Consumer Groups Question the "Free" in the IRS "Free File" Program

January 16, 2003
For Information, Contact:
Chi Chi Wu, NCLC, 617-542-8010
Jean Ann Fox, CFA, 757-867-7523

Washington, DC: The National Consumer Law Center (NCLC) and Consumer Federation of America (CFA) today warned taxpayers using the newly-unveiled IRS Free File program to avoid high-priced "refund anticipation loans" and other high-priced products that commercial tax preparers may pitch as part of the program. The groups criticized the IRS for forming an alliance with commercial tax preparers without imposing adequate consumer protections.

The Free File program launched by the IRS today provides web links from the web site to seventeen commercial tax preparers or software companies who are offering free online federal tax return preparation and electronic filing to over 60% of taxpayers. The Free File companies offer their program to groups of consumers based on income, age, military status or eligibility for the Earned Income Tax Credit.

"The IRS should be providing all taxpayers with the ability to file taxes online free of charge," said the NCLC's Chi Chi Wu. "Instead the IRS is connecting taxpayers to commercial tax preparers who are free to charge triple-digit interest rates for 'instant refund loans and extra fees for other services."

NCLC and CFA have been highly critical of loans marketed to low-income consumers in a hurry to receive their tax refunds or Earned Income Tax Credits. RALs are high-cost loans secured by a taxpayer's refund, with annual interest rates ranging from 67% to an astounding 774%. Commercial tax preparers sell RALs in conjunction with banks, and RALs are mostly marketed to low-income consumers, draining hundreds of millions of dollars from EITC anti-poverty benefits.

"Free File could be the 'loss leader' for commercial tax preparers," stated Jean Ann Fox, CFA. "Although the Free File rules prohibit tying the free offer to purchases of expensive extras, there is nothing in the agreement to stop companies from heavily marketing RALs."

For example, the H & R Block site offers a refund anticipation loan of up to $2500 for a finance charge of $90 and charges an extra $29.95 for professional review of tax returns before they are filed. The link on its home page touts "Receive your refund in as little as 24 hours after acceptance by the IRS with our Refund Now Option."

Wu and Fox point out that the Free File program may not be easily accessible to the low income taxpayers who most need a break from high commercial tax preparation fees and who need prompt access to Earned Income Tax Credits. According to government data, the majority of EITC recipients don't have the Internet access needed to take advantage of free online filing. NCLC and CFA cited a Brookings Institution report released on Monday detailing how tax preparers skim billions of dollars off the EITC by selling usurious tax refund loans and high cost services to low-income workers. A refund through E-filing is faster than mailing in a tax return, but low-income consumers who do not have bank accounts to receive direct deposit from the IRS will still have to wait for a paper check to arrive in the mail.

In September NCLC, CFA, and other consumer groups filed comments with the IRS urging stronger consumer protections. A copy of that letter is available at CFA's web site, NCLC's web site, and U. S. Public Interest Research Group's site

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CFA is a non-profit association of almost 300 pro-consumer groups, which, since 1968, has sought to advance the consumer interest through advocacy and education.

NCLC is a non-profit organization specializing in consumer issues on behalf of low-income people. NCLC works with thousands of legal services, government and private attorneys, as well as organizations, who represent low-income and elderly individuals on consumer issues.