RALs/Tax Preparation

Tax Time Troubles: Delays and Risks Await Many Taxpayers in 2017

Washington, D.C. – The holiday season may still be in full swing, but advocates from the National Consumer Law Center and Consumer Federation of America urge Americans to start now to plan for tax-time, especially for those who claim the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC). Taxpayers should be aware of new and old problems and risks, including:

  • Refund delays for millions of vulnerable taxpayers. Refunds for EITC and ACTC recipients will be delayed until late February, which may cause problems for millions of financially-strapped taxpayers who expect to receive their refunds several weeks earlier.
  • Fraud and errors from unregulated preparers. The majority of paid tax preparers are not required to meet any minimum educational, competency, or training standards. Consumers are at risk from preparers who make errors or commit fraud.
  • A confusing landscape of financial products. Paid preparers offer and promote financial products that vary in their cost and usefulness. “No fee” refund anticipation loans (RALs) do not charge taxpayers a direct fee and may be tempting to taxpayers facing delayed refunds. But unscrupulous preparers could pad their fees to borrowers and some lenders might impose a hidden fee by charging more if borrowers later opt for another product, a refund anticipation check.

“Tax time is often a tough time for consumers,” noted Chi Chi Wu, staff attorney at the National Consumer Law Center, “Delays created by Congress, incompetent and abusive preparers, and financial products of varying cost will make it even more confusing and tricky.”

PATH Act Will Result in Tax Refund Delays

Many low-income taxpayers will face an unpleasant surprise — their refunds will be delayed due to a new law passed by Congress. The Protecting Americans from Tax Hikes (PATH) Act requires the IRS to delay refunds to taxpayers claiming the EITC or ACTC until at least February 15, 2017, and more likely until late February. The IRS must delay the entire refund – even the portion not associated with the EITC and ACTC – until that date.

The PATH Act mandated the tax refund delay in order to give the IRS more time to help detect and prevent fraud involving the EITC and ACTC. The IRS has cautioned that, while it will begin to release EITC/ACTC refunds starting February 15, these refunds likely won’t arrive in bank accounts or prepaid cards until the week of February 27 due to “several factors, including banking and financial systems needing time to process deposits.”

The tax refund delay will likely cause problems for many taxpayers who receive the EITC or ACTC. These taxpayers are low-income working taxpayers, the vast majority of whom have children. They often depend on receiving their refunds early in the tax season to help pay for groceries, holiday bills, overdue utility debt, or other pressing expenses.

Even though refunds may be delayed, taxpayers should still file as early as possible.  In addition to making sure the refund can be processed as soon as possible after February 15, early filing provides a cushion of time if a tax return has other issues, such as math errors.

Information on the PATH Act tax delay is available from the IRS. The Consumer Financial Protection Bureau has advice on dealing with financial issues arising from the delay.

Lack of Minimum Competency Standards

Lack of minimum standards for paid tax preparers continues to be a serious problem plaguing taxpayers. In all but four states (CA, MD, NY and OR), paid tax preparers are not required to meet any minimum educational, competency, or training standards. While some tax preparers are licensed as certified public accountants (CPAs) or credentialed by the IRS as enrolled agents, these certifications are not mandatory and most preparers do not have them. Indeed, the only tax preparers — apart from CPAs, attorneys and enrolled agents — required to pass a test are the unpaid volunteers at Volunteer Income Tax Assistance (VITA) and AARP Tax-Aide sites.

The lack of competency standards for paid tax preparers exposes consumers to potential errors or even fraud, as well as potentially costing federal and state governments tens of millions of dollars in lost tax revenue. Multiple rounds of mystery shopper tests of tax preparers have found high levels of errors, ranging from 25% to over 90%, and even instances of fraud.

“Minimum competency and training standards need to be adopted in the 46 states that don’t have them,” recommended Michael Best, senior policy advocate at the Consumer Federation of America, “Taxpayers deserve no less.”

“No Fee” RALs

With the PATH Act tax refund delay, “no fee” RALs may prove attractive to many consumers. These are loans that are secured by the taxpayer’s refund, but the lender does not charge the taxpayer a fee or finance charge. Instead, some lenders charge the preparer a fee. Many lenders and preparers call these products an “advance,” but they are actually a loan.

Advocates recommend that taxpayers avoid no fee RALs if possible. One risk is that some unscrupulous tax preparers might charge more in their tax preparation fees to “no fee” RAL borrowers. Also, last tax season lenders such as EPS and River City Bank appeared to actually impose a price for “no fee” RALs by charging a higher price for a refund anticipation check (RAC) if the preparer was offering these loans. (With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund monies. After the refund is deposited, the bank issues the consumer a check or prepaid card and closes the temporary account. RACs do not deliver refund monies any faster than the IRS can, yet cost $25 to $60.)

If a taxpayer is determined to get a “no fee” RAL, advocates advise that it is absolutely critical to choose a preparer very carefully. “Taxpayers seeking a no fee RAL have twice the reason to be cautious in selecting a preparer, both to avoid incompetent and fraudulent preparers and to prevent being charged hidden fees,” stated Wu.

Some of the questions a taxpayer should ask are:

  • What kind of training do you have in tax preparation? Have you taken formal classes or a course in tax preparation?
  • How long have you been preparing taxes?
  • Do you have any credentials (attorney, CPA, enrolled agent or completing voluntary IRS certification)?
  • How much will I be charged for tax preparation? Will I be charged more if I get a loan or an “advance’?
  • Are there any other fees that I will be charged?

Taxpayers may wish to consider a credentialed preparer, such as a Certified Public Accountant, an enrolled agent, an attorney, or a preparer who has voluntarily completed the IRS Annual Filing Season Program. A directory of credentialed preparers is available on the IRS website. An infographic on Choosing Your Preparer Wisely is available from CFA.

A free or inexpensive alternative for low-income taxpayers is free tax preparation sites, including VITA sites (1-800-906-9887 or www.irs.gov) and AARP Tax-Aide sites: (www.aarp.org/findtaxhelp). Choosing a VITA or AARP Tax-Aide site saves eligible taxpayers the cost of a tax preparation fee. Many VITA sites can also help taxpayers open a bank account or get a low-cost prepaid card, which enables taxpayers to get refunds faster via direct deposit without paying a fee. Free tax preparation may be available on military bases as well.

If taxpayers experience problems with RALs or RACs, they can complain to the Consumer Financial Protection Bureau (CFPB), which tries to resolve consumer complaints and often is able to help. It also uses information from consumers to identify and improve bad practices.   Complaints about improper tax preparation practices by a paid tax preparer can be sent to the IRS or the taxpayer’s State attorney General’s Office.

Related Resources

Report: Minefield of Risks: Taxpayers Face Perils from Unregulated Preparers, Lack of Fee Disclosure, and Tax-Time Financial Products

Report: Public Views on Paid Tax Preparation: Strong Public Support for New Consumer Protections to Prevent Errors and Fraud, January 2016

Report: Prepared in Error: Mystery Shoppers in Florida and North Carolina Uncover Serious Tax Preparer Problems, April 2015

Report: Riddled Returns: How Errors and Fraud by Paid Tax Preparers Put Consumers at Risk and What States Can Do, March 2014

State Model Law to Ensure Competent Paid Tax Preparers

Submit a complaint to the CFPB here or call toll-free (855) 411-2372

Contact: 

National Consumer Law Center: Chi Chi Wu (cwu@nclc.org) or Jan Kruse (jkruse@nclc.org); 617.542.8010

Consumer Federation of America: Michael Best (mbest@consumerfed.org); 202.939.1009


Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has worked for consumer justice and economic security for low-income and other disadvantaged people, including older adults, in the U.S. through its expertise in policy analysis and advocacy, publications, litigation, expert witness services, and training. www.nclc.org

The Consumer Federation of America is an association of more than 250 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education.