FOR IMMEDIATE RELEASE: February 11, 2021
Download the report at: http://bit.ly/2021-tax-season
Boston ― Tax season kicks off on February 12, several weeks later than usual. Today, the National Consumer Law Center (NCLC) issued its annual advisory on taxpayer consumer protection issues and warned that consumers need to be on guard as they navigate the tax filing season. “Tax time is usually a challenge for low-income and other vulnerable taxpayers, and when consumers don’t have adequate information to shop around, abusive pricing schemes proliferate,” said Michael Best, staff attorney at the National Consumer Law Center and co-author of the report. “Filing a tax return will also be critical this year for those who did not get some or all of their stimulus payment, including low-income families who do not normally need to file tax returns,” Best added.
Taxpayers should know that stimulus payments claimed through a tax return will not currently be protected from garnishment by debt collectors. NCLC has an issue brief (available at http://bit.ly/tax-refund-protection) on how Congress can, and should, still protect tax refunds and offsets, such as the Earned Income Tax Credit (EITC) and Child Tax Credit from garnishment. But Congress must act soon. Those at risk of garnishment can request a paper check and review NCLC’s Tips for Dealing with Bank Account Freezes and Seizures.
The IRS will not send refunds to taxpayers who receive the EITC until at least the first week of March, possibly later if fraud screening delays payments. “Delaying the EITC payments that low wage workers rely on simply diverts those economic development dollars from families to banks and tax preparers who sell expensive tax-time loan products to families who need help right now,” noted Chi Chi Wu, staff attorney at the National Consumer Law Center.
Key findings from NCLC’s 2021 Tax Season: Higher Costs for Vulnerable Taxpayers During the COVID Economic Crisis include:
Stimulus payments and the COVID crisis. Filing a 2020 tax return and claiming the Refund Recovery Credit will be important for those who did not receive some or all of their Economic Impact Payments (EIP), i.e., stimulus payments. This includes those who do not normally file tax returns because their income is so low, those whose payments bounced when sent to temporary bank accounts set up by paid preparers, and families who did not get the full EIP for dependents.
Tax-time financial products. Lenders and tax return preparers again team up to sell refund-related products and services to taxpayers, with a move towards larger “no-fee” refund anticipation loans (RALs) and one price for all RALs no matter the amount. The latter practice may result in larger loan costs for taxpayers who might have taken out a smaller amount at a lower cost in previous years. In 2019, there were 1,658,000 no-fee RALs and 349,000 fee-bearing RALs; in 2018, the numbers were 1,651,000 million no-fee RALs and 356,000 fee-earning RALs. In addition, there were 21 million refund anticipation checks in 2019.
New and Disturbing Twist: Debiting taxpayer bank accounts for preparation fees. This tax season, Santa Barbara TPG is offering third-party debt collection services to collect past-due tax preparation fees from taxpayers who previously took out a refund anticipation check (RAC) when the anticipated tax refund wasn’t received by the taxpayer. The company’s tactics include debiting the bank accounts of taxpayers who don’t respond to requests to pay.
Inability to comparison shop for in-person service. There seems to be a movement towards greater transparency in pricing when using an online or virtual tax preparation service. For in-person services, there is a lack of transparency, although H&R Block continues to offer more pricing information about these services than some other preparers. If the tax chains can disclose prices for virtual services, they and other brick-and-mortar preparers can disclose prices upfront as well.
Private debt collection. The IRS private debt collection program continues to deliver vulnerable taxpayers into the hands of private debt collectors and reward the collectors with legally dubious commissions. As of May 2020, private collectors had collected $498.4 million in commissionable payments — with 45% of that amount collected in the first two-thirds of 2020. But taxpayers have the right to demand in writing (recommended) or orally that their tax debt account be recalled from the private collector and returned to the IRS immediately.
Taxpayers who receive a 1099-C for a discharged debt may have options. Taxpayers whose debts are charged off or forgiven may receive a 1099-C, which reports taxable income There are options to avoid the tax, but taxpayers typically need the help of an attorney or enrolled agent.
The report also includes a roundup of resources for consumers regarding free tax preparation services and how to check the real-time status of refunds using the IRS website’s automated Where’s My Refund function.
This report is the latest in a wide body of work that NCLC has produced on consumer tax issues.