Guidance Regarding Marketing of Refund Anticipation Loans (RALs) and Certain Other Products in Connection With the Preparation of a Tax Return, 1131-1133 [08-2]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 73, Number 4 (Monday, January 7, 2008)]
[Proposed Rules]
[Pages 1131-1133]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 08-2]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-136596-07]
RIN 1545-BH12


Guidance Regarding Marketing of Refund Anticipation Loans (RALs) 
and Certain Other Products in Connection With the Preparation of a Tax 
Return

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Advance notice of proposed rulemaking (ANPRM).

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SUMMARY: This document describes rules that the Treasury Department and 
the IRS are considering proposing, in a notice of proposed rulemaking, 
regarding the disclosure and use of tax return information by tax 
return preparers. The rules would apply to the marketing of refund 
anticipation loans (RALs) and certain other products in connection with 
the preparation of a tax return and, as an exception to the general 
principle that taxpayers should have control over their tax return 
information that is reflected in final regulations published in T.D. 
9375, which is published elsewhere in this issue of the Federal 
Register, provide that a tax return preparer may not obtain a 
taxpayer's consent to disclose or use tax return information for the 
purpose of soliciting taxpayers to purchase such products. This 
document invites comments from the public regarding these contemplated 
rules. All materials submitted will be available for public inspection 
and copying.

DATES: Written or electronic comments must be received by April 7, 
2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-136596-07), Room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
136596-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov (IRS REG-136596-07).

FOR FURTHER INFORMATION CONTACT: Concerning submissions of comments, 
Kelly Banks at (202) 622-7180; concerning the proposals, Lawrence Mack 
at (202) 622-4940 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document describes rules that the Treasury Department and the 
IRS are considering proposing in a notice of proposed rulemaking 
regarding the marketing of refund anticipation loans (RALs) and certain 
other products identified below in connection with the preparation of a 
tax return.
    The proposed rules would amend the Regulations on Procedure and 
Administration (26 CFR part 301) under section 7216 of the Internal 
Revenue Code. Section 7216 was enacted by section 316 of the Revenue 
Act of 1971, Public Law 92-178 (85 Stat. 529, 1971), and has been 
amended several times since 1971. Section 7216 imposes criminal 
penalties on tax return preparers who knowingly or recklessly make 
unauthorized disclosures or uses of information furnished to them in 
connection with the preparation of an income tax return. In addition, 
tax return preparers are subject to civil penalties under section 6713 
for disclosure or use of this information unless an exception under the 
rules of section 7216(b) applies to the disclosure or use.
    A notice of proposed rulemaking (REG-137243-02) was published in 
the Federal Register (70 FR 72954) on December 8, 2005. Concurrent with 
publication of the proposed regulations, the IRS published Notice 2005-
93, 2005-52 I.R.B. 1204 (December 7, 2005), setting forth a proposed 
revenue procedure that would provide guidance to tax return preparers 
regarding the format and content of consents to use and consents to 
disclose tax return information under Sec.  301.7216-3.
    Among other recommendations received in response to the notice of

[[Page 1132]]

proposed rulemaking published on December 8, 2005, a number of 
commentators recommended that the regulations prohibit or substantially 
restrict the disclosure or use of tax return information for marketing 
purposes. As described in the preamble of the final regulations 
published in T.D. 9375, which is published elsewhere in this issue of 
the Federal Register, these commentators specifically recommended 
banning tax return preparers from disclosing or using tax return 
information for the purpose of soliciting refund anticipation loans 
(RALs) and similar products. The Treasury Department and the IRS did 
not adopt this recommendation in the final regulations that are being 
published concurrently with this ANPRM because of the significant 
policy issues that need to be considered and because they had not 
previously proposed a rule regarding the use or disclosure of tax 
return information for purposes of marketing of RALs and similar 
products.
    This ANPRM addresses two major areas of concern that have been 
raised and describes rules that the Treasury Department and the IRS are 
considering proposing regarding the marketing of RALs and certain other 
products identified below in connection with the preparation of a tax 
return. It also solicits comments on specific issues as described 
herein.

Concerns Raised by RALs and Certain Other Products

Financial Incentive To Inflate Refunds

    The Treasury Department and the IRS are concerned that RALs and 
certain other products may provide tax preparers with a financial 
incentive to take improper tax return positions in order to 
inappropriately inflate refund claims. In general, RAL amounts are 
capped by the amount of the refund claimed on a tax return. Therefore, 
a preparer who inappropriately inflates the amount of a refund is able, 
directly or indirectly through arrangement with a RAL provider, to 
collect a higher fee. Additionally, a significant number of RALs are 
made to taxpayers who claim the earned income tax credit (EITC). The 
Treasury Department and the IRS are concerned that the financial 
benefits of selling a RAL to a taxpayer can create an incentive for the 
preparer to not fully comply with due diligence requirements designed 
to ensure the accuracy of EITC claims. See section 6695(g).
    Even when a flat fee is charged for RALs, it may be possible that a 
financial incentive to inappropriately inflate the amount of a refund 
exists. As an example, some merchants who offer tax preparation 
services may encourage customers to obtain RALs and spend the funds on 
the merchant's products or services. To the extent that the preparer 
prepares a return that claims an inappropriately large refund, the 
taxpayer is enabled to purchase more of the merchant's products or 
services.
    The Treasury Department and the IRS are concerned that overall tax 
compliance suffers when tax advisors or tax preparers benefit directly 
from maximizing a refund in preparing a tax return. Treasury Department 
Circular 230 restricts the ability of tax practitioners to charge 
contingent fees in certain circumstances when there are tax 
administration concerns. See 31 CFR 10.27. The Treasury Department and 
the IRS are considering whether similar restrictions should be placed 
on use or disclosure of tax return information by preparers who receive 
a financial benefit from the sale of an ancillary product, such as a 
RAL, rather than directly from the determination of a taxpayer's tax 
liability.
    There are two other products that potentially raise similar 
concerns--refund anticipation checks (RACs) and audit insurance. A RAC 
is a post-refund product that allows taxpayers to pay for return 
preparation services out of their refunds. As with a RAL, a taxpayer 
will only qualify to purchase a RAC if a refund is claimed on the 
return. Audit insurance is a type of insurance that covers professional 
fees and other expenses incurred in responding to or defending against 
an audit by the IRS. Taxpayers who purchase audit insurance may be 
encouraged to take aggressive tax reporting positions if they believe 
the insurance will provide protection against the risk of an 
adjustment. The Treasury Department and the IRS generally believe that 
arrangements that create financial incentives for taxpayers or tax 
preparers to exploit the audit selection process undermine tax 
compliance.

Potential for Inappropriate Use by Tax Preparers

    In responding to the proposed regulations, some commentators 
expressed concern that tax preparers are inappropriately profiting from 
marketing RALs and certain other products to relatively unsophisticated 
taxpayers who do not comprehend the full costs of the products. These 
commentators noted that RALs are marketed primarily to low-income 
taxpayers who receive the EITC, that these taxpayers generally have 
relatively low levels of financial expertise, and that these taxpayers 
are more likely than other taxpayers to rely on the advice of their 
preparers. These commentators urged the IRS to amend the proposed 
regulations to protect these taxpayers from exploitation. The National 
Taxpayer Advocate also expressed similar concerns. See National 
Taxpayer Advocate FY 2007 Objectives Report to Congress, vol. II, The 
Role of the IRS in the Refund Anticipation Loan Industry, at 18 (June 
30, 2006).
    As a general rule, the Treasury Department and the IRS believe that 
taxpayers should have the ability to control the use or disclosure of 
their tax return information. Taxpayer control, however, must be 
balanced against the ability of the government to effectively 
administer the internal revenue laws, which includes guarding against 
(1) the potential lessening of tax compliance, (2) the potential 
exploitation of taxpayers described by certain commentators, and (3) 
the potential existence of inappropriate financial incentives for tax 
preparers to inflate tax refunds.

Explanation of Contemplated Rules

    Sections 7216 and 6713 provide a broad prohibition against the 
disclosure and use of tax return information by return preparers. 
Statutory exceptions are provided for a ``disclosure'' pursuant to any 
other provision of the Internal Revenue Code or an order of a court and 
for a ``use'' by a preparer to assist the taxpayer in preparing his or 
her state and local tax returns and declarations of estimated tax. The 
statutory language also authorizes the Secretary to prescribe 
regulations permitting additional exceptions. Thus, tax return 
preparers may use or disclose tax return information beyond the 
statutory exceptions only if, and to the extent that, Treasury 
regulations expressly authorize such acts.
    Among other exceptions, the regulations under section 7216 
generally provide that preparers may use or disclose tax return 
information if the taxpayer provides consent. As a general rule, 
taxpayers should have the ability to control the use or disclosure of 
their tax return information. To address the tax administration 
concerns described above, the Treasury Department and the IRS are 
considering proposing regulations that would create an exception from 
the general consent framework prescribed by Sec.  301.7216-3 for RALs, 
RACs, audit insurance, and similar products. This exception would 
effectively separate the act of return preparation from the act of 
marketing or purchasing certain financial products by prohibiting the 
use of information obtained during the tax-preparation

[[Page 1133]]

process for the non-tax administration purpose of marketing: (i) a RAL 
or a substantially similar product or service; (ii) a RAC or a 
substantially similar product or service; or (iii) audit insurance or a 
substantially similar product or service.

Proposed Effective Date

    The Treasury Department and the IRS anticipate that these new 
proposed rules would apply for returns filed on or after January 1st of 
the year following the date of publication in the Federal Register as 
final or temporary regulations.

Request for Comments

    Before a notice of proposed rulemaking is issued, consideration 
will be given to any written comments (a signed original and eight (8) 
copies) or electronic comments that are submitted timely to the IRS. 
All comments will be available for public inspection and copying.
    Specifically, comments are encouraged on the following questions:
    1. If RALs and certain other products create a direct financial 
incentive for preparers to inflate tax refunds, are there alternative 
approaches that would eliminate or reduce this incentive?
    2. If the marketing of RALs and certain other products exploit or 
have the potential to exploit certain taxpayers, is the approach 
described in this ANPRM better viewed as protecting taxpayers from 
exploitation or as restricting taxpayers' ability to control their tax 
return information? If the latter, is there an alternative approach 
that would address the concerns described above?
    3. Should RACs be treated the same way as RALs and audit insurance, 
or do RACs present lesser concerns?
    4. Are there other products that present significant concerns for 
tax compliance or taxpayer exploitation that should be addressed by 
regulation?

Drafting Information

    The principal author of this advance notice of proposed rulemaking 
is Dillon Taylor, formerly of the Office of the Associate Chief Counsel 
(Procedure and Administration). For further information, contact 
Lawrence Mack of the Office of Associate Chief Counsel (Procedure and 
Administration) at 202-622-4940 (not a toll-free call).

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 08-2 Filed 1-3-08; 8:58 am]
BILLING CODE 4830-01-P