by Sarah Mcbride

H&R Block
Paul Sakuma/AP

The Internal Revenue Service is trying to fight big-fee loans that can come with tax refunds, and some tax preparers are crying foul.

For the last few years, if a taxpayer's preparer files a return electronically, the IRS has sent back a notice stating whether any of the taxpayer's refund will be docked for student loans, child support, or other payments. That information is called the "debt indicator," and tax preparers like H&R Block rely on it when deciding whether to offer a refund-anticipation loan to its customer.

Now, the IRS won't send out that notice anymore, which will drastically affect tax preparers' ability to evaluate whether they should give a loan to somebody. Bottom line: it'll be much harder to get a refund loan.

 

Friends of the move say it will stop tax preparers charging giant fees for relatively short-term loans— fees that come right out of the refund. A New Mexico newspaper reported a fee of $140 for a refund-loan of $1000—even though the refund typically comes electronically in a few days. Consumer advocates also say the IRS action will ensure programs set up to help the poor— like the Earned Income Tax Credit— don't get diverted to pay those fees.

But critics say the move hurts the poor, who sometimes can't wait a few days for the payment and are more likely to be one of the 17 million people in this country without bank accounts— and so can't get their refunds the fastest way. Now, they won't be able to get loans— or will have to turn to payday lenders or others with even higher interest rates. "The increased lending risk will potentially hurt consumers with significantly lower loan approval rates and higher costs," says Alan Bennett, H&R Block's chief executive.

The IRS has been down this road before. It got rid of the debt indicator in 1994 because of fraud associated with refund loans. But when prices for the loans rose dramatically, the IRS brought it back in 1999. Loan prices dipped and then rose back up, according to the Congressional Report. Back then, fewer people used electronic filing.

H&R Block's stock had been trading north of $15 before the IRS's announcement Aug. 5. Now, it's trading around $14.07. H&R Block says elminating the debt indicator, and thus reducing its ability to offer refund loans, will reduce earnings by about only 5 cents a share next  year.