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IRS wants to slow loans on refunds

Published Oct. 8, 2005

A new Clinton administration crackdown on fraud could severely crimp the ability of many taxpayers to get refund anticipation loans through their tax preparers next spring.

The loans are made by banks and finance companies, working with tax preparation services who file their clients' returns by computer to IRS.

The IRS, usually within 24 hours, spits back a notice _ called a direct deposit indicator _ that the refund will be on its way shortly and isn't encumbered by a delinquent student loan or for some other reason.

The bank then makes a loan, deducting its fee from the refund amount. It's a particularly popular program with people who live from paycheck to paycheck and want their refunds as soon as possible.

However, the ability to get refunds so fast is an inducement for fraud, particularly for taxpayers due refunds under the earned income tax credit program for low-income working people, the government said. The Treasury Department estimated about 150,000 illegal aliens last year got loans for earned income tax credits they did not deserve.

"The crooks take the money and run and the taxpayers and banks get burned," said Treasury Secretary Lloyd Bentsen. "So we're no longer going to tell the electronic filing operations whether a refund is likely to be coming."

In addition, it will no longer provide preparers who file electronically a so-called direct deposit indicator, which shows that it sees no reason to hold up the tax credit.

Encouraging taxpayers to file electronically is a key part of the IRS' modernization effort. But tax preparers predicted the elimination of direct deposit indicators will crimp the growth in electronic returns, which totaled 13.5-million this year, up from 7.5-million three years ago.

"It's what drives the electronic program; people file electronically because they want their refunds quicker," said Ozzie Wenich, vice president of H&R Block Inc., with headquarters in Kansas City. Lenders probably will be much more cautious about whom they lend to, he said.

Four financial institutions make about 90 percent of the loans, nationally: Beneficial National Bank of Wilmington, Del.; Greenwood Trust, a division of DeanWitter; Mellon Bank of Pittsburgh; and BankOne of Columbus, Ohio.

"We're going to go on with the program," said Gary J. Perkinson of Beneficial. "But we'll probably have to increase the price some and we'll have to cut out some of the people who can least afford to be cut out."