We welcome guest blogger Elizabeth Maresca. Professor Maresca runs the tax clinic at Fordham Law School. She also serves as a Senior Legal Advisor to the National Consumer Law Center. When I saw the IRS announcement she discusses, I reached out to the National Consumer Law Center to see if it had thoughts on this decision. We are fortunate that Professor Maresca has provided a response. We do not always think of taxpayers as consumers but certainly aspects of the role of taxpayer involves consuming tax services. In that role the way the IRS handles their cases can have an important impact not only on the taxes themselves but collateral matters. The discussion here points to a potentially negative collateral consequence of the decision for handling cash tax payments. Keith
Earlier this summer, the IRS announced that it would allow certain “retail partners,” to accept cash tax payments for IRS. Most disturbingly, these retail partners include payday lenders, in particular ACE Cash Express. Payday lenders engage in practices that entrap lower-income individuals in a long-term cycle of exorbitantly-priced debt that often brings serious financial harm. In addition, the IRS use of retail partners imposes a fee on taxpayers, and is cumbersome in that it requires internet access, takes three steps, and several days to complete.
read more...The Perils of Payday Lending
Payday lenders typically offer their borrowers high-cost loans, often with short terms such as 14-days. The loans are marketed as a quick fix to household financial emergencies with deceptively low fees that appear be less than credit card or utility late fees or overdraft fees. Background on the abuses of payday loans is available here and in National Consumer Law Center, Consumer Credit Regulation, 2d ed. 2015, Chapter 9. The loans are marketed to those with little or no savings, but a steady income.
Fees for payday loans generally translate into APRs of 200% to 400%. The payday loan business model requires the borrower to write a post-dated check to the lender – or authorize an electronic withdrawal equivalent – for the amount of the loan plus the finance charge. On the due date (payday), the borrower can allow the lender to deposit the check or debit the account – or the borrower can pay the initial fee and roll the loan over for another pay period and pay an additional fee. The typical loan amount is $350. The typical annual percentage rate on a storefront payday loan is 391%.
Rollover of payday loans, or the “churning” of existing borrowers’ loans creates a debt treadmill that is difficult to escape: The Consumer Financial Protection Bureau found that over 75% of payday loan fees were generated by borrowers with more than 10 loans a year. And, according to the Center for Responsible Lending, 76% of all payday loans are taken out within two weeks of a previous payday loan with a typical borrower paying $450 in fees for a $350 loan.
Use of Retail Partners Imposes Burden and Fees on Taxpayers
In addition to using these payday lenders as tax payment agents, the new IRS arrangement poses other problems for taxpayers. Since as early as 2007, the IRS National Taxpayer Advocate has criticized the IRS for the lack of available Taxpayer Assistance Centers that accept cash payments from taxpayers. Although taxpayers can still pay in cash at some of these Centers, appointment are required, and can take upwards of 30 to 60 days to schedule.
While the IRS solution of using retail partners reduces costs for the agency, it adds significant costs and burdens on taxpayers. There is a fee of $3.99 per payment, and each payment is limited to $1,000. Before using a “retail partner,” the taxpayer must visit the “Official Payments” website, which effectively excludes any taxpayers who are not comfortable with using the Internet. Emails are then sent from both Official Payments and PayNearMe. The PayNearMe email includes a payment code that the taxpayer must print or display on a smartphone at the retail partner. The entire process takes five to seven business days and must be completed before the payment due date.
The IRS should exclude Payday Lenders from Retail Partner Program
Unfortunately, the new IRS arrangement will almost certainly bring new customers into payday lending stores and leave them susceptible to high-cost loan products and the debt treadmill. Indeed, the individuals most likely to pay their tax liability at a retail partner have some of the characteristics – low-income, BIPOC, female, elderly – that make them prime targets for payday lenders.
The IRS should recognize that using payday lenders as tax payment agents poses a threat to low-income taxpayers. Their services can trap them in debt, and jeopardize their ability to pay their tax debts, and other necessary expenses, such as food and rent. The IRS should stop allowing payday lenders to accept cash payments for federal taxes, but instead should provide taxpayers with safe and convenient alternatives.
All of this is very true.
Here is the one flaw in your reasoning.
Taxpayers do not HAVE TO use these services.
Anyone with any sense will use their bank account, or get a money order from 7-11 or get a prepaid credit or debit card, if they do not have good credit.
Those people that do use these services, in general, will continue to use such services for a variety of situations, whether the IRS makes this option available or not.
I truly wish that low-income people would get bank accounts, or better financial guidance.
(And in fact, have turned down a lucrative opportunity for TaxMama to be the spokesperson for a check cashing business – early in my career.)
But this is what they use. This is where they live.
So, IRS might as well leave this option intact.
Sad. Very sad
“Taxpayers do not HAVE TO use these services.”
In the case of low income taxpayers I’m inclined to agree with you, but corporations that comply with state laws in selling marijuana might disagree.
“I truly wish that low-income people would get bank accounts, or better financial guidance.”
You might need to talk to banks about that. Lots of banks charge fees and only rebate fees in accounts that maintain a sufficient balance.
One time I intended to pay cash to the IRS (not frivolously; I had 20 $100 bills straight from a bank and an assortment of other bills and coins to use a minimal or near-minimal number of instruments to pay whatever amount they would compute) but they refused to compute and they rejected my estimated overpayment of 13 $100 bills. The IRS told me to go to the US Post Office in the same building and buy a money order, which I did, except that I paid fees for 2 money orders because the US Treasury is suspicious of money laundering if someone tries to buy too big of a money order payable to the US Treasury. Later I posted a question in misc.legal.moderated asking what happens when the US government rejects notes that are legal tender for all debts public and private, and got a few non-answers but no real answer.
The PAC connected with ACE Cash Express has collected $127,830 this election cycle and paid out $37,500 to federal candidates through August 31. In 2018, it collected $113,677 and paid out $83,500 to federal candidates.
https://www.opensecrets.org/pacs/lookup2.php?cycle=2020&strID=C00392290
I’m sure this doesn’t make any difference in how IRS selects its “private payment agencies.”
Here is some Bankruptcy Code information to add to the conversation.
11 U.S.C. (Bankruptcy Code) § 523(a)(14) makes nondischargeable a debt incurred to pay a tax to the United States, which tax would otherwise be nondischargeable. So, the type of loan discussed in the blog entry will be nondischargeable in bankruptcy, if a relatively recent tax debt is being paid. To date, there is no guidance on what happens if the loan is incurred when the tax was nondischargeable, but the bankruptcy filing occurs after the time when the tax would be dischargeable.
I am not a Truth in Lending Act expert, but here is some additional information. Bankruptcy Code § 523(a)(2)(C)(i)(II) makes nondischargeable cash advances that aggregate more than $1,000 “that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order of relief” is entered. 15 U.S.C. § 1602(i), which is made applicable by the Bankruptcy Code, defines consumer, when used as an adjective, as characterizing “the transaction as one in which the party to whom credit is offered or extended is a natural person, and the money, property or services which are the subject of the transaction are primarily for personal, family, or household purposes.” The Bankruptcy Code treats tax debt as nonconsumer debt. IRS v. Westberry (In re Westberry), 215 F.3d 589 (6th Cir. 2000). But, Regulation Z states that a personal account used occasionally for business purposes is a consumer account. 12 C.F.R. § 1026.3(a)((iii)(C).