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Electronic filing and refund anticipation loans.

Last year, the Internal Revenue Service indicated it would stop giving direct deposit acknowledgments to lenders and preparers in the hope of discouraging fraudulent electronic filers. Electronic filers tried to persuade the IRS to reconsider its plan. These acknowledgments are the only tool banks have to determine whether or not the taxpayer's refund will be reduced or eliminated by an outstanding Federal debt, allowing participating banks to determine if the loan can be made.

Without these acknowledgments, RAL programs would be seriously undermined, since financial institutions that make loans in anticipation of a Federal tax refund would have no way of determining whether or not the taxpayer (borrower) owed any Federal-related debt that would compromise the refund. Many participants in the Electronic Filing/RAL program fear that without the immediate access to RALs, the growth of the electronic filing program itself could be in danger.

The Internal Revenue Service, fearing a reduction in electronic filing, announced the indicator program would continue. The Service also noted that the following measures would be put into place to help prevent fraudulent use of electronic filing:

* All first-time filers will be required to get a paper refund (about 30% of fraudulent electronic returns come from first-time filers);

* Lenders must verify that the Form W-2 contains a valid EIN before the return is accepted for processing;

* Lenders will validate the SSN of children on returns claiming the earned income credit;

* Generally, an increased scrutiny of preparers and transmitters participating in the electronic filing program will be implemented;

* Electronic return preparers are required to advise the Service at the time the return is filed if the taxpayer is asking for a refund loan.

With these safeguards in place, the Service will continue to release Federal debt information to preparers who offer electronic return filing. Taxpayers with outstanding Federal debts (such as delinquent child support and education loans) are ineligible for direct deposit of their refunds, as any refund is first applied against debt. To facilitate the making of refund anticipation loans, the Service will continue to notify the preparer that a direct deposit will not be made if it finds that the taxpayer owes a Federal debt.
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Title Annotation:Tax Talk
Author:Green, Gary L., Jr.
Publication:The National Public Accountant
Date:Sep 1, 1993
Previous Article:Effective letters to legislators.
Next Article:Small business owners beware.

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