Tax Refund Products: Product Mix Has Evolved and IRS Should Improve Data Quality
Released: 2019-04-12T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: American taxpayers spent at least half a billion dollars in 2017 on financial products—issued by banks, through paid tax return preparers—to help them file taxes and get advances or loans against tax refunds.

GAO was asked to review tax-time financial products. Among other things, GAO (1) described market trends and examined IRS data, (2) described characteristics of product users and factors that influence product use, and (3) described product disclosure practices.

GAO reviewed fee and product usage data; conducted a multivariate regression analysis to determine user characteristics; and analyzed disclosures of selected providers that are national chains and those of their bank partners. GAO conducted nongeneralizeable undercover visits of nine randomly selected tax preparers in the Washington, D.C. area to understand how they communicate fees and terms to taxpayers. Preparers were selected to ensure a mixture of regulatory jurisdictions, among other factors. GAO reviewed laws, regulations, and guidance on the products, and interviewed IRS and other government officials and a nongeneralizeable selection of product and service providers, tax preparation companies, consumer groups, and academics.

section_title: What GAO Found
paragraphs: Trends in the market for tax-time financial products since 2012 include

the decline of refund anticipation loans (short-term loans subject to finance charges and fees),

the rise in use of refund transfers (temporary bank accounts in which to receive funds), and

the introduction of refund advances (loans with no fees or finance charges).

More recent product developments include increased online access to products for self-filers, higher refund advance amounts, the introduction of new products, and for tax year 2019, the reintroduction of fee-based loans.

However, GAO identified some limitations in Internal Revenue Service (IRS) data on product use, including over- or under-counting of certain types of products. IRS has not communicated these data issues to users and has not updated guidance to tax preparers on how to report new product use. As a result, data users (including federal agencies and policymakers) have inaccurate information to inform their findings and decision-making.

Lower-income and some minority taxpayers were more likely to use tax-time financial products, according to GAO analysis of 2017 data from IRS, the Bureau of the Census, and the Federal Deposit Insurance Corporation. Specifically, taxpayers who made less than $40,000 were significantly more likely to use the products than those who made more. African-American households were 36 percent more likely to use the products than white households. Product users tend to have immediate cash needs, according to studies GAO reviewed. For these users, tax-time financial products generally provide easier access to cash and more cash at a lower cost than alternatives such as payday, pawnshop, or car title loans.

GAO's undercover visits with nine tax preparers, its review of selected provider websites, and review of documents obtained from selected banks and tax preparers found disclosures generally followed requirements for disclosing fees. However, disclosure practices by some paid tax preparers may pose challenges for consumers. For example:

Preparers in GAO's review generally indicated that they present taxpayers with almost all of the documents with fee information after their tax returns have been prepared and the preparers determined the taxpayers qualified for a tax-time financial product. The timing of these disclosures would pose a challenge for taxpayers looking to compare prices for different providers.

During six of nine undercover visits, GAO investigators explicitly requested literature on product fees but were not provided such information.

Refund transfer fee information on websites GAO reviewed sometimes was presented only after the tax preparation process started, was in small print, or could be found only after navigating several pages. As a result, taxpayers may face challenges comparing prices.

section_title: What GAO Recommends
paragraphs: GAO is making two recommendations to IRS to make the collection of product use data more accurate and make data limitations known to users of the data. IRS concurred with both recommendations.

section_title: Letter
paragraphs: More than 20 million American taxpayers spent at least an estimated half  a billion dollars in 2017 on financial products that are based on their  anticipated tax refund, according to the National Consumer Law Center.  Tax-time financial products, typically offered by banks and made available  by providers of tax preparation services, include refund advances and  refund anticipation loans (credit products) and refund transfers (deposit  product). In fiscal year 2017, the Internal Revenue Service (IRS)  processed more than 150 million individual federal income tax returns,  and issued almost 120 million refunds totaling almost $383 billion,  according to IRS.

You asked us to review trends in the market for tax-time financial  products and the transparency of fees charged for these products. This  report (1) describes trends in the market for tax-time financial products  and product fees and examines the reliability of IRS data on these trends,  (2) describes characteristics of those who use tax-time financial products  and factors that influence their decision to obtain the products, and (3)  describes regulatory oversight of industry participants and the disclosure  of information on product fees and terms.

To address these objectives, we reviewed relevant federal laws,  regulations, and guidance documents from the relevant financial  regulators—Consumer Financial Protection Bureau (CFPB), Federal  Deposit Insurance Corporation (FDIC), Board of Governors of the Federal  Reserve System (Federal Reserve), and the Office of the Comptroller of  the Currency (OCC)—the Federal Trade Commission (FTC), and IRS.  We interviewed officials from the financial regulators, FTC, and IRS. We  also interviewed representatives of various industry participants: five tax  preparation providers selected because they are national chains, five  banks and settlement service providers selected because they work with  the major tax preparation providers, and four consumer advocacy groups  and two academic researchers selected to provide a range of  perspectives.

To examine trends in the use of tax-time financial products and fees, we  analyzed available IRS data from 2008 to 2018 compiled from filed tax  returns to determine the types and use of these products. We determined  these data have some limitations, as discussed later in the report, but  were adequate to suggest general trends when supplemented with other  information. To supplement these data, we conducted a literature search  and reviewed the websites, promotional materials, and other industry  literature and public filings of four providers of online tax preparation  services, three tax preparers with physical locations, and four banks to  help identify trends in product offerings. The tax preparation firms were  selected because they are national tax preparation chains, and the four  banks because they partnered with the national tax preparation chains.  The information collected from providers is not generalizeable to the  population of tax preparers and banks offering these products. To  examine trends in product fees, because of limited publicly available  industry data we collected fee-related information on product fees,  ancillary product fees, tax preparation fees, and aggregate fee data. We  collected this information from selected preparers’ and banks’ websites,  advertising materials, and public filings. The fee information is not  generalizeable to the population of product and related fees.

To identify characteristics of product users, we used a sample of data on  demographic and economic variables from the Bureau of the Census and  FDIC from 2011, 2013, 2015, and 2017 to conduct a multivariate  regression analysis to determine the relationship between individual  characteristics and the decision to obtain a product. We statistically  controlled for various income, education, tax-filing, and demographic  factors. We used a sample of data from IRS from the 2014, 2015, and  2016 tax years to identify other taxpayer characteristics associated with  product use. We determined these data to be sufficiently reliable for the  purposes of our analysis by reviewing documentation on and conducting  testing of the data for errors. We supplemented this information with a  review of literature from government and industry reports on the financial  needs of taxpayers, particularly those who obtain these products.

To describe the regulatory oversight of industry participants and the  disclosure of information to consumers on tax-time financial products, we  reviewed relevant laws and regulations. We reviewed reports and  guidance documents from IRS, CFPB, FDIC, Federal Reserve, OCC, and  FTC on disclosure of financial product fees and terms. To identify existing  issues, we interviewed representatives of industry participants and four  consumer advocacy groups selected to provide a range of perspectives.  To review how product terms and fees are disclosed, in February 2018  GAO undercover investigators visited nine randomly selected tax  preparers in Washington, D.C., Maryland, and Virginia to inquire about  tax-time financial products. We selected locations based on product use  and proximity to lower-income households in each location and to ensure  a mixture of state laws governing products and service providers. The  undercover visits provide illustrative information that is not generalizeable  to the disclosure practices of all tax preparers. We also conducted a  content analysis of websites of eight tax preparers and five bank  providers that offer the products and reviewed consumer-facing  disclosures and product agreements from these firms. We selected the  tax preparation firms because they are national tax preparation chains,  and the five banks because they partnered with these firms. The results  of the website content analysis are not generalizeable to the content of all  tax preparation firms’ websites. Appendix I provides more detail on our  scope and methodology.

We conducted this performance audit from July 2017 to April 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. We conducted our related  investigative work in accordance with standards prescribed by the Council  of the Inspectors General on Integrity and Efficiency.
subsections: section_title: Background
subsections: section_title: Tax-Time Financial Products
paragraphs: Table 1 provides an overview of tax-time financial products based on  information gathered during our review.

section_title: Participants in the Tax- Time Financial Products Industry
paragraphs: The tax-time financial products industry consists of four main groups of  participants: banks, paid providers of tax preparation services, settlement  service providers, and software developers.

Providers of tax preparation services include paid tax return preparers  or electronic return originators (ERO). Not all tax preparers are  EROs, but because IRS generally requires returns to be filed  electronically for tax preparers filing more than 10 returns, tax  preparers generally work with or for an ERO that also may be a tax  preparer. Paid preparers and EROs offer their services in-person, on  the Internet, or through software sold to taxpayers. They generally  offer different refund disbursement options to taxpayers and may  partner with banks to offer tax-time financial products.

Software developers provide software needed to file tax returns  electronically and offer tax-time financial products through their  software to taxpayers. The largest tax preparation companies have  their own software that allows them to prepare returns as well as offer  tax-time financial products. Applications for the products generally can  be completed through the same software used to file the return.

Banks provide tax-time financial products. They also may approve  and process product applications and perform settlement services  (discussed below).

Settlement service providers serve as intermediaries in transactions to  deliver tax-time products. They work with banks to accept and  process applications for tax products; allocate payments due to paid  preparers, other providers, banks, and taxpayers; and provide  distribution instructions to banks. Some banks have affiliates that  perform settlement services, and some banks perform these functions  themselves.

Figure 1 illustrates the roles of these groups, using the example of a  refund transfer transaction.

section_title: Regulators
subsections: section_title: Federal Banking Regulators
paragraphs: The purpose of federal banking supervision is to help ensure that banks  throughout the financial system operate in a safe and sound manner and  comply with banking laws and regulations in the provision of financial  services. At the federal level, banks are supervised by one of the  following three prudential regulators and CFPB:

The Federal Reserve supervises state-chartered banks that opt to be  members of the Federal Reserve System, bank holding companies  and savings and loan holding companies (and the nondepository  institution subsidiaries of those organizations), and nonbank financial  companies designated for Federal Reserve supervision by the  Financial Stability Oversight Council.

FDIC supervises all FDIC-insured state-chartered banks that are not  members of the Federal Reserve System as well as state savings  associations and insures the deposits of all banks and thrifts approved  for federal deposit insurance.

OCC supervises federally chartered national banks, federal savings  associations (federal thrifts), and federally chartered branches and  agencies of foreign banks.

CFPB has rulemaking authority to implement provisions of federal  consumer financial law and enforces various federal laws and  regulations governing consumer financial protection. CFPB also  examines banks with more than $10 billion in assets and their  affiliates and certain nonbanks for compliance with federal consumer  financial laws, accepts consumer complaints on topics such as debt  collection and other consumer financial products or services, and  educates consumers about their rights under federal consumer  financial laws.

FDIC, the Federal Reserve, and OCC are required to conduct a full- scope, on-site risk-management examination of each of their supervised  banks at least once during each 12-month period. The regulators may  extend the examination interval to 18 months, generally for banks and  thrifts that have less than $3 billion in total assets and that meet certain  conditions (for example, if they have satisfactory ratings, are well  capitalized, and are not subject to a formal enforcement action).

The prudential regulators generally conduct consumer compliance  examinations every 12–36 months and Community Reinvestment Act  examinations every 12–72 months. The specific timing depends on a  bank’s size and its previous consumer compliance and Community  Reinvestment Act rating. But the Dodd-Frank Wall Street Reform and  Consumer Protection Act transferred consumer protection oversight and  other authorities over certain consumer financial protection laws from  multiple federal regulators to CFPB. Additionally, for the transferred laws  such as Truth in Lending Act (TILA) and Equal Credit Opportunity Act,  CFPB has examination and primary enforcement authority for banks with  assets of more than $10 billion and any affiliates of such institutions.

The three prudential regulators also are responsible for supervising for  compliance with federal consumer financial laws for insured depository  institutions with total assets of $10 billion or less. For example, they  examine depository institutions for compliance with consumer financial  laws including the Fair Housing Act, the Servicemembers Civil Relief Act,  and Section 5 of the Federal Trade Commission Act.

FTC can enforce Section 5 of the Federal Trade Commission Act, which  prohibits unfair or deceptive acts or practices affecting commerce, and  TILA, which seeks to promote the informed use of consumer credit. TILA  requires disclosures about the terms and cost of credit and standardizes  the manner in which costs associated with borrowing are calculated and  disclosed.

FTC can enforce a number of additional statutes against certain entities;  they include portions of the Gramm-Leach-Bliley Act, which requires  financial institutions, including those providing tax-time financial products,  to protect consumer data; the Telemarketing and Consumer Fraud and  Abuse Prevention Act, which prohibits telemarketers from making  misrepresentations in the sale of goods or services, which could include  tax-time financial products; and the Military Lending Act, which provides  important protections for servicemembers and their dependents seeking  and obtaining certain types of consumer credit, including refund  anticipation loans.

The Office of Professional Responsibility within IRS is responsible for  ensuring all tax practitioners (defined as certified public accountants,  attorneys, enrolled agents, enrolled actuaries, appraisers, and enrolled  retirement plan agents) and other individuals authorized to practice before  IRS adhere to regulations relating to Circular 230, which governs practice  before IRS.

According to IRS, IRS is neither involved in offering, nor responsible for,  tax-time financial products. Nonetheless, IRS stated that it addresses  these types of products on its website because it is important for  taxpayers to understand the terms of the loan products, which constitute  an agreement between them and the third-party lender. Although IRS is  not statutorily required to collect data on tax-time products, according to  IRS officials, the agency retains information on use of the products.  Specifically, IRS compiles information from tax returns that indicates  whether the taxpayer also applied for a financial product. IRS also issues  guidance to EROs on reporting these data through its Handbook for  Authorized IRS e-File Providers of Individual Income Tax Returns (Pub.  1345). IRS makes the usage data publicly available on its website, and  provides it on a biweekly basis to industry participants that are members  of an IRS working group on security issues. In addition to researchers  and consumer advocacy groups, federal entities also use these data,  including the National Taxpayer Advocate, who leads IRS’s Taxpayer  Advocate Service—an independent office in IRS whose objectives include  mitigating systemic problems that affect large groups of taxpayers. As  industry data on product use are generally limited, agencies and  researchers rely on IRS for this information.

section_title: Tax Credits and Protecting Americans from Tax Hikes Act of 2015
paragraphs: Refundable tax credits include the Earned Income Tax Credit (EITC) and  the Additional Child Tax Credit (ACTC). The credits are termed  refundable because, in addition to offsetting tax liability, any excess credit  over the tax liability is refunded to the taxpayer. EITC provides tax  benefits to eligible workers earning relatively low wages. For tax year  2018, the maximum EITC amount available was $6,431 for taxpayers  filing jointly with three or more qualifying children, and $519 for individuals  without children. In 2017, EITC provided more than $65 billion to about 27  million taxpayers. ACTC is the refundable portion of the Child Tax Credit  and provides tax relief to low-income families with children.

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made  several changes to the tax law. One of its provisions stipulates that funds owed taxpayers claiming EITC or ACTC refunds for a tax year cannot be  released before February 15 to allow IRS time to review these returns for  potential fraudulent activity. This change became effective on January 1,  2017. For the 2018 tax filing season (January through April 2018),  refunds for taxpayers who claimed these tax credits were not available in  bank accounts or prepaid cards until February 27, 2018.

section_title: IRS Data on Use of Tax-Time Financial Products Have Some Limitations, but When Combined with Other Available Data Suggest Product Offerings Have Evolved IRS Data for 2016–2018 Do Not Accurately Reflect Product Use and IRS Has Not Updated Reporting Guidance to Tax Preparers
paragraphs: IRS data on tax-time financial products for 2016–2018 do not accurately  reflect product use and IRS has not updated reporting guidance to tax  preparers. IRS data for 2008–2016 and information from industry  participants and a consumer advocacy group’s reports suggest that  trends in the market for tax-time financial products include the decline of  refund anticipation loans and that refund transfers became the most used  product. Industry data also indicate that product fees for refund transfers  increased in 2018; multiple other fees can be associated with tax-time  products. New tax-time products and product features continue to be  introduced.

Data collected by IRS are the primary source of information on the use of  tax-time financial products and are used by federal entities, policymakers,  regulators, researchers, and consumer groups. However, we identified  some limitations in the IRS data related to use of refund anticipation  loans, refund advances, and refund transfers.
subsections: section_title: Tax-Time Financial Products Have Evolved Since 2012
paragraphs: Despite limitations with IRS data on product use by tax year, our analysis  of multiyear trends from these data, supplemented with data collected by  the National Consumer Law Center and from Securities and Exchange  Commission filings, suggests that use of refund anticipation loans  declined, the refund advance was introduced while refund transfers have  become the most used tax-time product.
subsections: section_title: Refund Anticipation Loans
paragraphs: Applications for refund anticipation loans declined sharply from 2010 to  2012, according to IRS data and consumer groups reports. According to a  2010 study, the volume of refund anticipation loans peaked in 2002 with  12.7 million taxpayers. Volume began to decline at a faster rate  between 2010 and 2011. According to a report by the National Consumer  Law Center and the Consumer Federation of America, banks stopped  offering the products in 2012 after the loans came under the scrutiny of  federal banking regulators. IRS data continued to show use of refund  anticipation loans after 2012 but with banks out of the market for refund  anticipation loans, it is unclear what types of financial institutions were  offering the loans. Consumer advocates with whom we spoke agree that  nonbank lenders such as payday lenders likely offered the loans;  however, we were not able to identify any. The consumer advocates,  researchers, and industry participants with whom we spoke also were not  able to provide us with any current information about these lenders.

The IRS Taxpayer Advocate Office, the Financial Crimes Enforcement  Network, and consumer advocates have long raised concerns about  refund anticipation loans. For example, in 2007 the National Taxpayer  Advocate expressed concerns about how the loans were offered to  consumers and whether consumers adequately understood the product.  Consumer advocates questioned the high interest rates the loans could  carry, how loan fees reduced EITC benefits taxpayers received, and the  ramifications of borrower default. In a 2008 advance notice of proposed  rulemaking, IRS and the Department of the Treasury also shared concerns that refund anticipation loans offered tax preparers an incentive  to fraudulently inflate refund claims and to market the loans to taxpayers  who might not understand the full cost of the product.

Banking regulators raised concerns as well. OCC and FDIC noted  consumer protection and safety and soundness risks to banks that  offered refund anticipation loans. FDIC encouraged consumers to have  tax refunds directly deposited into their own bank accounts and raised  concerns about other options that claimed to speed up a refund for a  sizable cost, according to FDIC officials. The Office of Thrift Supervision,  which had supervisory authority over federal thrifts at the time, ordered a  medium-sized thrift to cease making refund anticipation loans in 2010.  In part due to concerns expressed by OCC, national banks stopped  offering the loans by 2010 and FDIC-supervised banks stopped offering  them by 2012.

An IRS decision also contributed to FDIC enforcement actions on refund  anticipation loans. Before 2011, IRS used a tool called the debt indicator  that acknowledged whether any of a taxpayer’s refund could be used to  pay certain outstanding debts. IRS provided the debt indicator to tax  preparers at the time the taxpayer’s return was filed electronically. Banks  used the debt indicator in their underwriting tools to help determine a  borrower’s likelihood of loan repayment. FDIC determined that without the  debt indicator, a bank would have to develop and adopt a more robust  underwriting process to make these loans in a safe and sound manner.  According to FDIC, IRS’s elimination of the debt indicator created a safety  and soundness concern because it removed a key data element used for  determining a borrower’s ability to repay. Losing this information  increased the risk of loss for lenders and at that time helped inform  FDIC’s consent orders with two banks under its supervision to stop  offering refund anticipation loans. In 2011 (the first tax season without the  debt indicator), the number of returns with a refund anticipation loan  indicator reported by IRS decreased to 1.17 million from 6.9 million in the  prior year.

IRS data continue to show use of refund anticipation loans after 2012,  albeit at a much lower volume. For example, in 2016, IRS data show  about 468,500 returns with a refund anticipation loan indicator and in  2017 the number appeared to spike to about 1.7 million. However, as  discussed earlier, the data for these two years may be misleading  because they likely conflate refund anticipation loans with refund  advances. In 2018, IRS created a separate reporting category for refund  advances and the 2018 data show about 356,000 returns with a refund  anticipation loan indicator as of October 2018.

section_title: Refund Transfers
paragraphs: Use of refund transfers—which allow for direct deposit of refund checks  through temporary accounts that banks open for taxpayers—far exceeded  use of refund anticipation loans and refund advances since 2008,  according to IRS data. The number of taxpayers who used a refund  transfer more than doubled from 2008 through October 2018 to exceed  21 million. As banks stopped offering refund anticipation loans in 2012,  refund transfers (also known as refund anticipation checks) began to  increase. Unlike other tax-time financial products generally only available  early in the tax season (which generally runs through mid-April), refund  transfers are usually available after April.

However, IRS data on refund transfers since 2016 have limitations.  Although a refund transfer is not required to get a refund advance, a  number of industry experts told us that almost all taxpayers who apply for  a refund advance also apply for a refund transfer. But because tax  preparers could select only one product indicator when reporting use of  tax-time financial products, they could report a refund advance or a  refund transfer, but not both. As discussed previously, IRS made changes  in 2018 to allow preparers to add information about other product use but  has not issued explanatory material about the changes.

section_title: Refund Advances
paragraphs: In 2016, a few banks began offering refund advances to taxpayers.  Refund advances are no-fee, nonrecourse loans.

It is difficult to determine usage trends for this product, although available  data indicate an increase in use from 2016 to 2017.

First, accurate IRS data on refund advances are not available for  2016 and 2017 because IRS did not provide an option for tax  preparers to report refund advance products. As previously discussed,  IRS added a separate reporting category for refund advances in 2018.  As of October 17, 2018, IRS data show about 1.65 million returns with  a refund advance indicator.

Second, publicly available data from industry and other sources  (consumer advocacy and research organizations) are limited.  According to data reported by the National Consumer Law Center,  major tax preparation companies facilitated the sale of about 365,000  refund advances in 2016. According to industry sources, use  increased to about 1.63 million in 2017, when one of the largest tax  preparation companies began offering refund advances. Industry data  for 2018 were not yet publicly available at the time of this report.

Third, taxpayers often obtain refund advances and refund transfers in  tandem. But as discussed previously, IRS reporting indicators did not  include an option for reporting use of multiple products until 2018.

Use of refund advances also may have increased in 2017 because tax  preparers increased the size of the advances. One lender that offers  refund advances to tax preparers told us that the driving factor in demand  for refund advances was the available loan amount. The maximum  advance amount that tax preparers offered taxpayers in 2016 was $750.  In 2017, the maximum increased to $1,300.

Most industry participants and consumer groups told us that they believe  that provisions of the PATH Act requiring IRS to delay issuance of EITC  or ACTC returns and associated refunds until after February 15 led to an  increase in demand for refund advances. They said that the delay puts  pressure on taxpayers eligible for EITC or ACTC who depend on getting  their refund early in the tax season (a refund advance can help mitigate  the impact of this delay). Others stated that an increase in demand due to  the PATH Act is possible, but the correlation between the two cannot be  determined. One industry provider suggested that increased demand for  refund advances also could be the result of marketing by tax preparation  companies.

section_title: Limited Public Data Suggest Refund Transfer Fees Generally Increased in 2018
paragraphs: Our analysis of publicly available data about product fees for refund  transfers showed that fees increased in 2018. In particular, our analysis of  fee data collected by the National Consumer Law Center shows that in  2014–2017 refund transfer fees charged by paid tax preparers remained  generally unchanged at between $32.95 and $34.95. According to fee  information we were given during our undercover visits, paid tax  preparers generally charged their customers $39.95 or $49.95 during the  2018 tax filing season for a refund transfer that sometimes included both  federal and state tax refunds. In one case the fee was $65, which  included a paper check disbursement. Also in 2018, we found that online  providers of tax filing services and software charged online filers who  prepared their own returns between $12 and $39.99 for a refund  transfer.

According to our analysis, factors that can affect the fee a taxpayer pays  for a refund transfer include the following:

Filing method. Our review of providers’ websites shows that  taxpayers who filed their own returns online using preparer software  paid an average fee of $31.13 in 2018, which was lower than the  $39.95 or $49.95 that paid preparers charged their customers.

Disbursement method. The manner in which the taxpayer chooses  to receive a tax refund may affect the fee. For example, our review of  industry literature indicates that one bank set the fee at $29.95 if the  refund was disbursed to a prepaid card offered by an affiliate vendor  or at $39.95 if the refund was directly deposited or disbursed as a  check. Another bank gave tax preparers the option to offer a free  refund transfer for disbursement onto a prepaid card, $15 for a direct  deposit, or $20 for a paper check.

Incentives offered to tax preparers by banks. Incentives from  banks for tax preparers can increase fees for taxpayers. Our review of  banks’ promotional materials for tax preparers also indicates that  some bank providers offer tax preparers different fee structures for a  product—that is, the preparers can charge a higher fee to earn a  rebate. For example, one bank offered a tax preparer the option to  provide a refund transfer to clients for $39 (which includes an $8  incentive paid to the tax preparer) or for $29 (no incentive payment).  On their websites, two banks marketed the no-incentive option to tax  preparers as a way to be competitive (by offering low-cost options to  their customers).

Using a refund advance. According to a report by the National  Consumer Law Center, one bank set a higher fee for a refund transfer  if taxpayers also applied for a refund advance. When taxpayers used  only a refund transfer, the fee was $29.95 for the federal refund and  an additional $9.95 for the state refund, for a total of $39.90. If the  taxpayer also applied for a refund advance (a no-fee product), the  refund transfer fee was $44.95. Thus, taxpayers paid $5.05 more for a  refund transfer if they also received a refund advance.

Our analysis found that, in addition to the product fee, taxpayers may be  charged other fees when they use a refund transfer.

State refund transfer. In some cases, the refund transfer fee covered  the deposit of a federal and a state refund. In other cases, the fee only  covered the federal refund. In these cases, if the taxpayer received a  state refund, the tax preparer charged an additional fee of $10 or $12.

Disbursement services. According to documentation we reviewed, a  tax preparer may charge an additional fee of $25 if taxpayers choose  to get their refund as a paper check or $7 for a cash transfer to a third  party.

Prepaid card use. The long-term use of prepaid cards used to  disburse a refund may add to the overall cost of getting a tax product.  We reviewed cardholder agreements and fee schedules for several  prepaid cards commonly used to disburse funds from a tax refund and  found they generally carry monthly fees of about $5. The issuer of the  prepaid cards also may charge consumers a fee every time they  access cash at automated teller machines, deposit more money onto  the card, or do not use the card for a certain period of time.

Software fees. Companies that design tax preparation software may  charge a fee or fees associated with the tax product. Taxpayers may  pay one or more of these fees when they use a refund transfer to  receive their tax refund. The bank deducts these fees from the  taxpayer’s refund after receiving funds from IRS or the state taxing  authority. The fee categories are technology fee (up to $18 in our  review), a transmission fee that may be a fixed amount (such as $2)  or a variable amount, and a processing fee of $6.
subsections: section_title: Comparative Fee Scenarios
paragraphs: To determine how the fees associated with a refund transfer can affect  the total tax preparation fees a provider may charge a taxpayer, we  reviewed fee data we collected. We then identified the types and totals of  fees generally associated with tax products and created four possible  scenarios based on this analysis (see fig. 2). We designed two scenarios  with online self-filers (taxpayer uses a refund transfer and taxpayer does  not use a refund transfer) and two scenarios with paid preparers  performing the filing (taxpayer uses a refund transfer and taxpayer does  not use a refund transfer).

section_title: Tax-Time Financial Products Have Continued to Evolve Since 2016
paragraphs: Recent and emerging developments in the market for tax-time financial  products include higher loan amounts and new products, according to our  analysis of selected tax preparers’ websites and marketing materials, and  information we were given during our undercover visits. For example, in  2018 refund advances became available to online filers. They previously  were offered only to taxpayers who obtained paid tax preparation services  in person (at a “storefront”).

The maximum amount for a refund advance has continued to increase. In  2016, the maximum loan amount available to a taxpayer was $750. In  2018, the maximum loan amount available was $3,250 and for 2019, one  preparer has offered an advance of up to $3,500. One industry participant  told us that the industry in general is in a race to increase borrowing limits  to remain competitive and attract more customers.

In 2018, banks offered a new product that combines the features of a  refund anticipation loan and a refund advance. The product allows the  taxpayer to apply for a refund advance (up to a fixed amount) with no fee  or finance charges, the option to apply for an additional loan with a fee  (similar to a refund anticipation loan), or a combination of the two  products known as a hybrid. For 2018, two banks offered this additional  loan (not to exceed $1,000) at an annual percentage rate of 29.9 percent.  For 2019, one bank offered taxpayers the option of a no-fee advance of  up to $1,000, or an interest-bearing loan of $2,000, $3,000, or $5,000  based on the expected refund. The interest-bearing loans would carry an  annual percentage rate of 26.07 percent in addition to a fee of $30–$75,  depending on the loan amount. Also for 2019, one national tax  preparation company has offered the option of a no-fee advance of up to  $3,500 or a fee-based advance of up to $7,000, which would carry an  annual percentage rate of 35.9 percent.

In addition, demand for refund transfers has increased among online self- filers. As more people file their own tax returns by using web-based  software, the number of refund transfers used by self-filers may continue  to increase. Because few tax preparers offer refund advances to online  self-filers, taxpayers are still more likely to get a refund advance from a  paid tax preparer.

Finally, issues relating to the applicability of TILA disclosure requirements  to refund transfers could affect the market for tax-time products.  According to representatives of two consumer advocacy organizations,  deferment of tax preparation fees until the refund is received constitutes  an extension of credit; therefore, refund transfers should be treated as  loan products. Tax preparers and a policy research and education  organization with whom we met do not believe that refund transfer fees  meet the definition of a loan.

Should regulators decide that a refund transfer constitutes an extension  of credit, and would therefore be a credit transaction with a finance  charge, refund transfers would become subject to provisions of TILA.  These changes could affect taxpayers’ access to this product as well as  product pricing. According to Securities and Exchange Commission filings  of some tax preparers, if refund transfers were successfully characterized  as such, the additional requirements and costs could limit their ability to  offer these products to clients.

Refund advances were promoted by providers as a fee-free, interest-free  credit product, and thus TILA disclosure requirements are generally not  considered applicable for them. However, new interest-bearing credit  products announced for 2019 may be subject to consumer protection  regulations.

section_title: Lower-Income and Some Minority Taxpayers Were More Likely to Use Tax- Time Financial Products for Various Reasons
subsections: section_title: Our Analysis Found That Lower-Income, African- American, and Single Taxpayers Were More Likely to Use Tax-Time Financial Products
paragraphs: Using FDIC data, we conducted a multivariate regression analysis to  examine the relationship between economic and demographic variables  and tax-time financial product use. This approach allowed us to test the  significance of the relationships between each variable and the likelihood  of using tax-time financial products, while controlling for other factors.
subsections: section_title: Income-Related Characteristics
paragraphs: Lower-income households were more likely to use tax-time financial  products than higher-income households, particularly when they used  paid tax preparers to file their taxes, according to our analysis of 2017  FDIC data. More specifically, we estimated that households with  incomes between $20,000 and $39,999 were more likely to use tax-time  financial products to receive their tax refunds more quickly through paid  tax preparers than households with incomes of $60,000 or more. For  example, we estimated that households with incomes between $20,000 and $29,999 were 34  percent more likely to use tax-time financial products than households  with incomes of $60,000 or more; and households with incomes between $30,000 and $39,999 were 61  percent more likely to use the products than households with income  of $60,000 or more.

Moreover, our analysis of FDIC data suggests that households that  received EITC were more likely to use tax-time financial products,  compared to households that did not receive EITC.

Our results also suggest that wealth, as measured by homeownership,  was associated with the household decision whether to use tax-time  financial products. Homeowners were 34 percent less likely to use tax- time financial products than non-homeowners, controlling for other  factors.

section_title: Other Characteristics, Including Race, Age, and Household Head
paragraphs: Households of some minority groups were more likely to use tax-time  financial products when filing tax returns than white households. For  example, using FDIC data, we estimated that African-American  households were 36 percent more likely to use tax-time financial products  than white households after controlling for other factors. Other research  (a 2013 study) found that African Americans were more likely to use  refund anticipation loans than white individuals.

According to our analysis of 2016 IRS data, which included information  about tax-time financial product use and locality, use of tax-time financial  products was more concentrated in some areas of the South and the  West (see fig. 3).

Our analysis of FDIC data further suggests that other characteristics  associated with use of tax-time financial products include age and  household type. For example, households headed by younger persons  (15–39 years old) were more than twice as likely to use the products as  households headed by older persons (60 or older), controlling for other  factors.

Households headed by single adults with families were more likely to use  tax-time financial products than households headed by married couples.  For example, according to our analysis of FDIC data, we estimated that  households headed by unmarried females with families were 76 percent  more likely to use tax-time financial products than households headed by  married couples, controlling for other factors. Using IRS data from 2016,  we found that a higher proportion of product users filed as unmarried  heads of household, compared to the general tax filing population. Among  those who used tax-time financial products, about 39 percent filed as  single, 22 percent filed as married, and 37 percent as unmarried heads of  household.

section_title: Reasons for Using Refund Products Include Obtaining Cash Faster and Not Paying Tax Preparation Fees Up Front
paragraphs: Reasons to use tax-time financial products include more quickly obtaining  cash from the expected tax refund, not having to pay tax preparation fees  out of pocket, and obtaining cash more cheaply than with alternative  short-term funding options, according to our review of federal and industry  reports.
subsections: section_title: Quick Access
paragraphs: Taxpayers generally might have to wait weeks for refunds from IRS:

Taxpayers who file paper returns can expect to receive their refund  about 6–8 weeks after the date on which IRS receives their return,  according to IRS guidance.

Taxpayers who file electronically generally can expect to receive their  refunds within 21 days, or faster if they opt to have refunds deposited  directly into their bank accounts.

As previously discussed, IRS must delay payments of refunds on  which EITC, ACTC, or both are claimed until at least February 15 of  each year. Effectively, the refunds might not be disbursed to bank  accounts (or prepaid cards) of tax filers until the end of the month.

In contrast, users of tax-time products can obtain cash very quickly. For  example, refund advance recipients generally receive loan funds within  24 hours of applying, and in some instances within the same hour they  apply, according to selected tax preparer documents and websites that  we reviewed. Refund transfer products also allow those who do not have  the option of directly depositing refunds into a temporary account instead  of waiting longer to receive a paper check. According to our analysis of  IRS data from 2016, tax-time financial product users were more likely  than other taxpayers to receive their tax refunds by direct deposit.

Taxpayers may use tax-time financial products because they need cash  quickly. Studies we reviewed found that product recipients tend to have  pressing financial obligations. One study’s review of available literature  from 2010 found that product recipients tend to live paycheck-to- paycheck or lack sufficient savings to cover prior, current, or future  spending. Another study published in 2010 found that recipients use the  products to pay for pressing financial obligations, both expected and  unexpected, and for their tax preparation. According to the study, many  users of tax-time products become delinquent on rent, utilities, and other  expenses during the winter with the expectation that they will be able to  pay obligations after receiving tax refunds. As one study found, the  annual tax refund represents the largest single cash infusion received all  year by about 40 percent of checking account holders.

section_title: Tax Preparation Fees Not Paid Out of Pocket
paragraphs: Lower-income taxpayers also use tax-time financial products to defer  payment of fees related to tax return preparation, according to federal  government and industry reports that we reviewed. Tax preparation fees  vary greatly based on the tax forms used, including the EITC worksheet.  One of the largest national tax preparation chains reported that its  average tax preparation fee was between $205 and $240 in 2017.

Free Filing Services   The Internal Revenue Service (IRS) offers the  following free filing services:  Fillable forms. IRS offers forms that can be  completed online and electronically submitted  to IRS. The forms are available without age,  income, or residency restrictions.  Free file software. IRS, in partnership with  the Free File Alliance (members of the tax  software industry), provides free online filing  options to eligible taxpayers. Twelve leading  tax software providers make a version of their  products available exclusively at IRS.gov for  taxpayers with an adjusted gross income up  to $66,000 (in 2018).  Volunteer Income Tax Assistance. The  program provides free basic income tax  preparation with electronic filing by IRS- certified volunteers to qualified individuals,  including to persons who earn $55,000 or  less, have disabilities, or have limited  proficiency in English.  Tax Counseling for the Elderly. The  program provides free tax preparation by IRS- certified volunteers to all taxpayers,  particularly those 60 or older. Program  volunteers specialize in pension and  retirement-related issues unique to seniors.

Consumers may perceive any costs associated with tax-time financial  products and tax return preparation as lower than they actually may be  because the costs are not paid out of pocket. Fees for the products and  tax return preparation are deducted from the refund before it reaches the  consumer. In general, studies have found that the transparency of a  payment method affected the payer’s willingness to spend. One  consumer advocacy organization representative posited that paying for  tax-time financial products and tax preparation from a refund makes  consumers less sensitive to the real cost of tax-time products and  preparation services.

Instead of using tax-time financial products to defer payment of tax  preparation fees, lower-income taxpayers can access free filing services  through several IRS programs (see sidebar). However, these options do  not allow taxpayers to use tax-time financial products to access refunds  faster.

IRS estimates that about 70 percent of taxpayers are eligible to access its  free filing software, and we estimated about 3 percent of taxpayers use  this service. According to IRS officials, while IRS does not have a  marketing budget to promote the free file programs, the predominant  reason so few taxpayers use them is because there are many free tax  preparation options on the market, such as tax preparation software.

section_title: Higher Refunds and Tax Preparation Assistance
paragraphs: Taxpayers also may use paid tax preparers because they do not think  they can fill out tax returns on their own, believe that preparers will help  them receive higher refunds, or both, according to federal government  and industry reports we reviewed. For taxpayers who did not use tax-time  financial products, we did not find a clear association between paid tax  preparation and higher average refunds. On the other hand, for taxpayers  who used tax-time financial products, we found that average tax refunds  were higher for taxpayers who filed through paid tax preparers than for  taxpayers who self-filed online (see table 2). According to IRS data,  nearly all taxpayers who used refund loan products filed their taxes  through paid tax preparers, as refund advances were not available online  until the 2018 tax filing season. There may be various reasons for the  association between higher refunds, paid tax preparation, and product  use. Those who use tax-time financial products tend to be eligible for tax  credits such as EITC, which can increase the size of tax refunds. Fifty- four percent of EITC claimants used a paid preparer. However, a 2017  study found that the combination of paid tax preparation and tax-time  financial product use was associated with relatively high incorrect tax  payments (specifically, overpayments of EITC compared to online self- filing and product use or no product use).

Furthermore, our analysis of IRS data found that taxpayers who used tax- time financial products received higher refunds on average than those  who did not use tax-time financial products, regardless of tax filing  method—although other factors might explain this association. For  example, taxpayers who have high refunds have a greater incentive to  use the products than taxpayers who have relatively small refunds or owe  taxes.

section_title: Tax-Time Financial Products Cheaper Than Alternatives
paragraphs: For lower-income taxpayers, tax-time products generally provide more  cash at a lower cost than other small-dollar loan alternatives such as  payday loans, auto title loans, and pawnshop loans, according to our  review of federal government and industry reports. The amounts of  alternative loan products are based on the value of the collateral the  consumer provides. Average loan amounts are $150 for pawnshops,  about $500 for payday loans, and under $1,000 for automobile title loans,  according to industry statistics and CFPB and other studies. In contrast,  refund advances were offered for up to $3,250 for the 2018 tax filing  season.

Furthermore, the alternative products generally include fees, unlike refund  advances. For example, fees for payday loans generally range from $10  to $30 per $100 borrowed. Automobile title lenders generally charge a  fixed price per $100 borrowed, with a common fee limit of 25 percent of  the loan per month. In contrast, refund advances are offered at no cost to  the consumer.

Tax-time financial products also may be easier to access because, unlike  alternative loans, they generally can be obtained without regard to credit  history. However, tax-time financial products generally are only available  during tax season.

Loans provided by nonfinancial companies (often called fintech firms) are  another source of short-term financing. However, fintech firms generally  provide much larger loan amounts than tax-time financial products, and  include fees, unlike refund advances.

section_title: Providers We Reviewed Generally Disclosed Required Information but Some Disclosure Practices May Hinder Consumer Decision- Making
paragraphs: The federal banking regulators oversee banks that offer tax-time financial  products and IRS sets standards of practice for certain service providers  (including some tax preparers). While our nongeneralizeable review found  that selected banks and tax preparers generally followed existing OCC  and IRS disclosure requirements, some tax preparers’ disclosure  practices may present challenges for consumers trying to compare  product options.
subsections: section_title: Industry Participants Are Subject to Varying Levels of Oversight
subsections: section_title: Banks and Settlement Service Providers
paragraphs: FDIC, the Federal Reserve, or OCC are responsible for the safety and  soundness supervision of banks within their authority (which offer tax-time  financial products) and may have supervisory authority over third-party  service providers (which provide settlement services). We identified five  banks that partnered with several national tax preparation chains in  recent years to offer tax-time financial products (refund transfers and  refund advances). Of the five banks, FDIC supervised one medium-sized  and one small bank, OCC supervised two medium-sized banks, and  Federal Reserve supervised one medium-sized bank.

As previously discussed, FDIC, the Federal Reserve, and OCC are to  conduct full-scope, on-site risk-management examinations of each of their  supervised banks at least once in each 12–18 month period. FDIC  officials told us that its regular safety and soundness examinations may  include an examination of the bank’s tax-time financial product offerings.  OCC officials told us that they examine tax-time financial products in  every annual examination of the banks they supervise that offer these  products.

Because the five banks each has total assets of less than $10 billion, the  three regulators also are responsible for enforcing compliance with federal consumer financial laws (such as TILA and the Electronic Fund  Transfer Act) that govern disclosure requirements for certain tax-time  financial products. Officials from the regulators told us that they received  few complaints about tax-time financial products offered by their  supervised banks. We discuss the disclosure requirements and  compliance with the requirements in more detail later in this section.

The regulators’ consumer compliance examiners also may review a  bank’s tax-time financial products—if, for example, a bank offers a new  product or there are a number of consumer complaints about a current  product. Examiners employ a risk-focused approach with a focus on  consumer harm in selecting products to evaluate for compliance with  applicable consumer laws and regulations. Furthermore, compliance  examiners may decide, based on the potential for consumer harm and a  bank’s compliance management system, that there is enough residual  risk to scope the product into the examination. FDIC officials said that a  bank with a lot of activity in the market for tax-time financial products  would have to assure examiners that it had performed appropriate due  diligence.

Regulators also can take other oversight actions, ranging from  enforcement to raising awareness among consumers. In 2015, CFPB  took an enforcement action, along with the Navajo Nation, to ban an  owner of four tax preparation franchises from the market and levy civil  penalties for understating refund anticipation loan rates and deceiving  customers about the status of their tax refunds. Our search of CFPB’s  complaint database did not identify any consumer complaints on tax-time  financial products. CFPB published a blog post in February 2018 that  describes the different tax-time financial product options and the process  for obtaining them, and cautions consumers to consider all fees, charges,  and timing associated with the products.

FTC staff we interviewed told us that supervision authority over many  financial services providers has been given to CFPB, but that FTC still  has the authority to enforce many financial statutes and rules, including  rules administered by CFPB. FTC brought an enforcement action in  2017 against an online tax preparation provider alleging that it failed to  secure consumer accounts. FTC officials also told us that, while they  received numerous complaints on tax-related issues, FTC’s complaint  database does not separately classify complaints based exclusively on  tax-time financial products.

FTC also has issued guidance to educate consumers regarding tax- related scams and other consumer protection issues that arise during tax  time, and to businesses, including tax professionals, to help them detect  cyber threats. FTC also co-sponsors a series of educational events for  consumers and businesses surrounding tax identity theft awareness  week.

section_title: Software Developers
paragraphs: Software companies we interviewed stated that they are subject to IRS  regulations relating to electronic filing of tax returns. Software developers  provide tax software to tax preparers so that they may file tax returns  electronically and assist taxpayers in obtaining tax-time financial  products. One software company told us that this involves working with  IRS to ensure that returns can be electronically submitted, IRS can  receive data, and the software is in compliance with IRS’s required data  schemas.

section_title: Tax Return Preparers
paragraphs: IRS officials said that IRS does not monitor or have direct oversight  authority over tax-time financial products, but requires some paid tax  preparers to meet standards of practice or other requirements. The extent  to which IRS has oversight over paid preparers depends partly on  whether the preparer is a tax practitioner or unenrolled preparer.

Tax practitioners are subject to regulations (Circular 230) that establish  standards of practice. For example, practitioners must return tax records  to clients, exercise due diligence in preparing tax returns, and submit  records and requested information to IRS in a timely manner. IRS officials  told us that they monitor the suitability of these practitioners and their  adherence to the rules. Additionally, certain tax practitioners known as  enrolled agents generally are required to pass a three-part examination  and complete annual continuing education, while attorneys and certified  public accountants are licensed by states but are still subject to Circular  230 standards of practice if they represent taxpayers before IRS.

Alternatively, unenrolled preparers—the remainder of the paid preparer  population and the majority of paid preparers—generally are not subject  to these requirements. In 2011, IRS issued final regulations to establish a  new class of registered tax return preparers to support tax professionals,  increase confidence in the tax system, and increase taxpayer compliance.  However, the U.S. District Court for the District of Columbia ruled in 2013  and the U.S. Court of Appeals for the District of Columbia Circuit affirmed  in 2014 that IRS lacked sufficient authority to regulate all tax preparers.  IRS officials also told us that all authorized IRS e-file providers have to  follow certain requirements to be able to file tax returns electronically.

section_title: Banks and Tax Preparers in Our Review Generally Followed Guidance for Disclosing Product Fees, but All Related Fees Were Not Always Disclosed Clearly or Early in Process
paragraphs: We found selected authorized IRS e-file providers generally followed the  requirements established by IRS on the disclosure of product fees, and  banks generally followed the disclosure guidance relating to tax-time  financial products issued by OCC. (We conducted nongeneralizeable  reviews of website content, industry documents, and disclosures made  during our undercover visits.) Two of the five banks we reviewed are  regulated by OCC. One of the two FDIC-supervised bank and the Federal  Reserve-supervised bank told us that they voluntarily follow OCC  guidance.

More specifically, IRS established the following disclosure requirements  for authorized IRS e-file providers, generally known as EROs, that relate  to tax-time financial products:

EROs must obtain taxpayers’ written consent before disclosing any  tax return information to other parties in relation to an application for a  tax product.

EROs must ensure taxpayers understand that if they use a tax  product, the refund will be sent to the bank and not to them.

If taxpayers choose to use a fee-based loan, EROs must advise that  the product is an interest-bearing loan and not an expedited refund.

EROs must advise taxpayers that the bank may charge them interest,  fees, or both, in the case of any shortages on the refund.

EROs also must disclose all deductions to be made from the expected  refund and the net amount of the refund.

In 2015, OCC issued risk-management guidance for national banks that  offer tax refund-related products. This guidance advises that banks  should specify to customers, as applicable,  the total cost of the tax product, separately from the tax preparation  cost;  that total costs will be deducted from and reduce the refund amount;  that tax refunds can be sent directly to the taxpayer without the  additional costs of a tax product;  that customers with deposit accounts can receive their refund without  incurring fees through direct deposit in about the same time as it  would take to receive a tax refund-related product; and  the ongoing periodic maintenance and transaction fees related to any  product intended for long-term use.

In addition, OCC’s guidance establishes that banks should clearly  disclose all material aspects of the product in writing before the consumer  applies or pays any fees for a tax-time financial product.

Also, representatives of the American Coalition for Taxpayer Rights, a  group representing the leading tax preparation, tax software, and bank  providers, told us that its members signed a joint statement with attorneys  general from six states on disclosure practices for refund transfers. The  member providers agreed to explain to taxpayers the different options for  filing and receiving a tax refund, including no-cost options, and the  associated costs and features of each option. The providers also agreed  to disclose the optional nature of the products, the timing of the refund,  and to present the disclosures in a clear and conspicuous manner  understandable by a reasonable consumer.

Our nongeneralizeable review of documents received from selected  banks and tax preparers found disclosures generally followed OCC  guidance or IRS requirements, respectively. However, our review of these  documents and selected tax preparer websites also found—and our  undercover visits of selected tax preparers suggested—that the level of transparency on product fees varied and product fees and information  were not always clearly disclosed.

Bank documents were more likely than information provided by paid  preparers (in person or online) to include more disclosures about the  fees and terms of tax-time financial products. For example, of the 12  bank documents we reviewed, all disclosed that funds would be sent  to the bank if the taxpayer used a tax product. Almost all the bank  documents disclosed the fees associated with the product and all  disclosed that the fees would be deducted from the refund. In  contrast, while written disclosure is not required, less than one third of  ERO documents disclosed that the taxpayer using a tax-time financial  product would receive funds from the bank instead of IRS.

However, almost all the documents are presented to taxpayers after  returns have been prepared and preparers have determined that  taxpayers qualified for a product. The timing of when a tax preparer  makes these disclosures would pose a challenge for taxpayers  looking to compare prices for different providers. That is, they would  not learn of the total fees—partly because the paid preparer could not  determine the amount of some tax preparation fees until well into the  preparation of the tax return.

A taxpayer trying to determine the cost of using a tax refund to pay for  online tax preparation services only would be able to compare the  prices of two of the eight online providers we reviewed. The remaining  six did not disclose this fee in a prominent way—with some  disclosures made in small print or requiring navigation through several  pages after the product page—or at all.

A taxpayer choosing to file taxes using the services of a paid tax  preparer in a brick-and mortar-location, and opting to use the refund  to pay for tax preparation fees, would be unlikely to be able to  compare prices among different providers. For example, during six  of our undercover visits, our investigators explicitly requested  literature on product fees. However, the preparers stated that they did  not have the literature available or only provided us with business  cards and other promotional material.

Our analysis shows that providers do not consistently explain  products or disclose fees to taxpayers. For example, providers told us,  and industry documents show, that a refund transfer is not required to  get a refund advance. However, during our site visits, tax preparers  tied the use of a refund transfer to a refund advance four out of five  times. In two of these cases, the tax preparer included the fee for a  refund transfer as part of processing an advance product, while in  another two cases the tax preparer said that a refund transfer was  required with the advance. Also, during our site visits, three of the  nine tax preparers did not disclose the cost of a refund transfer.

Appendix III provides more information on our analysis of bank and tax  preparer disclosure practices.

According to industry participants, only taxpayers expecting a refund can  qualify for a tax product; consequently, the tax preparer generally cannot  determine whether the taxpayer qualifies until after the tax return is  completed. Once this is determined, the tax preparer must request the  taxpayer’s consent to offer a tax product. EROs with whom we met told  us they may disclose fee information at various points throughout the  process of tax preparation, and do so verbally or through their in-store  computer interface. Bank disclosures are provided to the taxpayer before  the product application has been submitted.

Some researchers and representatives from consumer advocacy  organizations with whom we met were concerned about the timing of  disclosures of tax-time financial product fees. Consumer advocates said  disclosures given to taxpayers were inadequate, unhelpful, or timed in  such a way as to prevent meaningful comparison shopping. Specifically,  one consumer advocacy organization said that taxpayers they serve do  not understand the fees associated with filing through preparers.  Representatives from another consumer advocacy organization said that  taxpayers do not know the total cost for tax-related financial products and  services until they already have taken steps to file their returns. In its  2017 Report to Congress, the National Taxpayer Advocate recommended  that IRS require all e-file participants offering tax-refund financial products  to provide a standard “truth-in-lending” statement to help taxpayers better  understand the terms of the refund anticipation loan product. IRS did not  adopt the National Taxpayer Advocate’s recommendation but agreed that  e-file providers should be transparent about the costs associated with the  loan products offered to taxpayers as part of the return preparation  process.

As previously discussed, courts have determined that IRS does not have  sufficient authority to regulate individuals who are solely tax preparers  and not licensed by IRS—in effect, the majority of the paid preparer  population. Previously, we asked Congress to consider legislation  granting IRS the authority to regulate paid tax preparers, if it agreed that  significant paid preparer errors existed. As of March 2019, this  Congressional action we have recommended remains open. The lack of  consistency about the timing of fee disclosures for tax-time financial  products may add to the rationale for Congress to consider regulating  preparers. Such statutory authority could allow IRS to require that tax  preparers make tax-time financial product disclosures or ensure  meaningful transparency in the sale of the products.

section_title: Conclusions
paragraphs: For lower-income taxpayers with pressing financial obligations, tax-time  financial products can offer an alternative to higher-cost short-term  products such as payday loans. Taxpayers can purchase tax-time  financial products from many tax preparers; however, according to our  review of selected tax preparers and banks, the price and associated fees  of these products can vary. And disclosure practices by some paid tax  preparers may pose challenges for consumers looking to compare prices  for different providers.

IRS is an essential source for data on tax-time financial products, but to  date IRS has offered limited options to tax preparers for accurately  reporting usage of all available tax-time products. Furthermore, IRS has  not informed tax preparers about changes made in reporting options and  has not informed users of IRS’s product data about known issues with the  data. Consequently, data on product usage are not reliable. Improving the  quality of data collected on these products would help ensure that federal  agencies, policymakers, regulators, consumer advocacy groups, and  researchers have quality information to report on tax policy and consumer  protection issues and inform their decision-making.

section_title: Recommendations for Executive Action
paragraphs: We are making a total of two recommendations to IRS.

The Commissioner of Internal Revenue Service should communicate data  issues regarding the refund anticipation loan indicators for tax years 2016  and 2017 and the refund transfer indicators since tax year 2016—for  example, by attaching explanatory material to the dataset.  (Recommendation 1)

The Commissioner of Internal Revenue Service should improve the  quality of tax-time financial product data collected; for example, by  allowing authorized e-file providers to indicate more than one type of tax- time financial product for each return or by informing tax preparers of the  addition of new product definitions and instructions on how to accurately  code the products. (Recommendation 2)

section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to IRS, FDIC, Federal Reserve, OCC,  CFPB, and FTC for review and comment. IRS provided written  comments, which are reproduced in appendix IV and discussed below.  FDIC, Federal Reserve, OCC, CFPB, and FTC provided technical  comments, which we incorporated as appropriate.

In its comments, IRS concurred with both recommendations, and  described how it planned to address them. In response to our first  recommendation, IRS stated that it plans to provide the appropriate  notations with the datasets. In response to our second recommendation,  IRS stated that it plans to pursue programming changes and clarify  instructions for tax return preparers to promote accurate coding of refund- related products. We believe that these actions, if implemented, would  address our recommendations and improve the quality of data IRS  reports on these products.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees and IRS, FDIC, Federal Reserve, OCC, and  FTC. This report will also be available at no charge on our website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or clementsm@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix V.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report (1) describes trends in the market for tax-time financial  products and product fees and examines the reliability of IRS data on  these trends, (2) describes characteristics of those who use tax-time  financial products and factors that influence the decision to obtain the  products, and (3) describes regulatory oversight of industry participants  and the disclosure of information on product fees and terms.

To examine trends in the use of tax-time financial products, we used  2008–2018 Internal Revenue Service (IRS) data compiled from tax filings  to determine the types and use of these products. We assessed the  reliability of these data by interviewing IRS officials about the controls and  quality assurance practices they used to compile these data. We  determined the data alone did not provide a reliable count of refund  transfers, refund anticipation loans, or refund advances in 2016, 2017,  and 2018, but were adequate to suggest general trends when  supplemented with other information. To supplement the IRS data, we  collected information from reports issued by the National Consumer Law  Center, reviewed Securities and Exchange Commission filings for two  selected tax preparers, and interviewed representatives from National  Consumer Law Center and both tax preparers on the offerings of tax-time  financial products. We selected these preparers because they are major  providers of tax preparation services and tax products.

To identify and review trends in product offerings, we reviewed the  websites, promotional materials, and other industry literature including  Securities and Exchange Commission filings of a nongeneralizeable  selection of four providers of online tax preparation services, three tax  preparers with physical locations that also offer services online, and four  banks. We also discussed changes in the market and product offerings  with nine of the industry providers with whom we met. We accessed  provider websites before and during the 2018 tax season. The tax  preparation firms were selected because they are national tax preparation  chains, and the five banks were selected because they partnered with the  national tax preparation chains and major developers of tax preparation  software. In addition, we reviewed studies related to these products  published by GAO, federal agencies, four consumer advocacy and  research groups, and two academic researchers. We used these studies  primarily to corroborate findings from our data analysis. We focused on studies from 2010 and later; however, we also reviewed an older report to  gain a greater understanding of how the market for tax-time financial  products evolved. We identified these studies through expert  recommendations and citations in studies.

To examine trends in fees for tax-time financial products, we collected  fee-related information from several different sources (because of limited  publicly available industry data). All of the information cannot be used to  generalize our findings to the retail tax preparation industry.

Product fees. For 2018, we collected information on product fees  from six paid tax preparers and four banks. For tax years 2014 to  2017, we used product fee information as reported by the National  Consumer Law Center. For 2018, we also reviewed fee data from six  providers of online tax preparation software, two that provide services  in person and online, and four that only provide services online. We  selected these providers after conducting internet searches and  reviewing reports by consumer advocates and federal agencies. Data  elements included fees for refund transfers and refund advances. For  2018, data elements also included the dollar amount for the incentives  banks offered tax preparers for each refund transfer sold.

Ancillary product fees. We collected information on ancillary product  fees from four tax preparers, four banks, and three software  developers for tax years 2017 and 2018. Data elements included fees  for disbursement methods such as prepaid cards and paper checks  and other charges related to the use of a tax-time financial product  such as technology and transmission fees.

Tax preparation fees. We collected information on tax preparation  fees from eight tax preparers with physical locations and eight online  providers of tax preparation services for 2018. Data elements included  fees for federal and state filing.

Aggregate fees. We collected aggregate tax-time financial product,  ancillary product, and tax preparation fee information from studies  issued by consumer protection advocates.

We collected the above information from websites, advertising materials,  and public filings with the Securities and Exchange Commission of tax  preparers, banks, and software developers.

To identify some of the demographic and economic characteristics of  product users, we used data from the Bureau of the Census and the  Federal Deposit Insurance Corporation (FDIC) from 2011, 2013, 2015,  and 2017 to conduct a multivariate regression analysis to determine the  influence of individual characteristics on the decision to obtain a product.  We statistically controlled for various income, education, and  demographic factors. While the FDIC data contain a rich set of  demographic and economic variables, they include limited data on  characteristics specifically related to tax filing. To identify specific tax-filing  characteristics associated with product use, we also used a probability  sample of data from IRS from the 2014, 2015, and 2016 tax years to  calculate the percentages of taxpayers who used tax-time financial  products according to various tax-filing characteristics, including tax filing  status and tax filing method. We also used the sample data to calculate  the percentage of taxpayers who used free filing services, including free  file software, programs, and fillable forms. We reviewed documentation  on and conducted testing of the data we used and determined they were  sufficiently reliable for reporting economic, demographic, and tax-filing  characteristics associated with product use. For more detailed information  on our analysis of characteristics associated with tax-time financial  product use, see appendix II.

To better understand user characteristics associated with the decision to  obtain a tax-time financial product identified by our analysis, we reviewed  relevant federal and industry reports on the financial needs of individuals  with characteristics similar to taxpayers who obtained these products. We  focused on reports from 2010 and later. We also reviewed our prior  studies and studies from the Consumer Financial Protection Bureau  (CFPB) on alternative credit products and compared their features and  fees to those of tax-time financial products. In addition, we interviewed  representatives from consumer groups, four Low-Income Taxpayer  Clinics, and IRS’s Taxpayer Advocate Service to obtain their perspectives  on characteristics associated with tax-time financial product users.

To describe the regulatory oversight of industry participants associated  with tax-time financial products, we reviewed relevant federal laws and  regulations, and reports and guidance documents from IRS and federal  regulators, including the CFPB, FDIC, the Board of Governors of the  Federal Reserve System, Office of the Comptroller of the Currency  (OCC), and Federal Trade Commission. We inquired about consumer  complaint data related to tax-time financial products at the federal  regulators and interviewed officials from the federal agencies and  representatives from five tax preparation providers, five banks and bank  affiliates such as settlement service providers, four consumer advocacy  organizations, three software developers, two researchers, one provider  of alternative financial services, and one industry group to gain their  perspectives on the benefits and risks of the tax-time financial products  and how any related concerns were being addressed. The tax preparation  firms were selected because they are national tax preparation chains, and  the five banks and three software developers were selected because they  partnered with the national tax preparation chains. The four consumer  advocacy organizations, two researchers, alternative financial service  provider, and industry group were selected for their experience and to  provide a range of perspectives.

To review how product terms and fees are disclosed by tax preparers, in  February 2018 GAO investigators acting in an undercover capacity visited  a nongeneralizeable sample of nine randomly selected tax preparers in  Washington, D.C., Maryland, and Virginia to inquire about tax-time  financial products. We selected the two states and Washington, D.C. to  ensure a mixture of state and local laws governing the products and  providers. From the two states and Washington, D.C., we selected one  metropolitan statistical area based on the concentration of product users  and the proximity to lower-income households. We randomly selected  three individual tax preparers in each of the three metropolitan statistical  areas to visit, based on proximity to taxpayers in lower-income  households and to ensure a mixture of urban and rural communities and  company sizes. We visited offices of large tax preparation chains and  single-office tax preparation businesses. Results cannot be used to  generalize our findings to the retail tax preparation industry. Our  investigators posed as taxpayers seeking tax preparation services who  wanted to pay for the tax preparation fees with the expected refund or  obtain an advance based on their anticipated tax refund. They requested  available documents associated with tax preparation, refund advance and  refund transfer products, and different disbursement options and fees.  Because GAO investigators did not experience the tax preparation or the  product application process, we were not able to assess the timing of any  disclosures typically made after the tax return preparation process would  begin. In addition, we received some consumer-facing disclosures and  product agreements that were typically provided during the product  application process from two tax preparers and two banks.

We also conducted a content analysis of websites of eight selected tax  preparers that offer tax-time financial products. The tax preparers were  selected as national providers of tax preparation services with an online  presence, and the results are not generalizeable to the retail tax  preparation industry. Three of the providers offer tax preparation services  online and through physical retail locations and five of the providers offer  their services online only. We reviewed these websites to understand the  extent to which they disclose fees to the taxpayer for tax preparation  services, tax-time financial products, disbursement, and additional  products or services, and to review the ease with which these disclosures  are accessible.

In addition to consumer-facing disclosures we received from providers  with whom we met, we searched online for additional disclosures  provided by the tax preparers and banks in our review and reviewed  seven disclosures from two national tax preparation chains and 12  disclosures from five banks offering tax-time financial products. We then  compared the disclosures against IRS and OCC requirements for  disclosure for product terms and conditions. IRS established certain  disclosure requirements for authorized IRS e-file providers. OCC  instructs banks it supervises to make certain disclosures to product  consumers. More specifically, we analyzed tax products and fee  disclosures obtained from our undercover visits of selected tax preparers,  online reviews, and directly from tax preparers and banks to determine  the type and timing of disclosures made in these instances and whether  they were consistent with IRS disclosure requirements and followed OCC  guidance.

We conducted this performance audit from July 2017 to April 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. We conducted our related  investigative work in accordance with standards prescribed by the Council  of the Inspectors General on Integrity and Efficiency.

section_title: Appendix II: Analysis of Characteristics Associated with Tax-Time Financial Product Use
paragraphs: This technical appendix outlines the development, estimation, results, and  limitations of the econometric model and other data analysis we  described in the report. We undertook this analysis to better understand  the characteristics associated with the decision to obtain a tax-time  financial product.
subsections: section_title: Data
paragraphs: Federal Deposit Insurance Corporation. To assess the characteristics  associated with tax-time financial product use, we used data from the  Federal Deposit Insurance Corporation’s (FDIC) National Survey of  Unbanked and Underbanked Households for 2011, 2013, 2015, and  2017, which is a supplement of the Current Population Survey. We used  the following variables on households and heads of households to  examine how various demographic and economic characteristics are  related to the use of tax-time financial products:

Household income.

Household type.

Homeownership status.

Race and ethnicity of the head of household.

Educational attainment of the head of household.

Age of the head of household.

Head of household has children.

Household used refund anticipation loan or a tax preparation service  to receive a tax refund faster than the Internal Revenue Service (IRS)  would provide it in the past 12 months. This is a dummy variable,  which equals 1 if the household used products and 0 otherwise.

A refund anticipation loan is a tax-time financial product. Based on  our interviews and other research reports, refund anticipation  loans and other tax-time financial products (including refund  anticipation checks) may be used by consumers to get their tax  return faster than IRS could provide it. We refer to this variable as  “used tax-time financial product” for simplicity in the report, and we  explain the relevant caveats and limitations below.

This variable is the basis for the sample used for this analysis.

See table 3 for the estimated distributions of these variables for all  households, as well as households that used tax-time financial products  in 2017.

We also examined the relationship between the use of tax-time financial  products and being unbanked, as well as the association between using  tax-time financial products and alternative financial services (those  offered outside the banking system). We used additional data from  FDIC’s National Survey of Unbanked and Underbanked Households on  the following variables:

Household used other alternative financial services in the past 12  months, including nonbank check cashing, nonbank money orders,  payday loans, and pawn shops.

Household used prepaid card(s) in the past 12 months.

Household was unbanked in the past 12 months.

See table 4 for estimated distributions of household responses to  questions related to unbanked status and usage of other alternative  financial services for all households, as well as households that used tax- time financial products in 2017.

IRS. To further identify tax-filing characteristics associated with tax-time  financial product use and trends, we also used data from a probability  sample of 2 percent of all electronically filed tax returns from IRS for tax  years 2014, 2015, and 2016. In 2016, the sample size was 2,952,418,  representing a population of 147,625,598 tax returns. According to IRS,  the sample is representative of all electronically filed tax returns for the  relevant tax years. In this sample, IRS provided data on the following  variables:

Tax filing method, including online (self-filed using tax software) or  through a paid practitioner (including tax preparers with physical  storefronts).

Taxpayer used free filing services from IRS, including the Free File  program and free fillable forms.

Tax filing status, including single, married, and head of household.

Disbursement options for tax refunds (direct deposit or paper check)  or tax balance due.

Tax refund amount.

Tax year.

Tax-time financial product use, including refund anticipation loans,  refund anticipation checks, or no tax-time financial products. In tax  year 2016, we estimated that about 18 percent of taxpayers used a  tax-time financial product, plus or minus less than 1 percentage point.

We also used IRS data from the Statistics of Income division for tax year  2016 to assess the geographical concentration of product use at the zip- code level. Zip code data from the IRS Statistics of Income division are  based on population data that was filed and process by IRS in tax year  2016. Due to some data suppression from IRS for privacy purposes, zip  codes with less than 100 tax returns are excluded from the data. As a  result, in 2016 the total returns represented in the IRS zip code data are  145,302,140 and the number of tax returns with a tax-time financial  product was 21,654,760, meaning about 15 percent of tax filing units in  these data used a tax-time financial product.

section_title: Methodology
paragraphs: Regression analysis using FDIC data. Using FDIC data, we conducted  a multivariate regression analysis to examine the relationship between  each explanatory variable and tax-time financial product use. Specifically,  we estimated multivariate logistic regression models. Regression models  allow us to test significant relationships between economic and  demographic variables and the likelihood of using tax-time financial  products, while controlling for other factors.

We used logistic regression models because our dependent variable is  binary. The dependent variable represents whether a household used  tax-time financial products. We collapsed “no” and “did not know/refused”  into a single category for our regression analysis, so that the dependent  variable is equal to 1 if the household used tax-time financial products  and 0 otherwise.

Logistic regressions allow the relationships between various  characteristics and tax-time financial product usage to be described as  odds ratios. Odds ratios that are statistically significant and greater than  1.00 indicate that households or heads of households with those  characteristics are more likely to use tax-time financial products. Odds  ratios that are less than 1.00 indicate that households or heads of  households with those characteristics are less likely to use tax-time  financial products. For categorical variables, this increase or decrease in  the likelihood of product use is in comparison to an omitted category, or  reference group. For example, the odds ratio for households headed by  African Americans is statistically significant and 1.36. This implies that the  odds of tax-time financial product use for households headed by African  Americans are 1.36 times the odds of use for households headed by  whites, holding other factors constant. Put another way, households  headed by African Americans are about 36 percent more likely to use tax- time financial products than households headed by white individuals, if  other conditions remain constant. This result and others are discussed  further in the results section below. We also present 95 percent  confidence intervals, which helps clarify the statistical significance of the  odds ratios.

Our baseline estimates were derived from logistic regressions that  accounted for the survey features of the FDIC data. Our main regression  results used data from the 2017 survey year. We also estimated logistic  regressions using data from the 2015, 2013, and 2011 survey years,  using the same variables when possible. Our baseline specification  includes explanatory variables for race and ethnicity, education, age,  household type, income, and homeownership. We used groups of  indicator variables or categorical variables to control for all characteristics.  In other specifications, we included controls for children, unbanked status,  use of alternative financial services other than tax-time financial products,  state indicators, and region indicators to check the robustness of our  results.

We also assessed the sensitivity of our analyses by restricting the  analysis to households that only answered “yes” or “no” to tax-time  financial product use. We excluded answers of “did not know/refused,” so  that the dependent variable is equal to 1 if the household used tax-time  financial products and 0 if the household did not use tax-time financial  products.

In a more limited analysis, we merged data from the 2017 FDIC data,  which is the June 2017 supplement of the Current Population Survey,  with the 2017 Annual Social and Economic Supplement, which is the  March 2017 supplement of the Current Population Survey. We performed  the additional analysis because the March 2017 supplement has data on  tax-filing characteristics, including tax credits used by households. Given  the structure of the Current Population Survey, some households were  surveyed in both the March and June 2017 supplements, and those  households comprise the sample used in this part of the analysis. We  identified those represented in both supplements using household and  person identifiers, as well as data on sex, race and ethnicity, and age.  Using this merged sample, we estimated logistic regressions that both did  and did not account for the survey features of the data. We included the  same explanatory variables as our baseline estimates, along with  indicators for use of the Earned Income Tax Credit, Additional Child Tax  Credit, and Child Tax Credit.

Analysis of IRS data. Using the 2 percent sample of IRS data, we  estimated the percentages of tax filers with varying tax-filing  characteristics by year and average refund amounts by year. All  estimates are weighted at the tax filing unit level. Using the IRS’s zip code  data from the Statistics of Income division for 2016, we calculated the  number of total tax filing units and tax filing units who used tax-time  financial product at the zip code level.

section_title: Caveats and Limitations
paragraphs: Regression analysis using FDIC data. Our results have limitations and  should be interpreted with caution. For example, our analysis identifies  correlations between characteristics and tax-time financial product use  and not causal relationships. Moreover, there may be variables that are  correlated with tax-time financial product use that are not included in our  models. For example, we are not able to account for community  characteristics that may influence the decision to use the products due to  data limitations. We used statistical tests for multicollinearity (high  intercorrelations among two or more independent variables) and  goodness of fit to check the validity of the model to the extent possible,  given the use of complex survey data.

Our analysis of the characteristics associated with the use of tax-time  financial products uses a relatively small number of observations. For  example, we observe 798 households that used these products in the  2017 survey year, representing about 2.4 percent of households (plus or  minus 0.2 percentage points), and that is the benchmark utilization rate  against which the results should be interpreted. Moreover, IRS data  indicate that more than 20 million tax filers used tax-time financial  products in 2016, representing about 20 percent of tax filers who filed  their taxes electronically. These data sets use different units of analysis,  and there can be multiple tax filers in one household, especially for those  who use Earned Income Tax Credit. However, comparing the two  suggests that the survey data may not include all users of tax-time  financial products. Given the question used to measure the dependent  variable, our analysis focuses on those who use tax-time financial  products to get their tax refund more quickly. While a key reason people  use tax-time financial products is to meet cash needs, there may be other  reasons people use the products, including covering the cost of tax  preparation.

Our results may not generalize to other time periods. There have been a  number of changes in the market for tax-time financial products in recent  years. Our results may not generalize to all products currently available in  the market. However, our results from 2017 are generally similar with the  2015, 2013, and 2011 survey years, despite a number of changes to the  tax-time financial product market during these years. Our findings suggest  that similar types of households have utilized tax-time financial products  regardless of industry and market changes, particularly if households  used paid preparers and tax-time financial products to expedite their tax  refunds.

Our analysis focuses on households that used tax-time financial products  and accessed them through paid preparers. However, taxpayers also  may have accessed specific types of tax-time financial products when  they used online software to file their own taxes. For example, individuals  who file their own taxes online may use the products to cover the cost of  the software that helps them prepare their taxes. The characteristics of  people who use products for these reasons may be different than what  we found in our analysis.

Analysis of IRS data. The IRS data are representative of tax returns filed  electronically and not of tax returns filed by other means, including by  paper. The results may not generalize to years for which we do not have  data.

The indicators in the data for specific types of tax-time financial products,  including the indicators for refund anticipation loans and refund  anticipation checks have some significant limitations. In tax years 2014– 2016, IRS only allowed tax-time financial products to be coded as refund  anticipation loans or refund anticipation checks (that is, there was no  code to indicate that two or more products were used together). However,  there were some major changes in the industry during this period,  particularly with regards to refund anticipation loans, that suggest that  these indicators do not measure the same types of products over time.  Given the limitations of the definitions of specific tax-time financial  products, most of our analysis focuses on the universe of tax-time  financial products in the IRS data and not on differences by specific types  of products.

section_title: Results
paragraphs: Regression analysis using FDIC data. Our analysis suggests a number  of economic and demographic characteristics are associated with tax- time financial product use, particularly when purchased through a tax  preparer to expedite the tax refund, after controlling for other factors. In  2017, relatively lower-income households were more likely to use the  products than higher-income households. Households headed by single  women with families were more likely to use tax-time financial products  than households headed by married couples. Furthermore, householders  who owned their homes were less likely to use tax-time financial  products. African American households were more likely to use the  products compared to white households. Finally, relatively younger  households were more likely to use the products than older ones. The  results of the main specification of our logistic regression are presented in  table 5.

Our results for other specifications using 2017 data were generally  similar. For example, adding an additional control for unbanked status did  not substantively change the results. In alternative specifications that  included an indicator for use of other alternative financial services, we  found a significant and positive correlation between using tax-time  financial products and other alternative financial services, including  nonbank check cashing, nonbank money orders, payday loans, and pawn  shops. Moreover, including state and region indicators did not  substantively affect the results. Using the sample restricted to just “yes”  and “no” responses also did not substantively change the results.

Our results for other years were generally similar, with some exceptions.  For example, in other survey years prior to 2017, we found that in addition  to African American households, Native American households also were  more likely to use tax-time financial products than white households.  Moreover, education and children were significant correlates in prior  survey years.

Analysis of IRS data. We found that nearly 1 in 5 taxpayers who filed  their taxes electronically used tax-time financial products each year from  2014 to 2016, while less than 3 percent of filers used free filing services  available through IRS during the same period.

We also found that in 2016, tax-time financial product use was associated  with receiving tax refunds through direct deposit, which is a faster way to  receive a tax refund than paper check. Users of tax-time financial  products also were more likely to file as heads of household (tax filing  status) than taxpayers who did not use tax-time financial products.  Moreover, taxpayers who used the products received higher tax refunds  on average than taxpayers who did not use the products, especially when  they used paid tax preparers to file their taxes.

Finally, analyzing the zip code of the filers, we found that use of tax-time  financial product was concentrated in some areas of the South and the  West.

section_title: Appendix III: Disclosure of Product and Related Fees and Terms
subsections: section_title: Disclosure of Product Fees and Terms
paragraphs: Our limited nongeneralizeable review of documents received from  selected banks and tax preparers found disclosures generally followed  Office of the Comptroller of the Currency (OCC) guidance or Internal  Revenue Service (IRS) requirements for fees disclosure, respectively.  However, we noted from our undercover visits of selected tax preparers  that the extent and clarity of the disclosures offered to customers varied.  Furthermore, in our review of selected tax preparers’ websites, we found  that fees and information about products were not always clearly  disclosed.
subsections: section_title: Undercover Visits
paragraphs: All nine tax preparers we visited offered the option to pay for the tax  preparation fees with the tax refund by using a refund transfer, but they  did not always clearly communicate how these options work. For  example, three preparers did not disclose the refund transfer fee, and in a  few instances, the refund transfer was provided alongside a refund  advance and we were not given the option to pay for the tax preparation  fees out of pocket. In other cases, the refund transfer fee was disclosed,  but the product was not always identified as optional (that is, not required  for tax preparation).

During six of our undercover visits, our investigators explicitly requested  literature on product fees. However, the preparers either stated they did  not have the literature available or only provided us with business cards  and promotional material. The other three times we did not ask for, and  were not offered literature on product fees, features, or terms.

In two of our visits, the tax preparers offered our investigators a refund  advance after we expressed an interest in getting the refund quickly. In  another two visits, we were offered unsolicited refund advances. When  offering the product, these four tax preparers bundled the refund advance  with a refund transfer (an optional product). By adding a refund transfer,  the tax preparer effectively added a fee-based product to the refund  advance, a product that otherwise is free to the taxpayer. During one of  the visits, we were offered a refund advance only after we specifically  asked for it.

section_title: Website Content Analysis
paragraphs: We reviewed the websites of eight selected providers of tax preparation  services. We found that while these providers generally disclosed product fees, these disclosures were not made in a consistent manner. For  example, all eight of the websites we reviewed offered taxpayers the  option to use the expected refund to pay for tax preparation fees. Most of  the time, the fee associated with this option was not clearly disclosed on  the website. Only two of the eight providers clearly disclosed this fee on  the products page; the other six did not disclose the fee in a prominent  way or at all. In addition, all five providers that offered refund advances  fully disclosed fee information for this product.

Three of the eight online tax preparation service providers had physical  locations in addition to their online presence. Of these three, only one  disclosed on its website the refund transfer fee for taxpayers who filed a  return in-person at one of their offices. For the second preparer with a  physical presence, the refund transfer fee quoted for the online service  was significantly lower than the fee we were quoted for in-person services  at an office. The third preparer with a physical and online presence did  not disclose the refund transfer fee for either the in-person service or  online filing.

section_title: Document Review
paragraphs: We received and reviewed seven disclosure documents originated by two  national tax preparation companies both of which are electronic return  originators (ERO) and 12 bank documents from five banks in the industry.  We compared the disclosure documents against IRS requirements for  disclosure of fees for tax products and we compared the bank documents  to OCC guidance related to disclosure of product, disbursement, and  additional fees. Both sets of documents in our nongeneralizeable review  generally disclosed the product fees in accordance with IRS requirements  or OCC guidance as appropriate. Bank forms, including disclosures, are  presented to taxpayers once they have decided to apply for a tax product.  This practice is consistent with OCC’s guidance, which states that the  details of a product should be provided to consumers before they apply  for it. However, our analysis found that almost all of these documents are  presented to taxpayers after returns have been prepared and tax  preparers have determined the taxpayers were qualified for a tax-time  financial product. The timing of when a tax preparer make these  disclosures would make it challenging for a taxpayer to compare product  prices from different providers or make more informed purchasing  decisions.

Moreover, all the ERO documents we reviewed with information on refund  advances disclosed that the taxpayer would be receiving a loan and not a  refund. However, of the six ERO disclosure documents that disclosed  fees, four disclosed additional fees that might be associated with tax  refund products, such as disbursement fees.

Of the 12 bank documents we reviewed, all disclosed that funds would be  sent to the bank if taxpayers used a tax product. Almost all the  documents disclosed the fees associated with the tax product and that  the fees would be deducted from the refund. And four of five documents  related to a loan product disclosed that the taxpayer would be receiving a  loan and not a tax refund. The majority of the documents also disclosed  that the taxpayer may receive the refund directly from the taxing authority  without incurring additional costs and within the same time frame without  using a tax product.

All the tax preparer documents and the banks’ disclosure documents  were brief and written in plain language. However, almost all the bank  application documents were longer than four pages and included  technical and industry language.

section_title: Disclosure of Disbursement Fees, Including on Prepaid Cards
paragraphs: Based on our document reviews of selected tax preparers and banks and  as suggested by our undercover visits of nine selected tax preparers, the  disclosure of fees for disbursing funds was inconsistent, particularly  around prepaid cards. Prepaid cards are often used to disburse funds  from a tax-time product. Based on our analysis of providers’ promotional  content, in some cases a tax preparer will offer prepaid cards as the only  disbursement option. The cards generally carry additional fees for long- term use (such as monthly, withdrawal, reload, and inactivity fees).  Prepaid cards usually are reloadable and can be used to pay bills and  make retail purchases. IRS does not have guidelines for disclosing fees  for the long-term use of prepaid card. However, OCC requires that banks  disclose if a tax product may be used on a long-term basis and disclose  fees associated with extended use of the product.

During our visits, seven of the nine tax preparers provided the option to  have the tax refund deposited on a prepaid card. However, only two of the seven preparers noted any potential fee information associated with  the short or long-term use of prepaid cards. These two preparers said that  there was no additional charge to have the taxpayer’s refund deposited  on a prepaid card, and the other five did not explain whether any fees  would be charged for this transaction.

Five of the seven preparers that offered a prepaid card explained that the  card could be used for transactions other than receiving the tax refund.  However, only two of the five disclosed any fee information associated  with long-term use of the card. Another two of the five preparers referred  our undercover agents to the issuer of the card for additional information.  The remaining preparer did not disclose that additional fees would apply  to long-term use of the card.

Four of the eight tax preparation websites we reviewed disclosed partial  information about fees related to the disbursement of funds to the  taxpayer. Three of the eight websites only disclosed disbursement fee  information related to use of prepaid cards. We found fee information in  one of the eight websites only after doing a word search. Fees associated  with the long-term use of prepaid card fees were not disclosed by three of  the six preparers that offered this disbursement option. Two websites  disclosed partial fee information and only one disclosed all the fees and  terms associated with the long-term use of a prepaid card. Six of these  websites advised the taxpayer to see the terms and conditions of the  card, four included a link to the terms and conditions of the card, and two  did not include a link.

Bank documents generally disclosed the fees associated with different  disbursement methods such as paper checks and prepaid cards;  however, fees related to the long-term use of prepaid cards were not  always disclosed. Almost half of the documents we reviewed that include  the use of a prepaid card did not acknowledge that fees were associated  with the long-term use of prepaid cards, while others included only partial  information or a general statement that “fees may apply.”

section_title: Appendix IV: Comments from the Internal Revenue Service

section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Karen Tremba (Assistant  Director), Nathan Gottfried (Analyst in Charge), Jessica Artis, Maurice  Belding, Evelyn Calderón, Farrah Stone, Kathleen McQueeney, Marc  Molino, Neil Pinney, Barbara Roesmann, Jessica Sandler, Erinn Sauer,  Erin Saunders-Rath, Michael Walton, and Helina Wong made significant  contributions to this report.

Fast facts: For many taxpayers, their income tax refund is the single largest cash infusion they receive all year. In 2017, more than 20 million taxpayers used refund advance loans and other financial products to get quick access to this cash. Lower-income and some minority taxpayers were more likely to use them.

We found that tax preparers don't always clearly communicate about fees associated with tax refund products. This may make it difficult for taxpayers to compare prices for these products.

We also found that IRS's data on the use of these products is inaccurate. We recommended that IRS take steps to improve the quality of this data.

Question-summary annotations: questions: question: What IRS data limitations has GAO identified?
answer: However, GAO identified some limitations in Internal Revenue Service (IRS) data on product use, including over- or under-counting of certain types of products.
child_questions: question: How has the IRS failed to address these limitations?
answer: IRS has not communicated these data issues to users and has not updated guidance to tax preparers on how to report new product use.
child_questions: question: What issues might this lack of communication cause?
answer: As a result, data users (including federal agencies and policymakers) have inaccurate information to inform their findings and decision-making.

questions: question: What did GAO's 2017 analysis of IRS, Census, and Federal Deposit Insurance Corporation data indicate?
answer: Lower-income and some minority taxpayers were more likely to use tax-time financial products, according to GAO analysis of 2017 data from IRS, the Bureau of the Census, and the Federal Deposit Insurance Corporation.
child_questions: question: What data supports this conclusion?
answer: Specifically, taxpayers who made less than $40,000 were significantly more likely to use the products than those who made more. African-American households were 36 percent more likely to use the products than white households.

question: Why were users motivated to use IRS products over alternatives?
answer: Product users tend to have immediate cash needs, according to studies GAO reviewed. For these users, tax-time financial products generally provide easier access to cash and more cash at a lower cost than alternatives such as payday, pawnshop, or car title loans.

questions: question: What did GAO analyze?
answer: GAO reviewed fee and product usage data; conducted a multivariate regression analysis to determine user characteristics; and analyzed disclosures of selected providers that are national chains and those of their bank partners.

question: Why did GAO conduct nongeneralizable undercover visits of tax preparers in the D.C. area?
answer: GAO conducted nongeneralizeable undercover visits of nine randomly selected tax preparers in the Washington, D.C. area to understand how they communicate fees and terms to taxpayers.
child_questions: question: How were preparers selected?
answer: Preparers were selected to ensure a mixture of regulatory jurisdictions, among other factors.

question: How else did GAO collect data?
answer: GAO reviewed laws, regulations, and guidance on the products, and interviewed IRS and other government officials and a nongeneralizeable selection of product and service providers, tax preparation companies, consumer groups, and academics.