No Debt Indicators from the IRS as of 2011

The IRS is announcing that beginning in 2011, a new practice may make it more difficult for income tax preparation companies to provide tax refund loans to their customers. In the past, the IRS had supplied lenders and tax preparers with a "debt indicator" for each taxpayer. This digital indicator would allow lenders to discover if a taxpayer's refund was going to be held by the government for payments on debts such as back taxes, child support, or delinquent student loans.

According to Money Talks News, the IRS debt indicator was never intended to be used for purposes of confirming the availability of the refund to the lender, but simply to inform the taxpayer. In practice however, the agency was essentially pre-screening potential loan customers for tax preparation services.

After the new practice takes effect, the process of tax return loans will change. As of next year, when the IRS receives an electronic tax return, they will no longer give the debt indicator information to the income tax preparation companies or to any lenders. Thus, the tax preparer will have no specific information on whether the taxpayer will actually receive his full refund. Without more information, it will be much riskier to offer a refund anticipation loan.

According to Money Talks, the tax preparation industry is bracing for the fall-out from the new IRS practice. Harry W. Buckley, president and chief executive officer of Jackson Hewitt said, "This form of credit, especially important to middle and low income, often unbanked, taxpayers, may well continue to be available in our industry. However, from the taxpayers' perspective, it will likely become harder to receive credit approval, will cost more and the amount of credit available may be limited -- all negative impacts on taxpayers during this difficult economic environment, and all a direct result of the unilateral action taken by the IRS today."

Money Talks reports that changes like this indicate the lending landscape is changing in America. Some are applauding the change and the supposed increase in consumer protection, while others are more concerned with potential government over-regulation.

Related Resources:

• IRS Won't Help Banks Underwrite U.S. Tax Refund Loans (Bloomberg News)
• The IRS Collection Process (FindLaw)
• Negligence Versus Tax Fraud: How Can the IRS Tell the Difference? (FindLaw)