[Federal Register: January 7, 2008 (Volume 73, Number 4)]
[Proposed Rules]
[Page 1131-1133]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ja08-15]
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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 http://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