Feinstein Letter Probes Relationship Between Tax Prep and Financial Products

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Some tax practitioners charge fees for preparing tax returns and also offer or facilitate sales of financial products. A December 9th letter Senator Diane Feinstein wrote to Rohit Chopra, the Director of the Consumer Financial Protection Bureau, highlights concerns and the limited information lawmakers know about preparers selling financial products.

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Senator Feinstein, while noting that there is nothing inherently wrong with preparers selling financial products, observes that for lower-income and vulnerable taxpayers it may dilute federal benefits and not be accompanied by sufficient information describing the products. 

To help understand the scope of the practice as well as properly evaluate the costs and benefits, Senator Feinstein asked for responses to the following questions within 60-days:

  1. What is the quality of information available about the extent to which high-cost financial products are being purchased by taxpayers, the characteristics of those who are most likely to sell and purchase such products, and whether the use of such products is growing or decreasing? How many complaints has the Bureau received about such products?
  2. To what extent are tax preparers making the costs of high-cost financial products tied to tax preparation and tax refunds clear and easily understandable? Is the CFPB considering any actions to improve the ease with which consumers can understand these costs
  3. For its 2006 report on paid tax preparers, the Government Accountability Office sent staff posing as taxpayers to visit tax preparers to see how they operated under two scenarios. Similarly, a 2015 report from the National Consumer Law Center involved sending “mystery shoppers” to paid tax preparers in Florida and North Carolina to check error rates. Would a similar approach be productive for the CFPB to gather additional information about financial products offered by tax preparers?
  4. Is there any evidence that companies that offer high-cost financial products have offered them in conjunction with assisting people in applying for other forms of government aid? If so, is the CFPB taking or considering actions to address these situations? If not, what safeguards are in place in case such companies do so in the future?
  5. The COVID-19 pandemic and the extra responsibilities Congress has conferred on the Internal Revenue Service (IRS) in response have caused substantial delays in tax processing. Is the CFPB concerned that potential delays in processing 2021 tax returns — such as the IRS having to reconcile child tax credit and economic impact payments — will lead to significant accrual or compounding of interest or other charges for taxpayers who have purchased refund advance loans or similar financial products? Has the Bureau received complaints about this?
  6. The CFPB has provided advice and information for taxpayers, including on refund advance loans and checks. Do you have evidence on whether the Bureau’s educational activities in this area have been effective?

Some Quick Observations

Through pandemic relief and expanded child-related tax benefits, millions of people who had no or little exposure to the federal income tax system now must file tax returns. Current House-passed legislation is pushing the IRS to consider what a true IRS-hosted online return platform would look like.  A recent Politico piece by Brian Faler, Democrats hope to get a foot in the door for free tax-filing by the IRS, [paywall], discusses the proposed legislative initiative, as well as possible Byrd-rule problems with the proposal and opposition from anti-tax activist Grover Norquist, who heads Americans for Tax Reform. As reconciliation packages must focus on fiscal matters, the Byrd-rule limits proposals that have budgetary effects that are only incidental. Norquist is a well known opponent of pretty much any substantive tax increase or proposal that would expand IRS capabilities.

There are many reasons related to tax administration to support the IRS developing its own platform, especially for lower income and vulnerable taxpayers.  To be sure, there are also reasons to oppose it. For a point/counterpoint see Professors Joe Bankman and Jim Maule squaring off in the ABA Tax Times Perspectives on Two Proposals for Tax Filing Simplification, which discusses the merits of a pro-forma and data retrieval proposals. The Biden Administration’s Executive Order from earlier this week Transforming Federal Customer Experience and Service Delivery to Rebuild Trust in Government explicitly calls on Treasury to consider expanded e-filing options (Sec 4(b)).

Even if IRS were to create a true public option for e-filing that minimized taxpayer burdens, there will be taxpayers who choose to engage private practitioners. A few years ago when I worked at TAS we produced a report with recommendations on improving the administration of refundable credits. One of our proposals was legislation to require all paid return preparers to provide a fee disclosure statement to taxpayers prior to providing tax preparation and filing service. Senator Feinstein’s letter highlights that policymakers should consider the costs (and possible benefits too) of products that are not directly related to return preparation, especially when millions of lower-income and less sophisticated taxpayers pay to file returns.

About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. EIC and CTC along with who actually is a dependent are among the most complicated pieces of the tax code. You make it sound so simple. Low income taxpayers with blended families and multiple possible dependency claimants can make this a confusing tangle for all involved. Those refund advances with high fees should be prohibited, but many low income taxpayers are unbanked and may see them as an alternative. The IRS also hits these taxpayers with a high rate of mail audits.

    In my CPA practice we try to avoid too much involvement with this.

  2. Steve Kassel, EA says

    No way this happens anytime soon for multiple reasons:
    1) Potential job loss in the tax prep industry. Both Democrats and Republicans will be very sensitive to job losses in the current economy;
    2) A gigantic likelihood of hacking. The number of individuals accessing sensitive information would rise tremendously and the risks would be extraordinarily high;
    3) Taxpayers won’t want the “automated” return. Millions will assume IRS will be the primary beneficiary, not the taxpayers.

    This idea will die.

  3. I am glad to hear this. I am a Calif EA and I am total opposed to preparers of any kind offering financial products. I think it is a conflict of interest plus I think it short changes the TP as most of the preparers offering are merely the front end for a firm who is actually supplying the product. The preparer is usually not licensed themselves and, therefore, only has access to supplying products from the company they have “partnered” with. In most cases, I highly doubt the preparer had any more idea of how that product compares to others in the market than the TP does but yet the preparer is representing the product as a good deal. I find this is a violation of clients trust and not in their best interest. They should be steered to a firm who has access to products across the board because they are licensed to directly offer those kinds of products like insurance brokers, stock brokers etc.

    I offer nothing in my practice but the traditional services. Tax, bookkeeping, payroll.

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