Area 4 Committee Meeting Minutes

Conference Call
September 8, 2005

Designated Federal Official

• Richard Morris, Local Taxpayer Advocate

Committee Members Present

• James Abraham, Ohio
• Larry Behnkendorf, Michigan
• Adrienne Bell-Stampley, Illinois
• Robert Broniarczyk, Illinois
• Richard Greenberg, Illinois
• Donna Hafer, Kentucky
• Joe Meissner, Ohio
• Donald Miller, Tennessee
• Lovella Richardson, Tennessee
• Ferd Schneider, Ohio
• Teresa Smedley, Indiana, Area 4 Chair

Committee Members Absent

• Maureen Amos, Illinois
• Paul Duquette, Wisconsin
• Steve Hoffman, Ohio, Area 4 Vice-chair
• Delford Jones, Indiana
• May Ann Lawler, Michigan
• Leslie Malcolmson, Michigan

TAP Staff

• Sandra McQuin, TAP Manager
• Mary Ann Delzer, Program Analyst
• Patti Robb, Secretary

Visitors

• None

Welcome
Smedley welcomed everyone to the call and thanked them for attending. The purpose of this meeting is to review and approve/disapprove seven issues so there is no formal agenda.

Roll Call
Quorum was met with 11 members present.

Issues to be discussed

• Endorsement of ACT Report, IMPROVE
  Consensus to elevate to Joint Committee.

• Elimination of Debt Indicator for Refund Anticipation Loans (RAL)
  Consensus to elevate to Joint Committee.

• Reduce RALs with Enhanced Return Processing
  Consensus to elevate to Joint Committee.

• Elimination of Electronic Return Originators (ERO) Incentives for Promoting Refund Anticipation Loans
  This will go back to the subcommittee for more work.

• Enforcement of RAL Provisions of Publication 1345, Handbook for Authorized IRS e-file Provides of Individual Income Tax Returns
  Consensus to elevate to Joint Committee.

• E-file Advertising and Alternatives to RALs
  Consensus to elevate to Joint Committee.

• Requiring Display of RAL Information
  Consensus to elevate to Joint Committee.

Smedley thanked the subcommittee for all their time and efforts. Meissner also thanked them for all their hard work.

Area 4 committee members thanked Jim Abraham for all his hard work on all issues as he is unable to be on the next Area 4 conference call. Abraham responded that he would be available as a resource person if needed.

Next meeting September 27, 2005, 11 a.m. ET via conference call.

Joint Committee Issue Referral Form

TAP Committee: Area 4

TAP Data Base Number:

Short Description: Endorsement of ACT report, IMPROVE

Date Approved by Committee:

Members of Subcommittee: Paul Duquette (Chair), Jim Abraham, Steve Hoffman, Leslie Malcolmson, Joe Meissner, Mary Ann Lawler.

Statement of Issue: TAP supports the recommendations made by the Advisory Committee on Tax Exempt and Government Entities (ACT) in their report of June 8, 2005, regarding project “IMPROVE.”

Goal: To support ACT’s efforts to improve compliance among newly-created charities.

Proposed Solution: TAP should draft a letter to Mr. Steven T. Miller, IRS Director, Exempt Organizations, supporting the eight recommendations made by the Advisory Committee on Tax Exempt and Government Entities (ACT) to improve the compliance of newly-created charities dated June 8, 2005.

Background, Research and Analysis: In a letter dated September 2, 2003 to Steven T. Miller, IRS Director, Exempt Organizations (EO), TAP Chair Thomas J. Seuntjens addressed eight specific recommendations regarding Form 990 “Return of Organizations Exempt From Income Tax.” Mr. Miller responded to Mr. Seuntjens in a letter dated November 10, 2003. In his letter, Mr. Miller stated that “some of your (TAP’s) concerns were identified during the initial phases of the Form 990 e-file project. In addition, the Exempt Organizations Customer Education and Outreach (CE&O) office, which coordinates the development of printed and internet-based educational materials, has identified some of these recommendations as ongoing projects.” With that in mind, Area 4, at their face-to-face meeting April 2005, decided to revisit the Form 990 issue in order to check recommendation progress to date. The 990 sub-committee research included ACT’s June 8, 2005 recommendations to the IRS regarding improving compliance of newly-created charities. They are:

1. Enhance the quantity and quality of EO contacts with charities.
2. Lower the Form 990 filing threshold to $5,000.
3. Leverage existing information outlets to better educate charities regarding ongoing compliance obligations.
4. Eliminate Form 8734.
5. Encourage consideration of donor-advised funds, fiscal sponsorships and other alternatives in lieu of free-standing exemption for smaller organizations.
6. Improve partnering with other IRS divisions and coordinate the process of reviewing charities within the various newly-established units of EO.
7. Share more information with the states.
8. Suspend exemption under section 501(c)(3) for failure to file Form 990 for three consecutive years.

(Please see attached, ACT’s June 8, 2005 project “Improve” recommendations for further detail.)

Benefits and Barriers: “Project IMPROVE seeks to address the interactions necessary between EO and newly-created Code section 501(c)(3) public charities (“charities”) during the crucial post-exemption stage. Building on earlier ACT reports and recommendations, Project IMPROVE will recommend a range of alternatives to assist EO in tracking newly-formed charities, in communicating with these charities, and in enhancing compliance levels by addressing the common transitions encountered by charities in their developmental years. Implementation of these recommendations will enhance EO oversight of newly-created charities and will increase the likelihood that these organizations will mature into compliant and productive members of the exempt organizations sector.” (ACT’s project IMPROVE, page 9)

The obvious barrier to implementing ACT’s recommendations is EO’s ability to devote the manpower and computer resources, given budget constraints set by Congress.

Conclusion: By supporting ACT, TAP lends additional credence to the recommendations made to the IRS’s EO division.

Joint Committee Issue Referral Form

TAP Committee: Area 4

TAP Database Number:

Short Description: Elimination of Debt Indicator for Refund Anticipation Loans

Date Approved by Committee:

Members of Subcommittee/Author(s): Joe Meissner (Chair), Jim Abraham, Maureen Amos, Bob Broniarczyk, Paul Duquette, Dick Greenberg, Leslie Malcolmson, Teresa Smedley.

Statement of Issue:
Refund Anticipation Loans (RALs) are problematic, in that the high fees charged dramatically reduce the refund dollars available to the taxpayer. IRS providing the debt indicator to the third party providing the loan encourages RALs, makes them appear to be endorsed by the IRS, and brings up major privacy issues.

Goal Statement:
The goal is to take the IRS out as the middleman in providing information used to provide loans to taxpayers, based the amount of their federal income tax refund.

Proposed Solution:
The IRS should stop providing the debt indicator to the third party providers of RALs.

Background, Research, and Analysis:
This issue was originally brought to our attention by numerous consumer groups in 2003, which were, and are, concerned about the impact that RALs have on the poorest taxpayers. This subcommittee has spent almost two years researching how RALs work, how they are provided to taxpayers, what the loan process involves, and what the impact is on the taxpayer.

Our research indicates that the IRS terminated the debt indicator in 1994 due to concerns about RAL fraud. However, it was reinstated in 1999 as an attempt to reduce fees associated with RALs, to encourage electronic filing, and because the RAL providers agreed to report loan applicants with indicators of fraud, allowing the IRS to reduce the incidence of fraud.

However, according to a June 2005 report by the National Consumer Law Center (Doc. 2005-14412), the reinstatement of the debt indicator has benefited the RAL industry, by providing them higher profits, while loan costs to the taxpayer have steadily risen to well above the pre-indicator levels. In addition, the research report noted that, not only has provider fraud not decreased, it has actually increased since the reinstatement of the debt indicator. The privacy concern is also a big issue, since there does not seem to be a consensus about whether the IRS providing the debt indicator to third parties violates privacy regulations. Discussions with various IRS officials also seem to debunk the idea that it is the access to RALs that is linked to an increase in electronic filing, since electronic filing has increased at a much higher rate than the growth rate for RALs. The connection may be spurious anyway, since there has been tremendous growth in free file returns, even though RAL availability is limited through the free file system.

Benefits and Barriers, Including Impacts of the Proposed Change:
Benefits of this change would be numerous. Without the debt indicator, the level of approved RALs would likely plummet. Based on figures from the June 2005 NCLC report, between 1994 and 1998 (the time during which the IRS was NOT providing the debt indicator), the volume of RALs approved dropped by almost half. RALs carry exorbitant interest rates, and prey on those least able to pay back such a loan, in the event that the refund does not materialize in a timely manner. Removing the IRS’ middleman status in such loans -- seemingly assisting the loan companies in making huge profits -- would be a benefit for all low-income wage earners, who are the target of such loans. It would also have the positive effect of no longer making it appear that the IRS endorses these loans. In addition, the privacy concerns would be eliminated. We believe the fraud would also decline, since loan companies would be more reluctant to provide loans to those who don’t meet usual loan standards, thus saving taxpayer dollars now used to pursue and collect on fraudulent RAL returns.

The sole barrier that we see will be the tremendous pressure the loan companies, who are making millions of dollars on these loans, will put on the IRS to not eliminate this debt indicator. They will come up with terrible scenarios of what will happen to these poor people whose loans are denied, attempting to create publicity, which will not put the IRS in a favorable light. However, the IRS is not, and should not be, in the loan business and should resist the political pressure to continue to drive this gravy train for the loan companies.

Summary and Conclusion:
The only moral and logical conclusion to our research on the history of the debt indicator is that it should be discontinued. Research has made it clear that the reasoning behind its reinstatement was based on fallacies, and therefore its continued provision is without merit.

Joint Committee Issue Referral

TAP Committee: Area 4

TAP Data Base Number:

Short Description: Reduce RALs with enhanced return processing

Date Approved by Committee:

Members of Subcommittee/Author(s): Joe Meissner (Chair), Jim Abraham, Maureen Amos, Bob Broniarczyk, Paul Duquette, Dick Greenberg, Leslie Malcolmson, Teresa Smedley.

Statement of Issue: The IRS can significantly reduce the perception that a Refund Anticipation Loan (RAL) is desirable by enhancing the speed in which a return is processed.

Goal: The IRS should embark on a program that will ultimately allow for direct deposit of refund checks within 24 hours of a return’s submission.

Proposed Solution: RALs are perceived by the taxpaying public as a way to speed up the receipt of their tax refund. The fees charged for RALs can, in some cases, reduce dramatically the amount of refund received. The IRS can significantly reduce the perception that an RAL is desirable by enhancing the speed in which a return is processed.

IRS should implement procedures to speed up the processing of e-file returns and direct deposit of refunds into taxpayer bank accounts. Initially, the IRS should strive to process returns and direct deposit refunds within 48 hours of submission. Ultimately, the IRS’s goal should be within 24 hours of submission.

Background, Research and Analysis: This issue was originally brought to our attention by numerous consumer groups in 2003, who were, and are, concerned about the impact that RALs have on the poorest taxpayers. This subcommittee has spent almost two years researching how they are provided to taxpayers, what the loan process involves, and what the impact is on the taxpayer.

Since an RAL is perceived by the taxpayer as a way to receive their refund more quickly, it stands to reason that reducing the time period between the e-filing of a return and direct deposit of the refund would negate the need for an RAL.

Benefits and Barriers: The benefits include timelier processing of returns and receipt of refunds by taxpayers, reduction of perceived need for an RAL to gain access more quickly to a refund, and the channeling of EITC dollars from loan company coffers to the poorest among us, as intended. The major barriers to our proposed solution are the IRS’s ability to devote both the manpower and computer resources to this endeavor given the budget constraints set by Congress.

Joint Committee Issue Referral Form

TAP Committee: Area 4

TAP Database Number:

Short Description: Elimination of ERO Incentives for Promoting Refund Anticipation Loans

Date Approved by Committee:

Members of Subcommittee/Author(s): Joe Meissner (Chair), Jim Abraham, Maureen Amos, Bob Broniarczyk, Paul Duquette, Dick Greenberg, Leslie Malcolmson, Teresa Smedley.

Statement of Issue:
The IRS should make changes to the Publication 1345 to remove incentives that may lead Electronic Return Originators (ERO) to encourage taxpayers to choose the more expensive Refund Anticipation Loan (RAL) option because it is more lucrative to the ERO than the less expensive options available to the taxpayer.

Goal Statement:
The goal is to have EROs who provide taxpayers with access to RALs present all of the available options and potential costs of each, without promoting the RAL option more than the others.

Proposed Solution:
IRS should prohibit EROs from accepting incentives (monetary or otherwise) for promoting RALs to their clients. This would require addition to the language of Chapter 6 in the Publication 1345.

Background, Research, and Analysis:
This issue was originally brought to our attention by numerous consumer groups in 2003, who were, and are, concerned about the impact that RALs have on the poorest taxpayers. This subcommittee has spent almost two years researching how RALs work, how they are provided to taxpayers, what the loan process involves, and what the impact is on the taxpayer.

Our research and discussions with taxpayers indicates that RAL providers do not always provide other than cursory information to taxpayers regarding options available other than RALs to get their refunds faster. We believe that this may occur because the loan companies provide monetary incentives to the EROs to promote the RAL. Since the ERO is not paid to promote most of the other options, it is logical that they have little incentive to encourage the taxpayers to elect the options that are less expensive for the taxpayers.

Benefits and Barriers, Including Impacts of the Proposed Change:
The major benefit of this change would be to remove the incentive for EROs to exclusively promote RALs to their clients. We hope that this would mean that taxpayers would be given equal information about all of the costs and benefits of each option, and would be better prepared to make an informed choice.

The sole barrier that we see will be the tremendous pressure the loan companies, who are making millions of dollars on these loans, will put on the IRS to not restrict their ability to “reward” the EROs who funnel the clients to RALs. They will accuse the IRS of trade restriction. However, it is well within the IRS power to regulate how EROs conduct their business in relation to electronically filed returns, in an effort to make sure taxpayers are protected from the potentially unscrupulous ERO and reduce the incidence of fraud in electronic filing.

Summary and Conclusion:
Reasonable restrictions on EROs to protect the public are a legitimate form of regulation by the IRS. The proposed restriction eliminating incentives paid to EROs solely to promote RALs to taxpayers would encourage EROs to promote all e-file options, costs and benefits, to the taxpayers they serve.

Joint Committee Issue Referral Form

TAP Committee: Area 4

TAP Database Number:

Short Description: Enforcement of RAL Provisions of Pub. 1345

Date Approved by Committee:

Members of Subcommittee/Author(s): Joe Meissner (Chair), Jim Abraham, Maureen Amos, Bob Broniarczyk, Paul Duquette, Dick Greenberg, Leslie Malcolmson, Teresa Smedley.

Statement of Issue:
Refund Anticipation Loans (RALs) are problematic, in that the high fees charged dramatically reduce the refund dollars available to the taxpayer. The IRS should focus more on enforcing the provisions of the Publication 1345 related to RALs.

Goal Statement:
The goal is to have the IRS step up their enforcement of the provisions of Publication1345 relating to RALs by increasing the number of site visits and imposing penalties on those not in compliance.

Proposed Solution:
The IRS should use the authority provided to them by Revenue Procedure 2000-31 to enforce the RAL provisions of the Publication 1345. We would like to see the number of site visits increased each year. Currently, only 1% of all Electronic Return Originators (ERO) providing bank products are visited. This should be increased, at minimum, to 3% for 2006 and 5% for 2007. Additionally, penalties should be imposed on EROs not in compliance, with increasing severity if there are multiple noncompliance issues in one site visit or repetitive instances of noncompliance over several site visits to the same location.

Background, Research, and Analysis:
This issue was originally brought to our attention by numerous consumer groups in 2003, who were, and are, concerned about the impact that RALs have on the poorest taxpayers. This subcommittee has spent almost two years researching how RALs work, how they are provided to taxpayers, what the loan process involves, and what the impact is on the taxpayer.

Our research and discussions with taxpayers indicates that RAL providers do not always follow the requirements of Publication 1345, Chapter 6, relating to financial products. Taxpayers have reported that they are not aware that the paperwork they are signing is for a loan, and that they were not informed of other, less expensive, options to get their refunds back quickly.

The IRS has the authority under Revenue Procedure 2000-31 to make site visits to ensure that the Publication 1345 provisions are being enforced, and to impose penalties on those who are not in compliance. However, information provided by the IRS indicates that less than 1% of the RAL providers receive site visits, and rarely are any penalties imposed, even when providers are not in compliance. Knowing that there is so little enforcement action from the IRS may encourage EROs to ignore the provisions of Publication 1345 that are designed to protect taxpayers from unscrupulous EROs.

Benefits and Barriers, Including Impacts of the Proposed Change:
The major benefit of this change would be to encourage compliance with the regulations stipulated in Publication 1345. While voluntary compliance is always the goal, increased enforcement would accomplish the goal of having EROs be more vigilant in staying within the regulations outlined. The benefit would be to the taxpayer, who would be assured of receiving all of the required information to make an informed decision relating to RALs and other bank products. In addition, by enforcing the provisions of Publication 1345, the IRS may reduce fraud in the program by suspending EROs from the program that are habitually not in compliance.

The barrier will be the limited resources that the IRS has available to police EROs. This increase in enforcement will initially require added manpower and other resources be allocated to enforcement. However, the potential reduction in fraud that ERO compliance may generate could compensate for the enforcement dollars spent.

Summary and Conclusion:
The IRS must increase enforcement of the provisions relating to RALs from the Publication 1345. By increasing the site visits, the IRS would make it clear that those provisions will be enforced and those EROs not in compliance will face sanctions, as provided by Revenue Procedure 2000-31.

Joint Committee Issue Referral Form

TAP Committee: Area 4

TAP Database Number:

Short Description: E-file Advertising and Alternatives to RALs

Date Approved by Committee:

Members of Subcommittee/Author(s): Joe Meissner (Chair), Jim Abraham, Maureen Amos, Bob Broniarczyk, Paul Duquette, Dick Greenberg, Leslie Malcolmson, Teresa Smedley.

Statement of Issue:
IRS should direct its current advertising campaign toward educating taxpayers on how they can speed up their tax refunds through the use of early filing, e-filing, and direct deposit.

Goal Statement:
Taxpayers, especially low-income and English as a Second Language (ESL), deserve and need to be informed that there are alternative measures available, besides the use of expensive Refund Anticipation Loans (RAL), in order to obtain a speedy tax refund.

Proposed Solution:
Many families, especially low-income and ESL, resort to RAL’s because they require speedy return of their tax refunds in order to pay bills and other necessities. Thru the use of early filing, e-filing, and direct deposit taxpayers can receive their full refund within a week to ten days, rather than resorting to an expensive RAL. Often, however, these taxpayers are not aware of these alternative measures and thus choose the expensive RALs out of ignorance.

IRS should direct its current advertising campaign toward educating taxpayers on how they can speed up their tax refunds through the use of early filing, e-filing, and direct deposit. IRS also could through its outstanding Low Income Tax Clinic (LITC) program, inform low-income ESL taxpayers about these alternative measures to RALs.

Background, Research, and Analysis:
This issue was originally brought to our attention by numerous consumer groups in 2003, who were, and are, concerned about the impact that RALs have on the poorest taxpayers. This subcommittee has spent almost two years researching how RALs work, how they are provided to taxpayers, what the loan process involves, and what the financial impact is on the taxpayer.

Our research and discussions with taxpayers indicates that RAL providers do not always provide other than cursory information to taxpayers regarding options available other than RALs to get their refunds faster. A combination of early filing, e-filing, and direct deposit can substantially speed up a tax refund. While it is true that an RAL can provide funds to tax payers within a day or two of filing, use of early filing, e-filing, and direct deposit can result in a tax refund within a week to ten days. Moreover, this short wait results in a complete tax refund, rather than a refund eaten up by expensive interest charges and other RAL administrative fees. An advertising campaign could be built around the slogan, “Can you wait a week?” The basic theme would be that this short wait can substantially benefit the taxpayer financially.

Benefits and Barriers, Including Impacts of the Proposed Change:
The major benefit of this change would be to insure that taxpayers, especially vulnerable low-income and ESL taxpayers, are aware that there are alternatives available, besides RALs, for obtaining a speedy tax refund. Furthermore, the taxpayer gets back his or her complete refund rather than one partly eaten up with usurious interest charges and administrative fees. Moreover, by using these alternative measures, the taxpayer avoids the risk that after having used up the RAL funds, the taxpayer for whatever reason does not receive his or her anticipated refund from IRS. As a side benefit, direct deposit also can encourage taxpayers to establish bank accounts which can provide many advantages to taxpayers and help them avoid expensive check cashing outlets.

The main burden is the time, expense, and planning of such advertising campaigns. RAL providers, of course, may lose some income. To the extent, however, that RAL providers may lose some business, this is only the result of knowledgeable taxpayers exercising their freedom of choice to select alternatives to expensive and risky RALs.

Summary and Conclusion:
IRS already conducts extensive advertising campaigns to educate taxpayers. Use of IRS advertising to promote the combination of early filing, e-filing, and direct deposit not only meets various goals IRS has established (such as increased e-filing), but also benefits taxpayers, especially low-income and ESL, to know the choices available to them besides the use of RALs. Furthermore, such alternatives result in taxpayers obtaining their full tax refund, without running the risks inherent in a Refund anticipation Loan. IRS should therefore emphasize in its advertising the use of early filing, e-filing, and direct deposit as alternatives to RALs.

Joint Committee Issue Referral Form

TAP Committee: Area 4

TAP Database Number:

Short Description: Requiring Display of RAL Information

Date Approved by Committee:

Members of Subcommittee/Author(s): Joe Meissner (Chair), Jim Abraham, Maureen Amos, Bob Broniarczyk, Paul Duquette, Dick Greenberg, Leslie Malcolmson, Teresa Smedley.

Statement of Issue:
Refund Anticipation Loans (RALs) are widely used by many taxpayers, especially low-income and English as a Second Language (ESL) families who are applying for their Earned Income Tax Credit (EITC). The IRS must insure that taxpayers are aware that RAL’s are a loan, not the taxpayer’s refund, and these involve substantial risks to the taxpayer.

Goal Statement:
The goal is to insure taxpayers are aware that RAL’s are an actual loan which carry substantial risks to the taxpayer.

Proposed Solution:
Refund Anticipation Loans (RALs) are widely used by many taxpayers, especially low-income and ESL families who are applying for their EITC. These loans, requiring usurious interest charges and other high administrative fees, dramatically reduce the refund dollars available to the taxpayers. Even worse, if for some reason the taxpayer does not receive back the originally anticipated refund, the taxpayer-- whose financial resources are usually limited and who has often already spent the RAL funds--faces the significant burden of paying back the loan. The IRS must insure that taxpayers are aware that RAL’s are a loan, not the taxpayer’s refund, and these involve substantial risks to the taxpayer.

IRS should develop a large-size poster for use by Electronic Return Originators (ERO), that would provide a prominent display of basic information to taxpayers about RALs. This prominent display would state the following: “An RAL or ‘Refund Anticipation Loan’ is a loan. It is not the taxpayer’s actual refund. Furthermore, if the taxpayer fails to receive back his/her anticipated refund, the taxpayer must still pay back the entire RAL with interest.”

ERO’s would be required to display this poster in a prominent location at their business site. This requirement for a prominent display of basic information about the RAL should be added to Chapter 6 in the Publication 1345.

Background, Research, and Analysis:
This issue was originally brought to our attention by numerous consumer groups in 2003, who were, and are, concerned about the impact that RALs have on the poorest taxpayers. This subcommittee has spent almost two years researching how RALs work, how they are provided to taxpayers, what the loan process involves, and what the impact is on the taxpayer.

Our research and discussions with taxpayers indicate that RAL providers do not always provide other than cursory information to taxpayers regarding the nature and risks of RALs to get their refunds faster. Many taxpayers, especially low-income and ESL taxpayers are often not aware that an RAL is a loan which carries substantial risks for the taxpayer if they do not receive back the refund they had anticipated and against which they have borrowed the RAL. Taxpayers who are considering an RAL have every right to be fully informed about the true nature and risks of these RALs.

Benefits and Barriers, Including Impacts of the Proposed Change:
The major benefit of this change would be to increase taxpayer awareness, especially among ESL and low-income taxpayers, about the true nature and risks of an RAL. This would provide them the information they need in order to make an informed choice about signing for an RAL.

IRS would pay for the development, printing, and distribution of this poster. This would be a part of IRS’s advertising efforts. EROs might lose some revenue when taxpayers choose not to sign for an RAL, but this would result from taxpayers exercising their right to choose not to “buy” an RAL.

Summary and Conclusion:
Reasonable guidance to EROs to protect the public are a legitimate form of regulation by the IRS. The proposed requirement for providing a prominent notice about the nature of an RAL and its risks protects vulnerable taxpayers and helps to insure that they have the information they need to make an informed decision.