. Esther Duflo, William Gale, Jeffrey Liebman, Peter Orszag and Emmanuel Saez, Saving Incentives for Low and Middle-Income Families: Evidence from a Field Experiment with H&R Block, Retirement Security Project Paper 2005-5 (2005), p. 21, at http://www.brookings.org/views/papers/20050509galeorszag.pdf. A recent study found 39% of taxpayers did nothing to minimize their tax liability, also suggesting likely benefits from using a tax professional for tax planning and preparation. "Two in Five Americans Filing Taxes This Year Doing Nothing to Minimize their Tax Liability," Wall Street Journal-Harris Interactive Personal Finance Poll (March 20. 2006), at http://www.harris interactive.com/news/newsletters/WSJfinance/HI_WSJ_PersFinPoll_2006_vol2_iss02.pdf. But compare Michael Brostek, Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors, Testimony Before the Senate Committee on Finance (April 6, 2006), GAO-06-563T, at http://www.gao.gov/new.items/d06563t.pdf (many errors found; however, a later analysis showed H&R Block performed relatively well: at the 4 H&R Block offices out of the 19 tax chain offices visited, in no case was Block's estimate of taxes owed off from the GAO solution by more than 2%, while more than half of non-H&R Block offices were off by more than $1,500, and of the eight issues identified for scrutiny, H&R Block offices got the correct answer in 80% of the cases while non-H&R Block offices were correct on these issues in 20% of the cases).

⁵⁹ The Taxpayer Advocate suggests that the solution for those who need RAL or RAC to pay for tax preparation is to rely on or expand VITA and IRS free tax preparation for those who can't afford to pay. 2007 Annual Report to Congress, p. 90, footnote 27. But it is unlikely that these free services would be able to absorb nearly the 19 million taxpayers who use bank products that have a feature allowing the deduction of tax return preparation fees. Paid tax return preparers prepare over 70% of EITC returns compared to about 2% at volunteer preparation sites. Moreover, many free services do not offer the same range of forms, hours, advice, savings opportunities, or alerts to government benefits eligibility as H&R Block. The quality of free return preparation has also been questioned in reports by Treasury officials. "TIGTA believes the IRS should proceed cautiously in its expansion efforts, given the importance of the accuracy of tax return preparation . . . While the 2007 Filing Season accuracy rate is an improvement compared to the 39 percent accuracy rate reported for the 2006 Filing Season, taxpayers still have just a 1 in 2 chance of having their tax returns accurately prepared by VITA program volunteers." Statement of the Honorable J. Russell George, Treasury Inspector General For Tax Administration, Before the Subcommittee on Financial Services and General Government, Committee on Appropriations, U.S. Senate, on "Internal Revenue Service FY 2008 Budget Request" (May 9, 2007), p. 3, at http://www.treas.gov/tigta/congress/congress05092007.htm. The Governmental Accountability Office concluded that, "despite increasing reliance on volunteer organizations to target underserved taxpayer groups, IRS lacks information on the effectiveness of its efforts." GAO, 2007 Filing Season Continues Trend of Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated (November 2007), GAO-08-33, p. 34, at http://www.gao.gov/cgi-bin/getrpt?GAO-08-38.

⁶⁰ "Audit insurance" products may have been sold, including indemnification against losses arising out of an IRS examination, with important exceptions, although it is not clear that such products are being sold today. One developer suggested the IRS cooperated in developing the product and a former senior Treasury official was a leader in the audit insurance business. "Full details of this plan have been discussed in depth with IRS officials.... Comments by Service officials have been helpful in designing policy provisions and exclusions to reduce the opportunity for taxpayers to abuse the coverage or take advantage of the system of tax administration." Amos Rafferty, "Tax Audit Insurance Available," Construction Dimensions (October 1983), pp. 37, 40, at http://www.awci.org/cd/pdfs/8310_f.pdf. Former Deputy Secretary of the Treasury Tim McNamar was CEO of a firm selling audit insurance. Teresa Riordan, "Patents: Audit Insurance for Taxpayers Willing to Pay Extra for That Additional Dollop of Peace of Mind," N. Y. Times, Jan. 21, 2002, at http://querv.nvtimes.com/gst/fullpage.html?res=9C0DE2D6143BF932A15752C0A9649C8B63. In addition audit representation is covered in some pre-paid legal service plans. One such program, Prepaid Legal Services, Inc., has 1.5 million members supported by a staff of 700 and charges $312 a year or less. See, http://wserver0. prepaidlegal.com/index.html. Hyatt Legal Plans charges $395 a year. See http://www.legalplans.com/ind-enrollment.html.

⁶¹ In 2003, Block agreed with a group of state attorneys general to refund fees to clients who took POM in 2001 but may not have fully understood that POM fees were added to tax preparation fees and to pay investigative costs. As part of their review, the attorneys general accepted Block's procedures which strengthened disclosures and training to ensure POM was fairly presented to all clients. Consumers must consent before they receive POM; H&R Block presents but does not recommend that consumers purchase POM; H&R Block clearly states that consumers who purchase POM have seven days to change their minds and receive a full refund; consumers who buy POM receive a written copy of the program's terms and conditions; and POM's purchase and price are clearly itemized on any invoice.

⁶² "Once again this year every TaxCut customer who e-files can access an H&R Block tax pro at no additional cost in the event of an audit. H&R Block's Worry-free Audit Support provides assistance at every stage of an audit-from the moment a customer gets a letter through the final resolution of an audit, even personal representation from an H&R Block Enrolled Agent at an IRS hearing if necessary. Correspondence. Phone calls. Face-to-face." See terms and conditions at http://www.taxcut.com/taxes/popups/wfa terms.html. and features at http://www.hrblock.com/popups/popwfafeatures.html. In 2008. H&R Block began testing a limited new professional audit service, providing Audit Assistance free for clients and at a flat fee of $75 non-clients, and Audit Representation by an Enrolled Agent for a flat fee of $120 for clients and $200 for non-clients.

⁶³ The IRS also benefits from professional tax preparation because Block's preparation of the return is subject to a higher standard, under IRC § 6694, than a return prepared by a taxpayer. Block must ensure for undisclosed non-tax-avoidance items that there is a "reasonable belief that the tax treatment of the position would more likely than not be sustained on its merits." Even for disclosed positions, Block must ensure that there is a "reasonable basis" for the tax treatment of the position. The taxpayer need only show "substantial authority." The Small Business and Work Opportunity Act of 2007, Pub. L. No. 110-28, increased the tax return preparer penalty standard under IRC § 6694. On December 31, 2007, the IRS issued Notice 2008-13 to provide interim guidance on the increased standard until final regulations are issued. The IRS has indicated it intends to issue final regulations by the end of 2008. Congress is currently considering legislation that would reverse the 2007 change in the tax return preparer standard and equalize the penalty standards applicable to tax return preparers and taxpayers.

⁶⁴See, e.g., IRC § 6694 with penalties for fraud including a "first-tier" 6694(a) penalty for understatements of the greater of $1,000 or 50% of the income derived by the tax-return preparer from the preparation of a return or claim with respect to which the penalty was imposed, and a "second-tier" section 6694(b) penalty (for willful or reckless conduct) of the greater of $5,000 or 50% of the income derived by the tax-return preparer. These penalties reflect recent statutory increases. See also, IRS Fact Sheet, "Avoiding Penalties and the Tax Gap," FS-2008-19 (March 2008), at http://www.irs.gov/newsroom/article/0,,id=181068.00.html (outlining penalties ranging from civil fines to imprisonment for criminal tax evasion, including 20% penalties for "substantial understatement" or "negligence and disregard of rules and regulations," and 75% penalties for civil fraud). An article on the California tax audit insurance program, referenced in note 60 supra, quotes an executive on the issue of fraud incentives: "'People could try to defraud us, but that doesn't happen very often . . . . That would be like getting car insurance and thinking, "Now I can drive recklessly." The truth is, nobody wants to tangle with the IRS.'" "Californians Can Breathe Easier with New Tax Audit Insurance," at http://www.insure.com/articles/businessinsurance/tax-audit-insurance.html (last updated Mar. 9, 2000). The Audit Protection Institute program described in the article may no longer be operating.

⁶⁵See, e.g., John Hyre, a tax attorney and accountant at RealEstateTaxAccounting.com LLC, a self-described low-cost provider: "Audit Representation: Billed by the hour at $225/hour. It is often cheaper to settle than it is to fight and win!" at http://www.realeslatetaxlaw.com/ services.php#Audit_Representation.

⁶⁶ Over 100 million service contracts are sold annually. J.D. Power and Associates reports that one in four consumers purchases an extended service warranty for a major appliance, and Consumer Reports found that of the 53% of consumers planning to buy an electronics gift during the 2007 holiday season, 69% of shoppers ages 18-34 and 36% of those ages 35-54 said they were likely to purchase an extended warranty. About 10 million motor vehicle service contracts are sold annually. See Service Contract Industry Council Frequently Asked Questions at http://www.go-scic.com/, and press releases, Nov. 15, 2007, at http://www.go-scic.com/files/newsroom/holiday.pdf citing Consumer Reports (November 2007), and Jan. 29, 2008, at http://www.go-scic.com/ files/newsroom/scicl-29-08.pdf. While extended service plans have been criticized by consumer advocates, their remedy is for consumers to evaluate the plans carefully before choosing one rather than a legislative or regulatory ban.

⁶⁷ In 2004, Taxpayer Advocate Nina Olson wrote that "Representation does have some positive effect on the outcome of a tax dispute" citing a survey of litigated cases in federal courts that found represented taxpayers prevailed in 26% of their cases while taxpayers representing themselves won 15% of their cases. Her 2007 annual report to Congress cites her more recent studies confirming that, although the vast majority of EITC taxpayers undergoing an audit are not represented, 'Taxpayers who use representatives are nearly twice as likely to be found eligible for the EIC as compared to taxpayers who are not represented during the audit process." Nina Olson, comment on Janet Holtzblatt and Janet McCubbin, "Issues Affecting Low-Income Filers," in Henry J. Aaron and Joel Slemrod, eds., The Crisis in Tax Administration (2004), p. 194-195; National Taxpayer Advocate 2007 Annual Report to Congress, Volume II, "IRS Earned Income Tax Credit Audits -- A Challenge to Taxpayers," p. 96. She has also noted that "there are only 136 [now 154] low-income taxpayer clinics nationwide to represent 400,000 potential clients who are selected annually for ETIC examination." "Low-income taxpayers need encouragement, direction, and other forms of assistance. They have so many basic survival demands in their lives, they are afraid of the IRS, they do not understand what is required and why, and, most difficult to overcome, they believe that, whatever they provide, it will not make any difference. Clearly even eligible low-income taxpayers require handholding during an examination, particularly in light of the burdensome documentation required during the audit." (Citations omitted, including example of IRS examiners refusing to accept notarized statements.)

⁶⁸ IRC § 7526(b). Eligibility is covered in IRS Publication 3319. Low Income Tax Clinic 2008 Grant Application. The coverage level, if based on adjusted gross income, would make a married couple with two children eligible for clinic help if their income is $53,000 or below, reflecting a recognition of the high cost of representation. In contrast, IRS' volunteer tax preparation sites prepare returns for taxpayers with incomes of $40,000 and below, covering all EITC recipients, http://www.irs.gov/individuals/article/Q,,id=107626,00.html. The median AGI for tax year 2005 was $30,881. http://www.irs.gov/taxstats/article/0..id=i02886,00.html.

⁶⁹ Professor Janet Spragens, testimony before the IRS Oversight Board, Jan. 27, 2003, p.2, at http://www.ustreas.gov/irsob/meetings/1-27-03/autc.pdf. One well known tax attorney has said, "'People will try to alleviate your fears and tell you that an audit is not a big deal. It is a big deal. It's like having a root canal without Novocain.'" Quoted in Kathy M. Kristof, "How to Avoid a Tax Audit, and How to Prepare for One," Los Angeles Times, March 16, 200S, at http://www.latimes.com/business/la-fi-perfin16marl6,1,5961449.column. Another commentator was equally blunt: '"You are being audited . . .' Words that can strike fear into the hearts of the bravest, most stable and level-headed adults. A federal tax audit is a fearful thing to most of us -- and with reason. Instinctively, we know an audit will take time, create frustration, and cost us money. It will make even the most intelligent and honest of us feel inadequate, dumber than a doorknob, and criminal, as well. Why? Because we know we don't really understand all the rules and regulations of filing our income tax. We know that common sense and intelligence are no guarantee of doing the dam things to the satisfaction of the IRS department. And, we've heard all the horror stories about others' audit experiences." Isabel M Isidro, "How to Stop a Federal Tax Audit," at http://www.powerhomebiz.com/vol17/audit.htm.

⁷⁰ An IRS Oversight Board 2007 Taxpayer Attitude Survey (February 2008) found that taxpayers, when asked, "How much influence does each of the following factors have on whether you report and pay your taxes honestly? Would you say it has a great deal of influence, somewhat of an influence, very little influence, or is not at all an influence?" replied that "fear of an audit" had "a great deal of influence" (31%) or "somewhat of an influence" (23%) for over half of taxpayers. P. 4, at http://www.treas.gov/irsob/reports/2008/2007_Taxpayer-Attitude-Survey.pdf.

⁷¹ David Cay Johnston, "IRS More Likely to Audit the Poor and Not the Rich," N.Y. Times (April 16, 2000). See also, Mary Williams Walsh, "IRS Tightening Rules for Low-Income Tax Credit," N.Y. Times (April 25, 3003), at A1, "The IRS Goes After the Poor," N.Y. Times (April 27, 2003), § 4, and Albert B. Crenshaw, "Crackdown on Tax Credit Put Off to Allow Comment," Washington Post (May 23, 2003), at E1.

⁷² This includes exams conducted by revenue agents, tax auditors, tax compliance officers, and correspondence audits, but not computer-matching programs of information returns and automated error-checking that may result in adjustments to tax liabilities, such as math error adjustments. See Research Institute of America, "What Are Your Chances For Being Audited? Latest IRS Data Book Provides Some Clues" (March 24, 2005). There were 130.1 million individual returns filed in calendar year 2003, and 1,007,874 were audited, of which 487,461, or 48.3%, claimed an EITC.

⁷³ IRS Data Books at http://www.irs.gov/taxstats/articce/0‚id-102174.00.html.

⁷⁴IRS Data Book, 2007, Table 9, pp. 23-24, at http://www.irs.gov/pub/irs-soi/07databk.pdf. Audit rates for EITC filers with incomes of $25,000 or more were 9.7% compared to 1% for all filers. For returns filed in calendar year 2006, 503,267 of the 1,384,563 returns, or 36.5%, involved the EITC, as compared to 40.3% in 2005. See also, "IRS Boosts Tax Audits," Accounting Today (Feb. 25-Mar. 16, 2008), p. 10.

⁷⁵IRS Fact Sheet. FS-2003-14 (June 2003).

⁷⁶National Taxpayer Advocate 2004 Annual Report to Congress, Volume II, "Earned Income Tax Credit (EITC) Audit Reconsideration Study," Dec-31, 2004, Publication 21048 (Rev. 12-2004), pp. 10,22, at http://www.irs.gov/pub/irs-utl/nta2004arcvo12interactive.pdf.

⁷⁷Id., p. 10.

⁷⁸See Form 8862, and General Accounting Office, Earned Income Credit: Opportunities To Make Recertification Program Less Confusing and More Consistent, GAO-02-449 (April 2002).

⁷⁹See IRS press release, IR-2003-78 (June 13, 2003), and Announcement 2003-40. On July 18, 2003, 44 U.S. Senators wrote to President Bush urging that the EITC certification program be halted. A New York Times article said the program would require, "the most exhaustive proof of eligibility ever demanded of any class of taxpayers." Mary Williams Walsh, "IRS Tightening Rules for Low-Income Tax Credit;' N.Y. Times (April 25, 3003), at A1. See also, Statement of Robert Greenstein, Executive Director, Center on Budget and Policy Priorities, before the IRS Oversight Board (January 26, 2004).

⁸⁰See Maria Luzarraga Albanese, ed., Tax Matters: Witnesses Want Simpler Code and Better Taxpayer Rights, 183 J. Accountancy (May 1997), p. 24.

⁸¹ Statement of Janet Spragens before the IRS Oversight Board (February 1, 2005), pp. 3, 6-7, at http://www.treas.gov/irsob/meetings/2-01-05/statement_spragens.pdf. For the story of a higher income taxpayer with a "woeful tale of back-to-back IRS audits," in the first of which he represent himself and in the second had the assistance of a tax practitioner, see David R. Evanson, "Audit Angst," Entrepreneur Magazine (October 1995), p. 53-54.

⁸² IRS press release, IR-2003-78 (June 13, 2003).

⁸³ Missing is the right to control the use of one's own personal tax information, which we believe should be among any list of core taxpayer rights. National Taxpayer Advocate 2007 Report to Congress, Volume I, Section 2, pp. 479-480. Her bill of rights follows several others already enacted into law. Taxpayer Bill of Rights I, included in the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647 (requires that the IRS inform taxpayers of their rights at an audit, that examinations be conducted at a convenient time and place, and that taxpayers can have an authorized representative appear on their behalf); Taxpayer Bill of Rights II, Pub. L. 104-168 (1996); and Taxpayer Bill of Rights III, Title III of The Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206.

⁸⁴ The Taxpayer Advocate reports that "Only 1.8 percent of TY 2004 EITC audited taxpayers had representation during the audit, down from 3.5 percent in TY 2002." "Given scarce resources, the IRS and taxpayers will be challenged to find a way to better verify EIC eligibility in an audit environment. The IRS simply cannot provide a representative to each taxpayer." National Taxpayer Advocate 2007 Annual Report to Congress, Volume II, "IRS Earned Income Tax Credit Audits -- A Challenge to Taxpayers," p. 94, footnote 1, and p. 98.

⁸⁵ Leslie Book, Professor of Law and Director of the Graduate Tax Program at Villanova University School of Law, in a research report for the Taxpayer Advocate, finds that, "the research to date regarding how paid preparers affect tax compliance is inconclusive." Leslie Book, "Study of the Role of Preparers in Relation to Taxpayer Compliance with the Internal Revenue Laws," in National Taxpayer Advocate 2007 Report to Congress, Volume II, p. 47.

⁸⁶ Block Financial LLC, a subsidiary that does not operate retail tax preparation offices, purchases a 49.9% participation interest in refund loans made by HSBC, the bank organization which makes refund anticipation loans through H&R Block tax offices. H&R Block discloses to RAL applicants that it may purchase an interest in their loan. While the revenue, net of losses, flows to the parent corporation, the arrangement is designed to insulate the employees of H&R Block Services, Inc. from the profits or losses of the RAL business. The H&R Block tax preparers act as agents of the bank when they facilitate RALs and are subject to the supervision of the bank and its regulators. Other IRS officials seem to disagree with the Taxpayer Advocate's view that H&R Block could benefit from increased revenue from larger loans when the officials distinguish between revenue at the corporate level and preparer incentives at the retail level during the actual tax prep process. In responding to her views, the other IRS officials state: "There is scant, if any, substantive evidence that individual tax preparers are directly or indirectly receiving fees or profit based on the size of RALs." (Italics added) 2007 Annual Report of the National Taxpayer Advocate, p. 86, footnote 10, and p. 91. H&R Block is also responsible for the credit risk and losses associated with its share as well as interest expense on borrowings to fund its share, and labor, materials, marketing and systems costs for facilitating loans. The losses associated with an average $3,000 RAL that is not repaid by the taxpayer's refund are 50 times the fees and Finance charges, not including the loss of tax preparation fees, again adding a strong incentive for the company to prepare accurate returns.

⁸⁷ An IRS e-file provider must "Ensure that if it is also the return preparer that it is not a related taxpayer to the financial institution or other lender that makes a RAL or other financial product agreement within the meaning of § 267 or § 707 A." Also, "Authorized IRS e-file Providers may not base their fees on a percentage of the refund amount or compute their fees using any figure from tax returns. When assisting a taxpayer in applying for a RAL or other financial product, the Provider may charge a flat fee for that assistance. The fee must be identical for all customers and must not be related to the amount of the refund or the financial product. The Provider must not accept a fee that is contingent upon the amount of the refund or a RAL or other financial product from a financial institution for any service connected with a financial product." Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, Publication 1345 (Rev. 11-04), pp. 44-45. at http://www.irs.gov/pub/irs-pdf/p1345.pdf.

⁸⁸ The preparer must use an EITC checklist and not know or have reason to know that any information used by the preparer in determining the taxpayer's eligibility for the EIC or in computing the EIC is incorrect. The preparer may not ignore the implications of information furnished to, or known by, the preparer, and must make reasonable inquiries if the information furnished to, or known by, the preparer appears to be incorrect, inconsistent, or incomplete. The checklist was based on questions H&R Block was using at the time of its adoption. IRC § 6694 provides penalties for reckless or willful misconduct by a return preparer. Under Sec. 6695(f), a return preparer may also be fined up to $500 for negotiating a refund check for a taxpayer whose return he has prepared. The IRS monitors the e-filing program, firms that facilitate RALs must make an application and be approved by the IRS to be an authorized e-file provider, suitability is reviewed, and the IRS can sanction providers for rules violations. See IRS e-File Application and Participation, Pub. 3112 (Rev. 11-04), p. 25-26, at http://www.irs.gov/pub/irs-pdf/p3112.pdf. For a summary of various preparer penalties see Leslie Book, "Study of the Role of Preparers in Relation to Taxpayer Compliance with the Internal Revenue Laws," in National Taxpayer Advocate 2007 Report to Congress, Volume II, p. 46.

⁸⁹ TurboTax®, for example, advertises that it "will get you the biggest refund you're entitled to -- guaranteed. If you get a bigger refund using any other tax preparation method, we'll give you your money back", citing its ability to search for over 350 deductions and getting the full value for charitable donations "so you can take the biggest deductions possible" and simplify medical deductions. At http://turbotax.intuit.com/best-tax-software/why-choose-turbotax/.

⁹⁰ Governmental Accountability Office, Advance Earned Income Tax Credit: Low Use and Small Dollars Paid Impede IRS's Efforts to Reduce High Noncompliance, GAO-07-1110 (August 2007), at http://www.gao.gov/new.itenis/d071110.pdf fin tax years 2002-4, only about 3% of those eligible used the AEITC, and as many as 80% did not comply with program requirements). See also, Jennifer L. Romich and Thomas Weisner, "How Families View and Use the EITC: Advance Payment versus Lump Sum Delivery," 53 National Tax Journal 1245-66 (December 2000) (lump-sum delivery aids in purchasing durable goods and is rational given scare time, money, and energy).

⁹¹ Mindy Fetterman, "For Many, Tax Refund Spells 'Fun'," USA Today, April 4, 2007 at http://www.usatoday.com/money/perfi/taxes/2007-04-Q4-tax-refund-usat_N.htm . There was considerable outcry when the 2001 tax rebates were found to be advances on 2002 refunds, which were accordingly smaller. David Milstead, "WARNING: There's a catch to that tax "refund" check . . . .," Rocky Mountain News (July 21, 2001), at http://www.truthorfiction.com/rumors/t/taxadvance.htm.

⁹² As the IRS has itself reported, "There is scant, if any, substantive evidence that individual tax preparers are directly or indirectly receiving fees or profit based on the size of RALs." National Taxpayer Advocate 2007 Report to Congress, Volume I, section 1, IRS response to problem #5, at p. 91, at http://www.irs.gov/pub/irs-utl/arc_2007_vol1covermsps.pdf. The Taxpayer Advocate argues that auto dealers or other merchants preparing taxes can encourage RALs to use the proceeds for down payment on a car or truck. The bigger the refund, the more the customer can spend on the products. In its response, the IRS writes that there possibly are incentives for merchants to inflate refunds associated with RALs. "However, what remains unclear is whether preparers are actually engaging in such behavior and, if so, how widespread it may be." Id., pp. 86, 91. But if this occurs, why are RALs needed? The auto dealer would have a financial incentive to inflate a refund even if RALs did not exist since the refund itself could be used for the car purchase. If this is a problem, banning RALs won't solve it.

⁹³ Michael S. Barr and Jane K. Dokko, "Tax Filing Experiences and Withholding Preferences of Low- and Moderate-Income Households: Preliminary Evidence from a New Survey" (June 15, 2006), p. 193, at 204-205, at http://www.irs.gov/taxstats/productsandpubs/article/0‚id=151642,00.html, and "Paying to Save: Tax Withholding and Asset Allocation Among Low-and Moderate-Income Taxpayers," 2nd Annual Conference on Empirical Legal Studies Paper (Nov. 29, 2007), at http://papers.ssrn.com/so13/papers.cfm?abstractid=997866. Similarly, "a 1968 IRS survey that found that 70 percent of respondents said they didn't mind paying income taxes as long as they did not have to pay an additional amount when they filed their return". Cited in Andrea Louise Campbell, How Americans Think about Taxes: Public Opinion and the American Fiscal State (March 27, 2008 draft excerpt, presented at New York University Law School Colloquium on Tax Policy and Public Finance), p. 25, at http://taxprof.typepad.com/taxprofblog/2008/03/campbell-presen.html. One theory is that "at least for many households, the current level of withholding is not 'overwithholding' but a deliberate method of forced savings or mechanism for hedging against the risk of penalties for underwithhoidinng." "In fact, in the past, when withholding rates were reduced, many taxpayers responded by increasing their withholding to ensure that they continued to receive refunds." Iwry, op.cit. note 13, at p. 9 and fn. 27. 94

⁹⁴ "Interestingly, the two groups least likely to take out a RAL are the ones most likely to want over-withholding . . . . We find that the tax filers most likely to want the commitment to save through overwithholding are, in fact, less likely to pay to undo it. In effect, they choose to wait for the refund rather than paying for a RAL to unravel the commitment. This behavior is consistent with present-biased individuals valuing a commitment mechanism." Barr and Dokko, "Paying to Save," op. cit. note 93, supra, p. 24.

⁹⁵ IRS press release, "IRS Warns of New E-Mail and Telephone Scams Using the IRS Name; Advance Payment Scams Starting," IR-2008-11 (Jan. 30, 2008), at http://www.taxea.org/Downloads/IR-2008-11.pdf; Greg Keizer, "IRS Warns of New e-Filing Scam that Rips Off Refunds," Computerworld (April 16, 2007), at http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleld=9016741 (bogus Website masquerading as IRS Free File Program); Diane Freeda, "Taxpayer Privacy: Phishing Schemes Abound as IRS Works To Deter Identity Theft, Reduce Use of SSNs," BNA Daily Tax Report (March 28, 2008), p. G1 (240 phishing schemes identified in 2007, mostly email contacts posing as the IRS to solicit sensitive taxpayer financial information); IRS press release, "Treasury, IRS Warn of Identity Theft Scheme Involving Bogus E-mail, Web site," IR-2004-60 (April 30, 2004), at http://www.irs.gov/newsroom/article/0‚id=022997.00.html.

⁹⁶2007 Annual Report of the National Taxpayer Advocate, p. 88.

⁹⁷ See footnote 84, supra.

⁹⁸ IRS filing statistics as of February 25, 2005, at http://www.irs.gov/newsroom/article/0..id=l36386.00.html.

⁹⁹ ". . . . although the 2005 data was intended to include only RALs, the IRS has acknowledged that the data still includes an unquantifiable number of RACs." National Taxpayer Advocate 2005 Report to Congress, p. 164, at http://www.irs.gov/pub/irs-utl/section 1 .pdf.

¹⁰⁰ The new regulations under Section 7216, 26 CFR § 301.7216-2(o), are so strict that they would prohibit the disclosure of information such as that discussed in this section, even though there is no risk to individual taxpayer privacy and the data are helpful to public policy analysis. The new rules prohibit such disclosures only after Jan. 1, 2009, however.

¹⁰¹ Data from IRS Electronic Tax Administration and Treasury Inspector General for Tax Administration, Better Screening and Monitoring of E-File Providers Is Needed to Minimize the Risk of Unscrupulous Providers Participating in the E-File Program (September 19, 2007), 2007-40-176, at http://www.treas.gov/tigta/auditreports/2007reports/200740176fr.pdf.

¹⁰² The data are from the IRS's Web site, as shown below.

 IRS Questionable Refund Program    FY 2007   FY 2006  FY 2005

¹⁰⁴ Edna R. Sawady and Jennifer Tescher, "Financial Decision Making Processes of Low-Income Individuals," Joint Center for Housing Studies, Harvard University, UCC08-2 (February 2008), p. 1, 21, at http://www.jchs.harvard.edu/publications/finance/understandingconsumercredit/papers/ucc08-2sawady tescher.pdf. This is not to suggest that there are not rational reasons to use a RAL. It may be justified on the basis of cost compared to alternative credit sources or late payment penalties or on the basis of convenience. For many consumers, use of "fringe" financial services providers can be less costly than use of mainstream banking services and a RAL in combination with the Emerald Card® may be even less costly. See Ellen Seidman, Moez Hababou, Jennifer Kramer, A Financial Services Survey of Low- and Moderate-Income Households (July 2005), Center for Financial Services Innovation, p. 2, at http://www.cfsinnovation.com/manageddocuments/threecitysurvey.pdf (check cashers may be more convenient and less costly compared to maintaining bank accounts with low balances and many landlords will not accept checks), and Constance R. Dunham, "The Role of Banks and Non-Banks in Serving Low-and Moderate-Income Communities," Federal Reserve Bank of Chicago, Proceedings (April 2001), pp. 46-48, at http://www.chicagofed.org/cedric/files/cfmacd dunham.pdf (83% of those surveyed found use of check cashers less costly than maintaining a bank account).

¹⁰⁵ A Financial Literacy and Education Commission was established under Title V of the Fair and Accurate Credit Transactions (FACT) Act of 2003 to improve financial literacy and education. The Commission is chaired by the Secretary of the Treasury and composed of 19 other Federal agencies. The President's Advisory Council on Financial Literacy was created on January 22, 2008 by President George W. Bush. The Council will work with the public and private sector to help increase financial education efforts for youth in school and for adults in the workplace, increase access to financial services, establish measures of national financial literacy, conduct research on financial knowledge and to help strengthen public and private sector financial education programs.

¹⁰⁶ IRS rules in Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, Publication 1345 (Rev. 11-04). p. 44, at http://vww.irs.gov/pub/irs-pdf/p1345.pdf. See also, the Truth in Lending Act, 15 U.S.C. § 1601 et seq.

¹⁰⁷See Gregory Elliehausen, "Consumer Use of Tax Refund Anticipation Loans," at http://www.gwu.edu/~business/research/centers/fsrp/pdf/M37.pdf (85% satisfaction with RALs among users). Elliehausen also studied whether consumers who used high-cost credit knew what they were doing. He found, "Most consumers using high-price credit products are aware of the cost of such credit. They generally are able to recall reasonably accurate finances charges but are largely unaware of annual percentage rates for recent loans. Because high-price loan products have a short term to maturity knowledge of the finance charge is sufficient for making informed decisions. Costs and benefits can generally be evaluated without consideration of their timing. Thus, annual percentage rates do not provide additional useful information and tend to be forgotten." "Many customers show signs of deliberation in their decisions, but most probably do not have an extended decision process. Many customers have previous experience with the product and may not exert much effort in subsequent decisions. Relatively low loan amounts and short-terms to maturity also may contribute to lack of awareness and lack of deliberation. Customers are largely satisfied with their decisions and generally do not believe that they have insufficient information. Decision processes for high-price credit products do not appear to be much different from decision processes for mainstream credit products. The decision to use high price credit typically is a result of the consumer's situation rather than a lack of knowledge or information." Gregory Elliehausen, "Consumers" Use Of High-Price Credit Products: Do They Know What They Are Doing?" Indiana State University Networks Financial Institute Working Paper 2006-WP-02 (May 2006), at http://www.frbsf.org/community/research/assets/DoHighPriceCreditCustomers.pdf, pp. 1, 34. In preliminary findings, the Treasury Inspector General for Tax Administration found 86% of RAL users understood they were receiving a loan and 83% stated that the preparers explained the fees. TIGTA, Interim Results of the 2008 Filing Season, 2008-40-100 (March 31, 2008), p. 10, at http://www.treas.gov/tigta/auditreports/2008reports/200840100fr.pdf.

¹⁰⁸ A study done recently for the Securities and Exchange Commission found that even among "experienced investors," there was "confusion" and a struggle to understand differences in titles, duties and standards of care of industry professionals -- broker-dealers, investment advisers and financial consultants. Angela A. Hung, Noreen Clancy, Jeff Dominitz, Eric Talley, Claude Berrebi, Farrukh Suvankulov, Investor and Industry Perspectives on Investment Advisers and Broker-Dealers, Technical Report of the Rand Institute for Civil Justice Study for the United States Securities and Exchange Commission (2008), xviii-xix (executive summary), at http://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf (including those with investments outside of retirement accounts, formal training in finance or investing, or positive responses to questions testing their financial understanding). The Taxpayer Advocate uses the SEC's Reg. D example to show that some citizens need extra protection because they are not sufficiently informed to make sound choices about their financial options. But Reg. D applies to "accredited investors" in private securities placements that are riskier than public offerings. The net worth requirements involve income of over $200,000 or assets of over $1 million, covering approximately the top 2% of taxpayers. There is nothing to indicate that RAL, RAC, or POM transactions involve anything near the complexity, specialization, and risk of such transactions engaged in by an elite group of taxpayers, as the IRS seems to agree in its response to the Taxpayer Advocate. National Taxpayer Advocate 2007 Report to Congress, Volume I, Section 1, problem #5, cf. pp. 89 and 92, at http://www.irs.gov/pub/irs-utl/arc2007vol1covermsps.pdf.

¹⁰⁹North Carolina Refund Anticipation Loan Act, N.C. Gen. Stat, §§ 53-245 to 53-254, requires facilitators to apply to the state, pay a $250 fee, undergo a fitness review, file RAL fees, register with the state, not engage in certain prohibited conduct, post fees and not charge fees that the state finds "unconscionable." The state posts a RAL fee chart enabling consumers to compare prices for a $2,000 RAL at http://www.savetherefund.org/Images/RALCosts.pdf (February 2008). The 15 complaints include those forwarded by the Attorney General's office. The state contends that determining unconscionability is problematic. See North Carolina Office of the Commissioner of Banks. Report on Refund Anticipation Loans (April 24, 2007), pp. 8-9, 12.

¹¹⁰ ". . . . the IRS has failed to date to conduct meaningful research addressing the impact certain commercial products have on tax compliance and taxpayer exploitation . . . . the IRS and policymakers remain hamstrung to a certain extent because the absence of hard data requires us to a large degree to rely on anecdotal evidence." National Taxpayer Advocate 2007 Report to Congress, Volume I, Section 1, problem #5, at p. 85, at http://www.irs.gov/pub/irs-utl/arc2007vol1covermsps.pdf [citation omitted]. The IRS responded by saying that they "must have reliable data prior to taking any regulatory actions that will curtail a taxpayer's ability to disclose his or her own tax information." And, "Before reaching the conclusion that RALs encourage noncompliance, much more research and analysis are needed."Id., pp. 90, 92.

¹¹¹ OMB Circular A-4 (2003), providing best-practices guidance for regulatory analysis including well established need and cost-benefit analysis, at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.

¹¹² Executive Order 13422, January 18, 2007 (revising previous Executive Orders of February 26, 2002 and September 30, 1993).

¹¹³ While still criticizing tax-related bank products, advocates have acknowledged improvements, citing significant cost reductions at H&R Block and elsewhere. See, e.g., Chi Chi Wu and Jean Ann Fox, "Coming Down: Fewer Refund Anticipation Loans, Lower Prices from Some Providers, But Quickie Tax Refund Loans Still Burden the Working Poor" (March 2008), National Consumer Law Center and Consumer Federation of America, at http://www.consumerfed.org/pdfs/RAL2008Reportfinal.pdf.

¹¹⁴ 2007 Annual Report of the National Taxpayer Advocate to Congress, pp. 83, 90.

¹¹⁵ In FY 2007, the Treasury Department's Financial Management Service collected $3.76 billion in delinquent debt, including $1.7 billion in past due child support, $1.47 billion in federal non-tax debt, and over $586 million in federal tax levies and state tax debt offsets. An additional $32.2 billion in tax debts was referred by the IRS for continuous levy. Treasury Department, FY09 Budget in Brief, p. 48, at http://treas.gov/offices/management/budget/budgetinbrief/fy2009/fms.pdf.

¹¹⁶Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, Publication 1345 (Rev. 11-04), p. 17, at http://www.irs.gov/pub/irs-pdf/p1345.pdf.

¹¹⁷ Tax return preparers also use tax information, with client consent, to assist clients in filling out student financial aid application forms and to validate client income for mortgage lenders to support home loans. The IRS itself provides information to mortgage lenders, at a taxpayer's request via Form 4506 ("Request for Copy of Tax Return," which costs $39 and can be sent to "a third party (such as a mortgage company)"), recognizing that loans are more secure and fraud less likely with accurate tax return income information. Sharing the information with mortgage lenders helps reduce misrepresentation of income, the most common type of mortgage fraud, according to an April 2008 report from the Treasury Department's Financial Crimes Enforcement Network (FinCEN), at http://www.fincen.gov/20080403.html. Barring the use of tax offset information, which reduces fraud, lending risk, and loan losses in the case of RALs, would be inconsistent with this policy. If the IRS decides to choke off the flow of information that taxpayers want shared, it should do so on a principled basis, not because officials approve of some uses (mortgages) and not others (RALs, RACs, POM) and want to substitute their judgment for that of the taxpayer to whom the information belongs.

¹¹⁸ The Regulatory Flexibility Act (RFA) as amended by the Small Business Regulatory Enforcement Fairness Act, 5 U.S.C. § 601 et seq. Under section 605(b) of the RFA an agency must provide a factual basis in support of the certification. At a minimum the factual basis should include: (1) identification of the regulated small entities based on the North American Industry Classification System; (2) the estimated number of regulated small entities; (3) a description of the economic impact of the rule on small entities; and (4) an explanation of why either the number of small entities is not substantial and/or the economic impact is not significant under the RFA. Alternatively, the IRFA must contain: (1) a description of the reasons why the regulatory action is being taken; (2) the objectives and legal basis for the proposed regulation; (3) a description and estimated number of regulated small entities; (4) a description and estimate of compliance requirements, including any differential for different categories of small entities; (5) identification of duplication, overlap, and conflict with other rules and regulations; and (6) a description of significant alternatives to the rule. 5 U.S.C. § 603.

¹¹⁹ Bank and securities regulators have traditionally relied on full disclosure as a key to consumer protection. "Disclosure is at the heart of our system of consumer protection." "Statement of Julie L. Williams, Acting Comptroller of the Currency, Before the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate" (May 17, 2005), p. 2, at http://www.occ.treas.gov/ftp/release/2005-49a.pdf. The majority of securities regulations are aimed at promoting fair and full disclosure of all material information. See, Securities Exchange Act of 1934, 15 U.S.C. § 78a. The Federal Trade Commission relies on truthful disclosure, consumer education, law enforcement, and industry self-regulation. Protecting Consumers in the Next Tech-ade: A Report by the Staff of the Federal Trade Commission (March 2008), p. 26, at http://www.ftc.gov/os/2008/03/P064101tech.Ddf.

¹²⁰ Regulators have praised industry self-regulation. "Compliance can be just as high under a coordinated self-regulatory system as under command and control regulation". Deborah Platt Majoras, Chairman, Federal Trade Commission, "Self Regulatory Organizations and the FTC," speech to the Council of Better Business Bureaus (CBBB) (April 11, 2005), p. 6, at http://www.ftc.gov/speeches/majoras/050411 selfregorgs.pdf. CBBB, Consumers Union and the Good Housekeeping Institute have provided third-party certification for some industries' programs. See, e.g. alcohol advertising, infomercials, entertainment industry and media violence, weight-loss advertising, and children's food and beverage advertising initiative at http://www.bbb.org/Alerts/article.asp?ID=728.

¹²¹ CERCA -- the Council for Electronic Revenue Communication Advancement is at http://www.cerca.org/.

¹²² The Coalition for Taxpayer Financial Choice is at http://www.taxpayerfinancialchoice.com/.

¹²³ The Taxpayer Advocate proposed such a plan in her 2002 Annual Report to Congress, pp. 216-230, at http://www.irs.gov/pub/irs-utl/arc2002 section two.pdf. See also, Written Statement of Nina E. Olson, Before the U.S. House Of Representatives Committee on Ways and Means Subcommittee on Oversight, on Regulation of Federal Tax Return Preparers (July 20, 2005), at http://www.irs.gov/pub/irs-utl/testimonywmoversight_returnpreparers.pdf. The Senate has voted for a similar proposal. The "Tax Administration Good Government Act of 2004," was unanimously approved, May 19, 2004. Most recently, it has been proposed as S. 1219 in the 110^th Congress.

¹²⁴ The Negotiated Rulemaking Act of 1990, 5 U.S.C. § 561, was reauthorized in 1996 and is now incorporated into the Administrative Procedure Act, 5 U.S.C. §§ 561-570. It uses an authorized advisory committee to bring diverse parties together and use shared information, knowledge, expertise, and technical abilities possessed by the affected parties in an effort to avoid unnecessary conflict and litigation and develop better regulations.