oversight

Tax Refund Products: Product Mix Has Evolved and IRS Should Improve Data Quality

Published by the Government Accountability Office on 2019-04-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office
             Report to Congressional Requesters




             TAX REFUND
April 2019




             PRODUCTS

             Product Mix Has
             Evolved and IRS
             Should Improve Data
             Quality




GAO-19-269
                                            April 2019

                                            TAX REFUND PRODUCTS
                                            Product Mix Has Evolved and IRS Should Improve
                                            Data Quality
Highlights of GAO-19-269, a report to
congressional requesters




Why GAO Did This Study                      What GAO Found
American taxpayers spent at least half      Trends in the market for tax-time financial products since 2012 include
a billion dollars in 2017 on financial
products—issued by banks, through           •   the decline of refund anticipation loans (short-term loans subject to finance
paid tax return preparers—to help               charges and fees),
them file taxes and get advances or         •   the rise in use of refund transfers (temporary bank accounts in which to
loans against tax refunds.                      receive funds), and
                                            •   the introduction of refund advances (loans with no fees or finance charges).
GAO was asked to review tax-time
financial products. Among other things,     More recent product developments include increased online access to products
GAO (1) described market trends and         for self-filers, higher refund advance amounts, the introduction of new products,
examined IRS data, (2) described            and for tax year 2019, the reintroduction of fee-based loans.
characteristics of product users and
factors that influence product use, and     However, GAO identified some limitations in Internal Revenue Service (IRS) data
(3) described product disclosure            on product use, including over- or under-counting of certain types of products.
practices.                                  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
GAO reviewed fee and product usage
                                            users (including federal agencies and policymakers) have inaccurate information
data; conducted a multivariate
                                            to inform their findings and decision-making.
regression analysis to determine user
characteristics; and analyzed               Lower-income and some minority taxpayers were more likely to use tax-time
disclosures of selected providers that      financial products, according to GAO analysis of 2017 data from IRS, the Bureau
are national chains and those of their      of the Census, and the Federal Deposit Insurance Corporation. Specifically,
bank partners. GAO conducted                taxpayers who made less than $40,000 were significantly more likely to use the
nongeneralizeable undercover visits of      products than those who made more. African-American households were 36
nine randomly selected tax preparers        percent more likely to use the products than white households. Product users
in the Washington, D.C. area to             tend to have immediate cash needs, according to studies GAO reviewed. For
understand how they communicate
                                            these users, tax-time financial products generally provide easier access to cash
fees and terms to taxpayers. Preparers
                                            and more cash at a lower cost than alternatives such as payday, pawnshop, or
were selected to ensure a mixture of
regulatory jurisdictions, among other       car title loans.
factors. GAO reviewed laws,                 GAO’s undercover visits with nine tax preparers, its review of selected provider
regulations, and guidance on the            websites, and review of documents obtained from selected banks and tax
products, and interviewed IRS and           preparers found disclosures generally followed requirements for disclosing fees.
other government officials and a            However, disclosure practices by some paid tax preparers may pose challenges
nongeneralizeable selection of product      for consumers. For example:
and service providers, tax preparation
companies, consumer groups, and             •   Preparers in GAO’s review generally indicated that they present taxpayers
academics.                                      with almost all of the documents with fee information after their tax returns
                                                have been prepared and the preparers determined the taxpayers qualified for
What GAO Recommends                             a tax-time financial product. The timing of these disclosures would pose a
GAO is making two recommendations               challenge for taxpayers looking to compare prices for different providers.
to IRS to make the collection of
product use data more accurate and          •   During six of nine undercover visits, GAO investigators explicitly requested
make data limitations known to users            literature on product fees but were not provided such information.
of the data. IRS concurred with both        •   Refund transfer fee information on websites GAO reviewed sometimes was
recommendations.                                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
View GAO-19-269. For more information,
contact Michael E. Clements at (202) 512-       may face challenges comparing prices.
8678 or clementsm@gao.gov.


                                                                                    United States Government Accountability Office
Contents


Letter                                                                                      1
               Background                                                                  3
               IRS Data on Use of Tax-Time Financial Products Have Some
                 Limitations, but When Combined with Other Available Data
                 Suggest Product Offerings Have Evolved                                   10
               Lower-Income and Some Minority Taxpayers Were More Likely to
                 Use Tax-Time Financial Products for Various Reasons                      23
               Providers We Reviewed Generally Disclosed Required
                 Information but Some Disclosure Practices May Hinder
                 Consumer Decision-Making                                                 32
               Conclusions                                                                40
               Recommendations for Executive Action                                       41
               Agency Comments and Our Evaluation                                         41

Appendix I     Objectives, Scope, and Methodology                                         43



Appendix II    Analysis of Characteristics Associated with Tax-Time Financial
               Product Use                                                                49



Appendix III   Disclosure of Product and Related Fees and Terms                           61



Appendix IV    Comments from the Internal Revenue Service                                 65



Appendix V     GAO Contact and Staff Acknowledgments                                      68


Tables
               Table 1: Types and Features of Tax-Time Financial Products                  4
               Table 2: Average Refund Amounts, by Tax Filing Methods and
                       Tax-Time Product Usage, 2014–2016                                  30
               Table 3: Characteristics of Households and Heads of Households,
                       2017                                                               50




               Page i                                   GAO-19-269 Tax-time Financial Products
          Table 4: Household Responses to Questions Related to
                  Unbanked Status and Alternative Financial Services
                  Usage, 2017                                                                       52
          Table 5: Factors Associated with Tax-Time Financial Product Use,
                  2017                                                                              58

Figures
          Figure 1: Overview of Participant Roles in Providing Refund
                   Transfer Products                                                                 6
          Figure 2: Illustrative Example of Refund Transfer Fees Based on
                   Filing Method and Use of Product                                                 20
          Figure 3: Proportion of Tax Returns with Tax-Time Financial
                   Products in 2016, by Zip Code                                                    26




          Abbreviations

          ACTC                       Additional Child Tax Credit
          CFPB                       Consumer Financial Protection Bureau
          EITC                       Earned Income Tax Credit
          ERO                        Electronic return originators
          FDIC                       Federal Deposit Insurance Corporation
          Federal Reserve            Board of Governors of the Federal Reserve System
          FTC                        Federal Trade Commission
          IRS                        Internal Revenue Service
          OCC                        Office of the Comptroller of the Currency
          Path Act                   Protecting Americans from Tax Hikes Act of 2015
          SSP                        settlement services provider
          TILA                       Truth in Lending Act


          This is a work of the U.S. government and is not subject to copyright protection in the
          United States. The published product may be reproduced and distributed in its entirety
          without further permission from GAO. However, because this work may contain
          copyrighted images or other material, permission from the copyright holder may be
          necessary if you wish to reproduce this material separately.




          Page ii                                            GAO-19-269 Tax-time Financial Products
                       Letter




441 G St. N.W.
Washington, DC 20548




                       April 5, 2019

                       The Honorable Elizabeth Warren
                       Ranking Member
                       Subcommittee on Financial Institutions and Consumer Protection
                       Committee on Banking, Housing, and Urban Affairs
                       United States Senate

                       The Honorable Tammy Duckworth
                       United States Senate

                       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


                       Page 1                                    GAO-19-269 Tax-time Financial Products
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


Page 2                                    GAO-19-269 Tax-time Financial Products
                     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.



Background
Tax-Time Financial   Table 1 provides an overview of tax-time financial products based on
Products             information gathered during our review.




                     Page 3                                     GAO-19-269 Tax-time Financial Products
Table 1: Types and Features of Tax-Time Financial Products

Product type                  Refund advances                                     Refund anticipation loans                  Refund transfers
Availability                  •   Begins when the Internal                        •   Begins when IRS accepts                •   Made available when tax return
                                  Revenue Service (IRS) accepts                       electronic returns, generally in           is filed, generally between
                                  electronic returns, generally in                    January, and activity typically            January and October
                                  January, and typically ends on                      ends in March.
                                  February 28a
Product terms                 •     Short-term loans                              •    Short-term, fee-based loans           •    Fee-based temporary bank
                              •     Several loan amounts available                •    Loan amount is up to the refund            account set up to receive tax
                                    from bank provider, taxpayer                       amount minus tax preparation               refunds by direct deposit
                                    must qualify (approval and loan                    fees, finance charges, and            •    Taxpayers responsible for one-
                                    amounts based on expected                          additional loan and preparation            time flat fee
                                    refund)                                            fees
                              •     Secured by expected refund                    •    Secured by expected refund
                                    (refund is collateral)                             (refund is collateral)
                              •     No fees                                       •    Taxpayers responsible for a
                                                                                       one-time fee and possibly other
                                                                                       charges
Method of                     •     Taxpayer pays no fees; tax                    •    Fees deducted directly from the       •    Fee deducted directly from
payment                             preparer generally pays fees to                    loan disbursement                          refund proceeds
                                    the bank provider
Timing for                    •     Funds disbursed within 24 hours               •    1-2 days upon loan approval           •    Tax refunds deposited to
receiving funds                                                                                                                   temporary bank account within
                                                                                                                                  typical IRS time frames
                                                                                                                                  (generally within 21 days from
                                                                                                                                  filing)
                                                                                                                             •    Taxpayer can receive
                                                                                                                                  remaining funds immediately
                                                                                                                                  thereafter (depending on
                                                                                                                                  method of disbursement)
Source: GAO analysis of product provider promotional materials. | GAO-19-269
                                                                 a
                                                                  Refund advances are generally offered only during the first two months of the tax season. According
                                                                 to two national tax preparation chains, this is because people with cash needs typically file early in
                                                                 the season.




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




                                                                 Page 4                                                    GAO-19-269 Tax-time Financial Products
•   Providers of tax preparation services include paid tax return preparers
    or electronic return originators (ERO). 1 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.




1
 A tax return preparer is any person who prepares for compensation, or who employs one
or more persons to prepare for compensation, all or a substantial portion of any return of
tax or any claim for refund of tax under the Internal Revenue Code. 26 U.S.C. §
7701(a)(36). An ERO, which is an authorized IRS e-file provider, originates the electronic
submission of the return to IRS. EROs also may act as paid preparers.




Page 5                                             GAO-19-269 Tax-time Financial Products
Figure 1: Overview of Participant Roles in Providing Refund Transfer Products




Regulators
Federal Banking Regulators               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



                                         Page 6                                     GAO-19-269 Tax-time Financial Products
    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). 2

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,


2
 12 U.S.C. § 1820(d)(4); Expanded Examination Cycle for Certain Small Insured
Depository Institutions and U.S. Branches and Agencies of Foreign Banks, 83 Fed. Reg.
67033 (Dec. 28, 2018).




Page 7                                           GAO-19-269 Tax-time Financial Products
      CFPB has examination and primary enforcement authority for banks with
      assets of more than $10 billion and any affiliates of such institutions. 3

      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   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.

IRS   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. 4


      3
       Not all consumer protection statutes were transferred. Some remain within the authority
      of the prudential regulators, regardless of the bank’s asset size. The non-transferred laws
      include the Fair Housing Act, the Servicemembers Civil Relief Act, and Section 5 of the
      Federal Trade Commission Act
      4
       Department of the Treasury, Regulations Governing Practice before the Internal Revenue
      Service, Circular No. 230 (Washington, D.C.: June 2014).




      Page 8                                              GAO-19-269 Tax-time Financial Products
                             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.


Tax Credits and Protecting   Refundable tax credits include the Earned Income Tax Credit (EITC) and
Americans from Tax Hikes     the Additional Child Tax Credit (ACTC). The credits are termed
                             refundable because, in addition to offsetting tax liability, any excess credit
Act of 2015                  over the tax liability is refunded to the taxpayer. 5 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. 6 One of its provisions stipulates that funds

                             5
                              See GAO, Refundable Tax Credits: Comprehensive Compliance Strategy and Expanded
                             Use of Data Could Strengthen IRS’s Efforts to Address Noncompliance, GAO-16-475
                             (Washington, D.C.: May 27, 2016) for more information.
                             6
                              The PATH Act was signed into law on December 18, 2015. The provision of this law that
                             restricts when a tax return can be issued was not effective until the 2017 tax filing season
                             for the 2016 tax year.




                             Page 9                                              GAO-19-269 Tax-time Financial Products
                             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.


                             IRS data on tax-time financial products for 2016–2018 do not accurately
IRS Data on Use of           reflect product use and IRS has not updated reporting guidance to tax
Tax-Time Financial           preparers. IRS data for 2008–2016 and information from industry
                             participants and a consumer advocacy group’s reports suggest that
Products Have Some           trends in the market for tax-time financial products include the decline of
Limitations, but When        refund anticipation loans and that refund transfers became the most used
                             product. Industry data also indicate that product fees for refund transfers
Combined with Other          increased in 2018; multiple other fees can be associated with tax-time
Available Data               products. New tax-time products and product features continue to be
                             introduced.
Suggest Product
Offerings Have
Evolved
IRS Data for 2016–2018       Data collected by IRS are the primary source of information on the use of
Do Not Accurately Reflect    tax-time financial products and are used by federal entities, policymakers,
                             regulators, researchers, and consumer groups. However, we identified
Product Use and IRS Has
                             some limitations in the IRS data related to use of refund anticipation
Not Updated Reporting        loans, refund advances, and refund transfers.
Guidance to Tax Preparers
Two Products Not             First, 2016 and 2017 IRS data may have underreported use of refund
Differentiated in 2016 and   advances and overreported refund anticipation loans. IRS officials told us
2017 IRS Data                that in 2016 and 2017, IRS made only three indicators available for tax
                             preparers to report tax-time financial products: no bank product, refund
                             anticipation loan, or refund anticipation check (that is, refund transfer). As
                             a result, based on our analysis, it is possible that tax preparers reported
                             refund advances as refund anticipation loans.

                             According to IRS officials, in 2016, IRS saw a large increase over the
                             prior year in the number of refunds associated with tax-time financial
                             product indicators. The agency performed an internal analysis on these
                             refunds to identify the products being used in the market and found a
                             direct relationship between this increase and new refund advance



                             Page 10                                     GAO-19-269 Tax-time Financial Products
                            products. They determined that the original definitions for the indicators
                            did not account for refund advance products.

                            In 2018, IRS expanded the indicator categories for tax-time financial
                            products to more accurately reflect the products available in the market,
                            including replacing the indicator for refund anticipation loans with two
                            separate indicators for “pre-refund advance products with a fee (RAL)”
                            and “pre-refund advance products with no fees” (most commonly known
                            as refund advances) and adding an open text field to note products not
                            otherwise covered.

                            Although IRS added another indicator category for refund advances, it
                            has not attached explanatory material to the dataset or otherwise made it
                            known to potential users of the dataset that the 2016 and 2017 data do
                            not distinguish between refund anticipation loans and refund advances.
                            Without explanatory material, users of the data, including the National
                            Taxpayer Advocate and policymakers, could be unaware of the
                            limitations.

Refund Transfers Also Not   Second, since 2016 IRS may have misreported the number of refund
Always Reported             transfers. A number of industry experts told us that almost all taxpayers
                            who apply for a refund advance also apply for a refund transfer. However,
                            tax preparers can select only one product indicator when reporting a
                            customer’s use of tax-time financial products, according to IRS officials.
                            Consequently, tax preparers can report a refund advance or a refund
                            transfer, but not both. Refund advances were introduced in 2016, so data
                            for the 2016, 2017, and 2018 tax seasons currently are affected. We
                            concluded that IRS data on refund transfer use prior to 2016 are not
                            meaningfully affected because our research shows that from 2012 to
                            2016, as we discuss later, most product users were using one product, a
                            refund transfer.

                            IRS officials told us that they had submitted a work request for filing
                            season 2018 to allow tax preparers to select more than one type of
                            product per tax return. The officials said that the request was denied due
                            to competing information technology priorities at IRS.

                            IRS officials told us that tax preparers instead could use an open text field
                            to indicate more than one product was used. IRS officials told us that the
                            open field originally was created to allow for new product lines that do not
                            fit existing descriptions. However, IRS has not provided additional
                            guidance to tax preparers informing them of the potential alternate use for
                            this field. Similarly, IRS has not informed tax preparers about the 2018


                            Page 11                                    GAO-19-269 Tax-time Financial Products
addition of a new indicator for refund advances and it has not updated its
Handbook for Authorized IRS E-File Providers of Individual Income Tax
Returns (Pub. 1345) on how to accurately code tax-time financial
products. Without this additional guidance, tax preparers may continue to
inaccurately report tax product information, making it challenging to
identify trends and potential concerns with taxpayers’ use of these
products. Furthermore, IRS has not made this issue known to potential
users of the dataset.

A strategic goal from IRS’s Strategic Plan (for fiscal years 2018–2022) is
to advance data and analytics. 7 Related to data, GAO guidance on
assessing the reliability of data states that reliable data can be
characterized as being accurate, valid, and complete. 8 In addition, federal
internal control standards state that management should internally and
externally communicate the necessary quality information to achieve
objectives. 9

As a result of the data conflation in 2016 and 2017 for refund advances
and refund anticipation loans, ongoing issues with reporting use of refund
transfers, and outdated guidance to tax preparers, users of the data
(including the National Taxpayer Advocate, policymakers, regulators,
researchers, and consumer groups) will have inaccurate information to
inform their findings and decision-making. 10




7
 Internal Revenue Service, Strategic Plan 2018-2022-Publication 3744 (Washington, D.C.:
April, 2018)
8
 GAO, Assessing the Reliability of Computer-Processed Data, GAO-09-680G
(Washington, D.C.: July 1 2009). Reliability means that data are reasonably complete and
accurate, meet the intended purposes, and are not subject to inappropriate alteration.
Completeness refers to the extent that relevant records are present and the fields in each
record are populated appropriately. Accuracy refers to the extent that recorded data reflect
the actual underlying information. Consistency, a subcategory of accuracy, refers to the
need to obtain and use data that are clear and well defined enough to yield similar results
in similar analyses.
9
 GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
(Washington, D.C.: Sept. 10, 2014)
10
  While IRS does not use data to monitor tax products, policy makers, regulators,
consumer advocates, academics, and other groups use these data to inform policy
decisions and monitor changes in the market and how those changes ultimately may
affect taxpayers.




Page 12                                            GAO-19-269 Tax-time Financial Products
Tax-Time Financial          Despite limitations with IRS data on product use by tax year, our analysis
Products Have Evolved       of multiyear trends from these data, supplemented with data collected by
                            the National Consumer Law Center and from Securities and Exchange
Since 2012
                            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.

Refund Anticipation Loans   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. 11 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. 12 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. 13 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

                            11
                              Urban Institute, Characteristics of Users of Refund Anticipation Loans and Refund
                            Anticipation Checks, (2010); report prepared at the request of the Department of the
                            Treasury.
                            12
                              National Consumer Law Center, The Party’s Over for Quickie Tax Loans: but Traps
                            Remain for Unwary Taxpayers, (February, 2012); report prepared with contributions from
                            the Consumer Federation of America.
                            13
                              See Taxpayer Advocate Service, 2017 Annual Report to Congress (Washington, D.C.:
                            December 2017). See also Financial Crimes Enforcement Network, The SAR Activity
                            Review: Trends, Tips and Issues (Washington, D.C.: August 2004).




                            Page 13                                            GAO-19-269 Tax-time Financial Products
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. 14

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. 15
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. 16 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

14
  Guidance Regarding Marketing of Refund Anticipation Loans (RALs) and Certain Other
Products in Connection with the Preparation of a Tax Return. 73 Fed. Reg. 1131 (Jan. 7,
2008).
15
  The Office of Thrift Supervision identified issues related to the bank’s compliance with
advertising regulation and determined the bank had engaged in unfair or deceptive acts or
practices in relation to its tax loan program. The Dodd-Frank Wall Street Reform and
Consumer Protection Act eliminated the Office of Thrift Supervision and transferred
supervisory authorities to OCC for federal savings associations, FDIC for state savings
associations, and the Federal Reserve for thrift holding companies and their subsidiaries,
other than depository institutions. The transfer of powers was completed in July 2011, and
the Office of Thrift Supervision officially dissolved in October 2011.
16
  Congress authorizes the Department of the Treasury’s Bureau of Fiscal Services to
reduce the amount of a tax refund and offset it to pay debts such as delinquent taxes,
unpaid child support, or delinquent federally funded student loans.




Page 14                                            GAO-19-269 Tax-time Financial Products
                   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. 17 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.

Refund Transfers   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.

                   17
                     To determine use for tax-time financial products, we used 2008-2017 IRS data. IRS data
                   are based on the number of accepted returns that include an indicator showing that the
                   taxpayer has applied for a tax product and do not reflect the number of returns that have
                   been approved for the product.




                   Page 15                                           GAO-19-269 Tax-time Financial Products
Refund Advances   In 2016, a few banks began offering refund advances to taxpayers.
                  Refund advances are no-fee, nonrecourse loans. 18

                  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
                  18
                    Nonrecourse loans are not subject to collection action by the bank in the event of a
                  shortage (when the refund is smaller than the anticipated amount).




                  Page 16                                            GAO-19-269 Tax-time Financial Products
                           determined. One industry provider suggested that increased demand for
                           refund advances also could be the result of marketing by tax preparation
                           companies.


Limited Public Data        Our analysis of publicly available data about product fees for refund
Suggest Refund Transfer    transfers showed that fees increased in 2018. In particular, our analysis of
                           fee data collected by the National Consumer Law Center shows that in
Fees Generally Increased
                           2014–2017 refund transfer fees charged by paid tax preparers remained
in 2018                    generally unchanged at between $32.95 and $34.95. 19 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. 20

                           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
                           19
                             From 2014 to 2017, the National Consumer Law Center in partnership with the
                           Consumer Federation of America issued reports on tax-time financial products that
                           included data on the fees charged by major providers for refund transfers. The National
                           Consumer Law Center reports that they obtained this information from the providers’
                           websites, public announcements, and direct communications from the providers.
                           20
                              For fee information—including product fees, fees for ancillary products that taxpayers
                           may have to use related to a tax product, and tax preparation fees—we collected data
                           from multiple sources, including our nine undercover visits. We reviewed information from
                           the websites and product-related literature of eight online tax preparation providers and
                           five banks offering tax-time financial products. Data elements include incentives that
                           banks offer tax preparers related to refund transfers. See appendix I for more information.




                           Page 17                                            GAO-19-269 Tax-time Financial Products
    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.



Page 18                                    GAO-19-269 Tax-time Financial Products
                            •   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.
Comparative Fee Scenarios   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).




                            Page 19                                   GAO-19-269 Tax-time Financial Products
Figure 2: Illustrative Example of Refund Transfer Fees Based on Filing Method and Use of Product




                                         Note: We collected fee information during our undercover visits. The additional fees in these
                                         scenarios are included for illustrative purposes and may not always be charged. A tax preparer may
                                         add other fees not included here. Our undercover work did not include online self-filing. Therefore, we
                                         were unable to determine if a software provider would charge additional fees after completing the tax
                                         return but before transmitting the electronic return to the taxing authority (federal, state, or both).
                                         a
                                             The disbursement fee is an add-on fee charged by a paid tax preparer.
                                         b
                                             Check cashing fees may apply.
                                         c
                                          To determine the tax preparation fees, we used the average starting cost for tax preparation we were
                                         quoted during our undercover visits. Paid tax preparers generally do not share information on tax
                                         preparation fees, because these fees are typically based on a taxpayer’s unique tax circumstances.
                                         For online self-filers, the software provider generally offers a free option to file a simple federal tax
                                         return which is generally limited based on the type of income, deductions or credits used and does
                                         not include the cost of filing a state return. For the online self-filing fee in this illustration, we used the
                                         average starting cost for all other simple tax preparation services as shown on several online tax
                                         preparation websites.
                                         d
                                          Fees for filing a state return were not discussed during our undercover visits because our fictitious
                                         taxpayers had recently moved to the area from a state that does not assess state taxes. In one case
                                         we were told the preparation fee included both federal and state filing.
                                         e
                                         During our undercover visits, tax preparers gave us a range from $93 to $500 and stated that fees
                                         were based on the specifics of the return.




                                         Page 20                                                       GAO-19-269 Tax-time Financial Products
Tax-Time Financial        Recent and emerging developments in the market for tax-time financial
Products Have Continued   products include higher loan amounts and new products, according to our
                          analysis of selected tax preparers’ websites and marketing materials, and
to Evolve Since 2016
                          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”). 21

                          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



                          21
                            To identify trends in products offerings in the tax-time financial products industry, we
                          reviewed the websites and available literature for four providers of online tax preparation
                          services, three tax preparers with physical locations, and four banks. We also met with
                          nine product providers such as software developers and providers of settlement services
                          and discussed changes in the market and product offerings. See appendix I for more
                          information.




                          Page 21                                             GAO-19-269 Tax-time Financial Products
to increase. 22 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. 23

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.




22
  According to IRS, the percentage of self-prepared e-filers increased 0.5 percent in 2017
from the prior year, and another 3.3 percent in 2018.
23
  According to our analysis of selected online tax preparation providers and interviews
with industry participants, at least three online providers offered refund advances in the
2018 tax season.




Page 22                                             GAO-19-269 Tax-time Financial Products
Lower-Income and
Some Minority
Taxpayers Were More
Likely to Use Tax-
Time Financial
Products for Various
Reasons
Our Analysis Found That   Using FDIC data, we conducted a multivariate regression analysis to
Lower-Income, African-    examine the relationship between economic and demographic variables
                          and tax-time financial product use. This approach allowed us to test the
American, and Single
                          significance of the relationships between each variable and the likelihood
Taxpayers Were More       of using tax-time financial products, while controlling for other factors. 24
Likely to Use Tax-Time
Financial Products
Income-Related            Lower-income households were more likely to use tax-time financial
Characteristics           products than higher-income households, particularly when they used
                          paid tax preparers to file their taxes, according to our analysis of 2017
                          FDIC data. 25 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. 26 For
                          example, we estimated that

                          24
                            Specifically, we estimated multivariate logistic regression models to assess the
                          statistical significance of the relationships between individual characteristics and the
                          decision to obtain a tax-time financial product. We used logistic regression models
                          because our dependent variable is binary (that is, represents whether or not a household
                          used a product). See appendix II for more information, including limitations.
                          25
                            Federal Deposit Insurance Corporation, 2017 FDIC National Survey of Unbanked and
                          Underbanked Households (Washington, D.C: October 2018). Our econometric analysis of
                          the survey data controlled for several variables, including household type, children, race
                          and ethnicity, education, age, and homeownership. We observed 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). That is the benchmark utilization rate
                          against which the results should be interpreted. See appendix I for more information on
                          the analysis design, and see appendix II for more information on this analysis.
                          26
                           According to the Census Bureau, the median household income in 2017 was $61,372.




                          Page 23                                            GAO-19-269 Tax-time Financial Products
                           •    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; 27 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. 28
                           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. 29

                           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.

Other Characteristics,     Households of some minority groups were more likely to use tax-time
Including Race, Age, and   financial products when filing tax returns than white households. For
Household Head             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. 30


                           27
                             All reported estimates from our econometric analysis of 2017 FDIC data are statistically
                           significant at the 10 percent level or less. See appendix II for confidence intervals
                           associated with estimates from this analysis.
                           28
                               The estimates for households with incomes of $20,000–$29,999 and $30,000–$39,999
                           are not statistically significantly different from each other. Our analysis of FDIC data is
                           subject to limitations. For example, our analysis used a relatively small number of
                           observations of households that used tax-time financial products and focuses on
                           consumers who accessed tax-time financial products to receive their tax refunds more
                           quickly through paid tax preparers. Consumers also may access the products when self-
                           filing online to cover the cost of the tax preparation. Moreover, our results may not
                           generalize to other time periods. Characteristics associated with use of the products may
                           differ with product type. We were not able to account for community characteristics that
                           may influence the decision to use tax-time financial products through paid tax preparers.
                           29
                             In 2017, households had to have incomes of $53,930 or less to qualify for EITC,
                           depending on tax filing status and number of dependents.
                           30
                             Signe Mary McKernan, Caroline Ratcliffe, and Daniel Kuehn, “Prohibitions, Price Caps,
                           and Disclosures: A Look at State Policies and Alternative Financial Product Use,” Journal
                           of Economic Behavior and Organization, vol. 95 (November 2013).




                           Page 24                                             GAO-19-269 Tax-time Financial Products
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). 31




31
  We analyzed the share of tax returns with tax-time financial products at the zip code
level using 2016 IRS Statistics of Income data.




Page 25                                            GAO-19-269 Tax-time Financial Products
Figure 3: Proportion of Tax Returns with Tax-Time Financial Products in 2016, by Zip Code




                                         Notes: Zip code data are based on population data filed and processed by the Internal Revenue
                                         Service during the 2016 tax year. Zip codes with less than 100 tax returns are excluded.


                                         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



                                         Page 26                                                GAO-19-269 Tax-time Financial Products
                            (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. 32
                            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. 33


Reasons for Using Refund    Reasons to use tax-time financial products include more quickly obtaining
Products Include            cash from the expected tax refund, not having to pay tax preparation fees
                            out of pocket, and obtaining cash more cheaply than with alternative
Obtaining Cash Faster
                            short-term funding options, according to our review of federal and industry
and Not Paying Tax          reports. 34
Preparation Fees Up Front




                            32
                              Households headed by single adults with families are single persons with children or
                            dependents.
                            33
                              By comparison, about 46 percent of all taxpayers who filed their taxes electronically filed
                            as single, 35 percent filed as married, and 16 percent filed as unmarried heads of
                            household, according to IRS. The remaining taxpayers filed using other statuses, including
                            widowed. IRS data from 2016 are representative of the population of taxpayers who filed
                            their taxes electronically in tax year 2016. Tax-time financial product use is measured as
                            having used a product or none. In contrast to FDIC data, which only include households
                            that accessed tax-time financial products through paid preparers, IRS data include
                            taxpayers who accessed products through paid tax preparers and by self-filing taxes
                            online. See appendix II for additional information. All percentage estimates from 2016 IRS
                            data have margins of errors of plus or minus 1 percentage point or less.
                            34
                              We reviewed federal government and industry reports on alternative financial products
                            and on the financial needs of individuals with characteristics similar to those of taxpayers
                            who used the products.




                            Page 27                                             GAO-19-269 Tax-time Financial Products
Quick Access   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. 35 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. 36 As one study found, the



               35
                 Brett Theodos, Rachel Brash, et al., Who Needs Credit at Tax Time and Why: A Look at
               Refund Anticipation Loans and Refund Anticipation Checks (Washington, D.C.: Urban
               Institute, November 2010).
               36
                Urban Institute, Characteristics of Users of Refund Anticipation Loans and Refund
               Anticipation Checks, (Washington, D.C.: 2010).




               Page 28                                          GAO-19-269 Tax-time Financial Products
                                                         annual tax refund represents the largest single cash infusion received all
                                                         year by about 40 percent of checking account holders. 37

Tax Preparation Fees Not Paid                            Lower-income taxpayers also use tax-time financial products to defer
Out of Pocket                                            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.

                                                         Consumers may perceive any costs associated with tax-time financial
 Free Filing Services
                                                         products and tax return preparation as lower than they actually may be
 The Internal Revenue Service (IRS) offers the
 following free filing services:                         because the costs are not paid out of pocket. Fees for the products and
 Fillable forms. IRS offers forms that can be            tax return preparation are deducted from the refund before it reaches the
 completed online and electronically submitted           consumer. In general, studies have found that the transparency of a
 to IRS. The forms are available without age,
 income, or residency restrictions.                      payment method affected the payer’s willingness to spend. 38 One
 Free file software. IRS, in partnership with            consumer advocacy organization representative posited that paying for
 the Free File Alliance (members of the tax              tax-time financial products and tax preparation from a refund makes
 software industry), provides free online filing
 options to eligible taxpayers. Twelve leading           consumers less sensitive to the real cost of tax-time products and
 tax software providers make a version of their          preparation services.
 products available exclusively at IRS.gov for
 taxpayers with an adjusted gross income up
 to $66,000 (in 2018).                                   Instead of using tax-time financial products to defer payment of tax
 Volunteer Income Tax Assistance. The                    preparation fees, lower-income taxpayers can access free filing services
 program provides free basic income tax
 preparation with electronic filing by IRS-
                                                         through several IRS programs (see sidebar). However, these options do
 certified volunteers to qualified individuals,          not allow taxpayers to use tax-time financial products to access refunds
 including to persons who earn $55,000 or                faster.
 less, have disabilities, or have limited
 proficiency in English.
 Tax Counseling for the Elderly. The                     IRS estimates that about 70 percent of taxpayers are eligible to access its
 program provides free tax preparation by IRS-           free filing software, and we estimated about 3 percent of taxpayers use
 certified volunteers to all taxpayers,
 particularly those 60 or older. Program                 this service. According to IRS officials, while IRS does not have a
 volunteers specialize in pension and                    marketing budget to promote the free file programs, the predominant
 retirement-related issues unique to seniors.            reason so few taxpayers use them is because there are many free tax
 Source: GAO analysis of IRS information. | GAO-19-269
                                                         preparation options on the market, such as tax preparation software.



                                                         37
                                                          Diana Farrell, Fiona Greig, and Amar Hamoudi, Deferred Care: How Tax Refunds
                                                         Enable Healthcare Spending, (JPMorgan Chase Institute: January 2018).
                                                         38
                                                           Frank van der Horst and Ester Matthijsen, “The Irrationality of Payment Behavior,” DNB
                                                         Occasional Studies, vol. 11, no. 4 (2013). According to this report, a more transparent
                                                         payment method increases the pain of making the payment and decreases the amount
                                                         the payer is willing to spend.




                                                         Page 29                                           GAO-19-269 Tax-time Financial Products
Higher Refunds and Tax                                      Taxpayers also may use paid tax preparers because they do not think
Preparation Assistance                                      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). 39

Table 2: Average Refund Amounts, by Tax Filing Methods and Tax-Time Product Usage, 2014–2016

                                                     2014                                        2015                                         2016
                                      Self-prepared         Practitioner-          Self-prepared          Practitioner-          Self-prepared       Practitioner-
                                              online           prepared                    online            prepared                    online         prepared
No tax-time financial
product                                          $2,103            $2,028                  $2,029                $2,108                   $2,548             $2,168
Tax-time financial
product                                          $3,359            $3,954                  $3,340                $4,044                   $3,255             $4,064
Source: GAO analysis of IRS data. | GAO-19-269

                                                            Notes: The table presents average refund amounts by tax filing method and tax-time financial product
                                                            use. Differences in average refund amounts across tax-time financial product use are statistically
                                                            significant with the exception of self-prepared taxes online in 2016. Differences in average refund
                                                            amounts across tax filing methods are statistically significant with the exception of tax refunds with no
                                                            tax-time financial product in 2016. Statistical significance is measured at the 5 percent level, meaning
                                                            the difference in estimates is significant at the 95 percent confidence level.




                                                            39
                                                              Maggie R. Jones, Tax Preparers, Refund Anticipation Products, and EITC
                                                            Noncompliance (Washington, D.C.: Center for Administrative Records Research and
                                                            Applications, U.S. Census Bureau, December 2017).




                                                            Page 30                                                    GAO-19-269 Tax-time Financial Products
                              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.

Tax-Time Financial Products   For lower-income taxpayers, tax-time products generally provide more
Cheaper Than Alternatives     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. 40 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.


                              40
                                 Users of tax-time financial product were more likely to use other alternative financial
                              services to obtain short-term infusions of cash, as suggested by our analysis of 2017
                              FDIC data. We found a significant correlation between households that used tax-time
                              financial products and households that used services, such as nonbank check cashing,
                              nonbank money orders, payday loans, and pawnshops.




                              Page 31                                             GAO-19-269 Tax-time Financial Products
                               The federal banking regulators oversee banks that offer tax-time financial
Providers We                   products and IRS sets standards of practice for certain service providers
Reviewed Generally             (including some tax preparers). While our nongeneralizeable review found
                               that selected banks and tax preparers generally followed existing OCC
Disclosed Required             and IRS disclosure requirements, some tax preparers’ disclosure
Information but Some           practices may present challenges for consumers trying to compare
                               product options.
Disclosure Practices
May Hinder
Consumer Decision-
Making
Industry Participants Are
Subject to Varying Levels
of Oversight
Banks and Settlement Service   FDIC, the Federal Reserve, or OCC are responsible for the safety and
Providers                      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. 41

                               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

                               41
                                 For the purpose of this report, small banks are banks with less than $1 billion in assets.
                               Medium-sized banks are those with average assets of at least $1 billion and less than $10
                               billion. Large banks have $10 billion or more in assets on average.




                               Page 32                                             GAO-19-269 Tax-time Financial Products
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. 42 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. 43



42
  Consumer Financial Protection Bureau, “CFPB and Navajo Nation Take Action to Stop
an Illegal Tax-Refund Scheme” (Washington, D.C.: Apr. 14, 2005): see
https://www.consumerfinance.gov/about-us/newsroom/cfpb-and-navajo-nation-take-action
-to-stop-an-illegal-tax-refund-scheme// Downloaded on December 17, 2018.
43
  Consumer Financial Protection Bureau, “Tax Refund Tips: Understanding Refund
Advance Loans and Checks” (Washington, D.C.: Feb. 13, 2018). Accessed online on
February 15, 2018, at
https://www.consumerfinance.gov/about-us/blog/tax-refund-tips-understanding-refund-adv
ance-loans-and-checks/.




Page 33                                         GAO-19-269 Tax-time Financial 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. 44 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. 45

                       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.

Software Developers    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.

Tax Return Preparers   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.



                       44
                         CFPB and FTC have a memorandum of understanding that involves coordinating
                       enforcement actions over consumer financial products and services, which may include
                       tax-time financial products.
                       45
                         According to FTC officials, FTC’s complaints about tax-related issues overwhelmingly
                       are composed of reports about government imposter scams, namely IRS impersonators
                       who tried to trick consumers into sending the scammers money for taxes they did not owe.
                       In addition, FTC’s complaint database received thousands of complaints in 2018 relating
                       to issues with tax preparers.




                       Page 34                                          GAO-19-269 Tax-time Financial Products
Tax practitioners are subject to regulations (Circular 230) that establish
standards of practice. 46 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. 47
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.




46
  Circular 230 (Regulations Governing Practice before the Internal Revenue Service) also
established penalties for noncompliance.
47
  Loving v. I.R.S., 917 F. Supp. 2d 67 (D.D.C., 2013) aff’d 742 F.3d 1013 (D.C. Cir.,
2014). In 2014, IRS issued a Revenue Procedure that stated until Congress provides the
Department of the Treasury and IRS with legislative authority to regulate tax preparers,
IRS has established a program to encourage tax return preparers that are not attorneys,
certified public accountants, or enrolled agents to improve their knowledge. Rev. Proc.
2014-42 (2014). The U.S. Court of Appeals for the District of Columbia upheld the
program in 2018. Am. Inst. of Certified Pub. Accountants v. I.R.S., 746 Fed. Appx. 1 (D.C.
Cir., Aug. 14, 2018).




Page 35                                            GAO-19-269 Tax-time Financial Products
Banks and Tax Preparers       We found selected authorized IRS e-file providers generally followed the
in Our Review Generally       requirements established by IRS on the disclosure of product fees, and
                              banks generally followed the disclosure guidance relating to tax-time
Followed Guidance for         financial products issued by OCC. 48 (We conducted nongeneralizeable
Disclosing Product Fees,      reviews of website content, industry documents, and disclosures made
but All Related Fees Were     during our undercover visits.) Two of the five banks we reviewed are
Not Always Disclosed          regulated by OCC. One of the two FDIC-supervised bank and the Federal
Clearly or Early in Process   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. 49
                              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,



                              48
                                OCC guidance is provided in Tax-Refund Related Products: Risk Management
                              Guidance, Bulletin 2015-36, IRS requirements are issued in Handbook for Authorized IRS
                              e-file Providers of Individual Income Tax Returns, Publication 1345, Rev. 04-18,
                              49
                                United States. Dept. of the Treasury. Internal Revenue Service. Publication 1345:
                              Handbook for Authorized IRS e-file Providers of Individual Tax Income Tax Returns, 2019.
                              Web. This guidance applies to firms accepted to participate in IRS e-file, which include
                              EROs, transmitters, and software developers involved in e-file activities. Because our
                              review did not include an assessment of the tax preparation process, we were not able to
                              make observations on IRS requirements related to consent or disclosure of all deductions
                              from the refund.




                              Page 36                                          GAO-19-269 Tax-time Financial Products
•    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; 50 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. 51 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
50
  Specifically, a refund transfer does not accelerate receipt of a refund for taxpayers with
a bank account who can direct IRS to directly deposit the refund. Taxpayers may receive
funds within 24 hours of filing a return only when they apply for a loan that is collateralized
against the expected refund, such as a refund advance or a fee-based refund anticipation
loan when available.
51
  The American Coalition for Taxpayers’ Rights is an industry group representing leading
banks and tax preparation and tax software companies which together provide the
majority of tax-time financial products. This joint statement was signed by some of the
leading companies and attorneys general from the states of Colorado, Kansas, Kentucky,
Mississippi, Rhode Island and Utah.




Page 37                                              GAO-19-269 Tax-time Financial Products
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. 52 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.


52
  During our undercover visits, three of nine tax preparers did not disclose the fee for
using the refund to pay for tax preparation fees. Six preparers disclosed it in a manner that
was not clear or accurate: In three of the six cases, the preparer included products the
taxpayer did not request. In the other three cases, the preparer stated tax preparation fees
would be paid from the refund without explaining this was an optional service.




Page 38                                             GAO-19-269 Tax-time Financial Products
•   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. 53 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. 54

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

53
  An ERO must obtain taxpayers’ consent to disclose their tax information to a financial
institution in connection with an application for a tax-time financial product.
54
  Because refund advances do not carry finance charges and refund transfer fees have
not been legally defined as finance charges, TILA disclosure requirements do not apply to
these products.




Page 39                                            GAO-19-269 Tax-time Financial Products
              to provide a standard “truth-in-lending” statement to help taxpayers better
              understand the terms of the refund anticipation loan product. 55 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. 56 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. 57 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.


              For lower-income taxpayers with pressing financial obligations, tax-time
Conclusions   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.


              55
                National Taxpayer Advocate, Annual Report to Congress, 2017. (Washington, D.C.:
              December 2017).
              56
                Any tax professional who is compensated for preparing a federal tax return must obtain
              an IRS Preparer Tax Identification Number (PTIN). While PTIN holders are authorized to
              prepare federal tax returns, only enrolled agents are licensed by the IRS. Enrolled agents
              are subject to a suitability check and must pass a three-part Special Enrollment
              Examination, which is a comprehensive exam that requires them to demonstrate
              proficiency in federal tax planning, individual and business tax return preparation, and
              representation. They must complete 72 hours of continuing education every 3 years.
              57
                See GAO, Paid Tax Return Preparers: In a Limited Study, Preparers Made Significant
              Errors, GAO-14-467T (Washington, D.C.: Apr. 8, 2014)




              Page 40                                            GAO-19-269 Tax-time Financial Products
                      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.


                      We are making a total of two recommendations to IRS.
Recommendations for
Executive Action      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)


                      We provided a draft of this report to IRS, FDIC, Federal Reserve, OCC,
Agency Comments       CFPB, and FTC for review and comment. IRS provided written
and Our Evaluation    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.


                      Page 41                                    GAO-19-269 Tax-time Financial 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.




Michael Clements
Director, Financial Markets
and Community Investment




Page 42                                   GAO-19-269 Tax-time Financial Products
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              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. 1 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

              1
               IRS data on product use are based on the number of returns that include an indicator
              showing that the taxpayer applied for a tax-time financial product, and do not reflect
              product applications that have been approved.




              Page 43                                            GAO-19-269 Tax-time Financial Products
Appendix I: Objectives, Scope, and
Methodology




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,



Page 44                                    GAO-19-269 Tax-time Financial Products
Appendix I: Objectives, Scope, and
Methodology




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


Page 45                                       GAO-19-269 Tax-time Financial Products
Appendix I: Objectives, Scope, and
Methodology




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


Page 46                                    GAO-19-269 Tax-time Financial Products
Appendix I: Objectives, Scope, and
Methodology




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. 2 OCC
instructs banks it supervises to make certain disclosures to product
consumers. 3 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

2
 The e-file providers must obtain taxpayers’ consent before disclosing any personal tax
information to other parties in relation to a product application; ensure taxpayers
understand that if using a tax product, refund will be sent to the bank and not to them; if a
taxpayer chooses to use a fee-based loan, advise that product is an interest-bearing loan
and not an expedited refund; advise taxpayers that the bank may charge them interest or
fees (or both) in case of any shortages on the refund; and disclose all deductions to be
made from the expected refund and net refund amount. IRS requirements are issued in
Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns,
Publication 1345, Rev. 04-2018.
3
 Banks are to specify to customers that the total cost of the tax-time financial product is
separate from the tax preparation cost; the total costs will be deducted from and reduce
the refund amount; tax refunds can be sent directly to the taxpayer without the additional
costs of a tax product; customers with deposit accounts can receive their refund without
incurring fees through direct deposit in about the same time that it would take to receive a
tax refund-related product; and that there are costs and terms related to long-term use of
product. OCC guidance is provided in Tax-Refund Related Products: Risk Management
Guidance, Bulletin 2015-36,.




Page 47                                              GAO-19-269 Tax-time Financial Products
Appendix I: Objectives, Scope, and
Methodology




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.




Page 48                                  GAO-19-269 Tax-time Financial Products
Appendix II: Analysis of Characteristics
              Appendix II: Analysis of Characteristics
              Associated with Tax-Time Financial Product
              Use


Associated with Tax-Time Financial Product
Use
              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.


Data          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.



              Page 49                                       GAO-19-269 Tax-time Financial Products
                                                                Appendix II: Analysis of Characteristics
                                                                Associated with Tax-Time Financial Product
                                                                Use




Table 3: Characteristics of Households and Heads of Households, 2017

                                                                                                                                   Estimated percentage of
                                                                                                  Estimated percentage                  population that used
 Household characteristics                                                                                of population          tax-time financial products
 Income                                      Less than $10,000                                                          6.6                                    7.7
                                             $10,000 to $19,999                                                        10.3                                12.3
                                             $20,000 to $29,999                                                        10.6                                12.9
                                             $30,000 to $39,999                                                        11.5                                16.9
                                             $40,000 to $49,999                                                         8.2                                 8.4
                                             $50,000 to $59,000                                                         8.1                                 8.4
                                             More than $60,000                                                         44.6                                33.5
 Household type                              Married couple                                                            47.4                                36.2
                                             Unmarried male-headed family                                               5.1                                    6.7
                                             Unmarried female-headed family                                            11.8                                22.9
                                             Single male                                                               16.9                                17.7
                                             Single female                                                             18.8                                16.5
 Homeownership                               Homeowner                                                                 63.9                                44.4
                                             Non-homeowner                                                             36.1                                55.6
 Head of household characteristics
 Race/ethnicity                              White, non-Hispanic                                                       66.7                                55.6
                                             African American, non-Hispanic                                            12.7                                20.6
                                             Asian, non-Hispanic                                                        4.9                                 5.8
                                             American Indian/Alaska Native, non-
                                             Hispanic                                                                   0.8                                    1.0
                                             Hispanic, any race                                                        13.5                                15.6
                                             Mixed race/other, non-Hispanic                                             1.5                                    1.5
 Education                                   Less than college education                                               35.2                                37.9
                                             Some college education or more                                            64.8                                62.1
 Age                                         15–29 years                                                               12.8                                23.2
                                             30–39 years                                                               17.0                                25.6
                                             40–49 years                                                               16.9                                18.3
                                             50–59 years                                                               18.9                                15.6
                                             60 years and older                                                        34.3                                17.3
 Children                                    Has own children                                                          26.7                                37.5
                                             Has no own children                                                       73.3                                62.5
 Sample size                                 33,561
 Estimated population size                   123 million
Source: GAO analysis of Federal Deposit Insurance Corporation data. | GAO-19-269

                                                                Notes: We used data from the 2017 Federal Deposit Insurance Corporation’s National Survey of
                                                                Unbanked and Underbanked Households. The sample size is 33,561, representing an estimated




                                                                Page 50                                               GAO-19-269 Tax-time Financial Products
Appendix II: Analysis of Characteristics
Associated with Tax-Time Financial Product
Use




population of about 123 million. Of the households sampled, 798 used tax-time financial products,
representing an estimated population of about 3 million, and 32,372 did not use the products,
representing an estimated population of about 118 million. We estimated that 2.4 percent of
households used the products, plus or minus 0.2 percentage points. The first column is the estimated
percentage of households and heads of households in the sample, conditional on being part of
various demographic subgroups. These statistics are weighted using household-level weights. All
estimates in the first column have relative standard errors of about 12.5 percent or less. The second
column is the estimated percentage of households and heads of households who used tax-time
financial products in the past 12 months, conditional on being part of various demographic subgroups.
These statistics are also weighted using household-level weights. Estimates in the second column
generally have relative standard errors of about 20 percent or less, with the exception of American
Indian/Alaskan Natives and mixed race/other non-Hispanics due to relatively small sample sizes, but
estimates for these subgroups are statistically significant.


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.




Page 51                                                  GAO-19-269 Tax-time Financial Products
                                                                Appendix II: Analysis of Characteristics
                                                                Associated with Tax-Time Financial Product
                                                                Use




Table 4: Household Responses to Questions Related to Unbanked Status and Alternative Financial Services Usage, 2017

                                                                                                                                       Estimated percentage of
                                                                                                    Estimated percentage                    population that used
                                                                                                            of population            tax-time financial products
 Used nonbank check cashing in                      Used                                                                   6.2                                   15.5
 past 12 months                                     Did not use                                                           92.2                                   84.4
                                                    Did not know/refused to answer                                         1.6                                    0.0


 Used nonbank money order in                        Used                                                                  14.0                                   32.7
 past 12 months                                     Did not use                                                           84.2                                   67.3
                                                    Did not know/refused to answer                                         1.7                                    0.0


 Used payday loan in past 12                        Used                                                                   1.8                                    7.9
 months                                             Did not use                                                           96.6                                   92.0
                                                    Did not know/refused to answer                                         1.7                                    0.1
 Used pawn shop in past 12                          Used                                                                   1.5                                    6.7
 months                                             Did not use                                                           96.9                                   93.3
                                                    Did not know/refused to answer                                         1.6                                    0.0
 Used prepaid card in past 12                       Used                                                                   9.5                                   21.4
 months                                             Did not use                                                           88.9                                   78.4
                                                    Did not know/refused to answer                                         1.6                                    0.2
 Unbanked in past 12 months                         Unbanked                                                               3.9                                    5.4
                                                    Banked                                                                89.4                                   85.2
                                                    Did not know/refused to answer                                         0.4                                    0.1
Source: GAO analysis of Federal Deposit Insurance Corporation data. | GAO-19-269

                                                                Notes: We used data from the 2017 Federal Deposit Insurance Corporation’s National Survey of
                                                                Unbanked and Underbanked Households. The sample size is 33,561, representing an estimated
                                                                population of about 123 million. Of the households sampled, 798 used tax-time financial products,
                                                                representing an estimated population of about 3 million and 32,372 did not use the products,
                                                                representing an estimated population of about 118 million. We estimated that 2.4 percent of
                                                                households used the products, plus or minus 0.2 percentage points. Sample size is slightly different
                                                                for unbanked status (N = 31,653) due to nonresponse, and unbanked means no one in the household
                                                                had a checking or savings account in the past 12 months. As a result, the percentages for this
                                                                variable do not add to 1. The first column is the estimated percentage of households in the full sample
                                                                that used alternative financial services, prepaid cards, or were unbanked in the past 12 months. All
                                                                estimates in the first column have relative standard errors of about 10 percent or less. The second
                                                                column is the estimated percentage of households that used tax-time financial products in the past 12
                                                                months and used alternative financial services, prepaid cards, or were unbanked in the past 12
                                                                months. All statistics are weighted using household-level weights. Estimates in the second column
                                                                generally have relative standard errors of 20 percent or less with some exceptions. Estimates of
                                                                those who did not know or refused to answer about nonbank check cashing, payday loan, pawn shop,
                                                                and prepaid card use and unbanked status are not statistically significantly different from zero.


                                                                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



                                                                Page 52                                                   GAO-19-269 Tax-time Financial Products
              Appendix II: Analysis of Characteristics
              Associated with Tax-Time Financial Product
              Use




              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.


Methodology   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.




              Page 53                                      GAO-19-269 Tax-time Financial Products
Appendix II: Analysis of Characteristics
Associated with Tax-Time Financial Product
Use




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


Page 54                                      GAO-19-269 Tax-time Financial Products
                          Appendix II: Analysis of Characteristics
                          Associated with Tax-Time Financial Product
                          Use




                          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.


Caveats and Limitations   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.



                          Page 55                                      GAO-19-269 Tax-time Financial Products
Appendix II: Analysis of Characteristics
Associated with Tax-Time Financial Product
Use




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.


Page 56                                      GAO-19-269 Tax-time Financial Products
          Appendix II: Analysis of Characteristics
          Associated with Tax-Time Financial Product
          Use




          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.


Results   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.




          Page 57                                      GAO-19-269 Tax-time Financial Products
Appendix II: Analysis of Characteristics
Associated with Tax-Time Financial Product
Use




Table 5: Factors Associated with Tax-Time Financial Product Use, 2017

                                                       95% confidence      95% confidence
                                             Odds        interval lower     interval, upper
Explanatory variables                        ratios             bound                bound
Income (omitted - income $60,000
or more)
Income less than $10,000                      1.02                 0.68                1.52
                                             (0.21)
Income between $10,000 and                    1.32                 0.94                1.86
$19,999                                      (0.23)
Income between $20,000 and                   1.34*                 1.00                1.81
$29,999                                      (0.20)
Income between $30,000 and               1.61***                   1.24                2.09
$39,999
                                             (0.22)
Income between $40,000 and                    1.19                 0.87                1.62
$49,999                                      (0.19)
Income between $50,000 and                    1.22                 0.86                1.74
$59,999                                      (0.22)
Household type (omitted -
married)
Unmarried male head of household              1.25                 0.88                1.79
with family                                  (0.23)
Unmarried female head of                 1.76***                   1.36                2.30
household with family                        (0.24)
Single male                                   1.11                 0.83                1.47
                                             (0.16)
Single female                                 1.12                 0.82                1.54
                                             (0.18)
Homeownership (omitted - non-
homeowner)
Head of household is homeowner           0.66***                   0.52                0.82
                                             (0.08)
Children (omitted - no children)
Head of household has children                1.13                 0.88                1.44
present
                                             (0.14)
Race and ethnicity (omitted -
white, non-Hispanic head of
household)




Page 58                                               GAO-19-269 Tax-time Financial Products
Appendix II: Analysis of Characteristics
Associated with Tax-Time Financial Product
Use




                                                                          95% confidence     95% confidence
                                                            Odds            interval lower    interval, upper
 Explanatory variables                                      ratios                 bound               bound
 African American, non-Hispanic                             1.36**                   1.07                1.73
 head of household
                                                             (0.17)
 American Indian/Alaskan Native,                               1.17                  0.52                2.64
 non-Hispanic head of household                              (0.49)
 Asian, non-Hispanic head of                                   1.18                  0.74                1.88
 household                                                   (0.28)
 Hispanic, any race of head of                                 0.93                  0.73                1.20
 household
                                                             (0.12)
 Mixed race/other non-Hispanic                                 0.84                  0.39                1.82
 head of household                                           (0.33)
 Education (omitted - no college
 education)
 Head of household has some                                    0.96                  0.81                1.13
 college education or more
                                                             (0.08)
 Age (omitted - 60 years or older)
 Age of head of household between                          2.55***                   1.87                3.48
 15 and 29
                                                             (0.41)
 Age of head of household between                          2.36***                   1.72                3.23
 30 and 39                                                   (0.38)
 Age of head of household between                          1.89***                   1.36                2.64
 40 and 49                                                   (0.32)
 Age of head of household between                          1.62***                   1.21                2.17
 50 and 59
                                                             (0.24)
 Number of observations                                    33,561

Legend: *** = p<0.01; ** = p<0.05; and* = p<0.1.
Source: GAO analysis of Federal Deposit Insurance Corporation data. | GAO-19-269

Notes: We used from data from the 2017 Federal Deposit Insurance Corporation’s National Survey of
Unbanked and Underbanked Households. Odds ratios are estimated from a multivariate logistic
regression that accounted for the survey features of the data. Standard errors are calculated using
successive difference replication based on the household weight and replicate weights are in
parentheses. The baseline household characteristics (omitted categories) are households with
incomes over $60,000, married couples, non-homeowners, white and non-Hispanic heads of
households, heads of household with no college education, heads of household over 60 years old,
and heads of household with no children.


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


Page 59                                                                 GAO-19-269 Tax-time Financial Products
Appendix II: Analysis of Characteristics
Associated with Tax-Time Financial Product
Use




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.




Page 60                                      GAO-19-269 Tax-time Financial Products
Appendix III: Disclosure of Product and
                           Appendix III: Disclosure of Product and
                           Related Fees and Terms



Related Fees and Terms

Disclosure of Product      Our limited nongeneralizeable review of documents received from
Fees and Terms             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.

Undercover Visits          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. 1 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.

Website Content Analysis   We reviewed the websites of eight selected providers of tax preparation
                           services. We found that while these providers generally disclosed product

                           1
                            Because the 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.




                           Page 61                                            GAO-19-269 Tax-time Financial Products
                  Appendix III: Disclosure of Product and
                  Related Fees and Terms




                  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.

Document Review   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. 2 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.

                  2
                   The tax preparers’ documents we reviewed included product disclosures and information
                  provided to the taxpayer during the tax preparation process. The bank documents
                  included product applications and disclosures.




                  Page 62                                         GAO-19-269 Tax-time Financial Products
                       Appendix III: Disclosure of Product and
                       Related Fees and Terms




                       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.


Disclosure of          Based on our document reviews of selected tax preparers and banks and
Disbursement Fees,     as suggested by our undercover visits of nine selected tax preparers, the
                       disclosure of fees for disbursing funds was inconsistent, particularly
Including on Prepaid
                       around prepaid cards. Prepaid cards are often used to disburse funds
Cards                  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. 3 However, only two of

                       3
                        In fall 2016, CFPB issued a final rule on prepaid accounts that includes requirements for
                       disclosing fees related to prepaid accounts. The rule was amended in 2017 and 2018 and
                       is expected to have an effective date of April 1, 2019.




                       Page 63                                            GAO-19-269 Tax-time Financial Products
Appendix III: Disclosure of Product and
Related Fees and Terms




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.”




Page 64                                   GAO-19-269 Tax-time Financial Products
Appendix IV: Comments from the Internal
              Appendix IV: Comments from the Internal
              Revenue Service



Revenue Service




              Page 65                                   GAO-19-269 Tax-time Financial Products
Appendix IV: Comments from the Internal
Revenue Service




Page 66                                   GAO-19-269 Tax-time Financial Products
Appendix IV: Comments from the Internal
Revenue Service




Page 67                                   GAO-19-269 Tax-time Financial Products
Appendix V: GAO Contact and Staff
                  Appendix V: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Michael Clements, 202-512-8678, or clementsm@gao.gov
GAO Contact
                  In addition to the contact named above, Karen Tremba (Assistant
Staff             Director), Nathan Gottfried (Analyst in Charge), Jessica Artis, Maurice
Acknowledgments   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.




(102185)
                  Page 68                                  GAO-19-269 Tax-time Financial Products
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Strategic Planning and   U.S. Government Accountability Office, 441 G Street NW, Room 7814,
External Liaison         Washington, DC 20548




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