Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, November 7, 1994 TAG: 9412070012
SECTION: BUSINESS PAGE: EX6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
The change in handling tax refunds was decreed by the Internal Revenue Service in an attempt to cut down on fraud by people receiving the refunds. It stretches out the time it will take, starting next year, to receive approval.
That delay will affect many people who get their money in a day or two by taking out a loan against the expected refund.
The loans are made by banks and finance companies working with tax preparation services.
Over the last six years, tax preparers have filed electronically clients' returns with the IRS. The agency has in the past sent back word electronically, often within a day, whether or not the refund was approved.
The lender would then make a loan to the taxpayer - after deducting its fee from the amount of the anticipated refund. The individual receiving the refund would, in turn, authorize direct deposit of the refund into the loan company's account.
That means the individual taxpayer would have his or her refund in a day or two, which is attractive for many people. The bank or other lender would have its fee, plus assurance that the money to cover the loan would be deposited directly by the government. And the IRS would have the form filed by computer, a method that it encourages because it saves the government time and money.
But the IRS said that the ability to get refunds so quickly also is an inducement for fraud, particularly for taxpayers who are due refunds under the earned income tax credit program for low-income working people.
The agency, therefore, plans to eliminate its notice of approval of expected refunds.
"The crooks take the money and run, and the taxpayers and banks get burned," Treasury Secretary Lloyd Bentsen said. "So, we're no longer going to tell the electronic filing operations whether a refund is likely to be coming. Taxpayers still will get any refund they're due, but we won't be sending out that notification."
Refund-anticipation loans have been widely criticized, however, because of the fee, which is usually $29 to $34, that lenders charge. That can equal two or more times the market rate of interest because the loan is outstanding for only a few weeks.
About 13.5 million returns were filed electronically this year, up from 7.5 million three years ago. About 10 million electronic returns this year involved tax-anticipation loans, and about 8.4 million of those were made on the basis of the early notification.
Joel Lytton, Roanoke district manager for H&R Block Inc., a nationwide tax preparation service, said his Kansas City, Mo., headquarters sent a "don't panic" message to its branches after the ruling was announced.
The bank used by H&R Block will continue refund-anticipation loans, Lytton said, but he assumes it will be more selective in the loans it approves. In the past, Lytton said, about 4 percent of refunds were denied in the early notification program, usually because the taxpayer owed back taxes or was delinquent in child support payments or had previously filed for bankruptcy.
Without the advance notification from the IRS, Lytton said, the bank will be at greater risk if it makes a loan in anticipation of a refund.
Lytton believes that the change in advance notification will not affect the number of clients who choose to file electronically.
With electronic filing, refunds are received much earlier, he said. The average time is two weeks if the refund is deposited in a bank electronically and three weeks if the money comes by mail.
The filing itself is faster and more accurate, Lytton said, and "you know it got there."
The second change comes from the Department of Housing and Urban Development. It ruled that mortgage lenders cannot accumulate unnecessary surpluses in escrow accounts.
Escrow accounts, financed from monthly payments in addition to principal and interest, are used to ensure prompt payment of such costs as real estate taxes, homeowner's insurance and private mortgage insurance.
The size and degree of surpluses have varied among lenders. Some accumulated several months worth of payments, while others have no surplus over what is needed to pay bills.
If there is a surplus, the lender must refund it, the HUD ruling says. Estimates of the average amount nationwide range from $150 to $250.
But don't spend the money yet.
For all new loans, lenders must comply with the new rules within six months. That could reduce slightly the amount of closing costs because many mortgage lenders have required sizable payments toward escrow at closing.
And to existing borrowers, the lenders have three years to return any excess money.
Several mortgage companies doing business in Roanoke declined to comment on the new regulation because they were still unfamiliar with its details.
by CNB