Allowing Taxpayers to “Split” Their Refunds Is “Fraught With Danger”
A collection of “consumer groups”recently urged then-IRS Commissioner Douglas Shulman to support their proposal to allow taxpayers to “split” their federal income tax refunds by directing the IRS to electronically transmit a portion of a taxpayer’s refund to a tax preparer or other entity, with the remainder going to the taxpayer’s bank account. This proposal raises serious policy implications, which are explained below.
The Split-Refund Option Is Potentially Unlawful
The first problem with this proposal is that a “split refund” appears to be potentially unlawful under current law. IRS Form 8888, in its current form, may not be used to direct deposit refund proceeds into an account that is not titled in the taxpayer’s name. The deposit of an income tax refund into a tax preparer’s account has always been considered to violate the Internal Revenue Code (IRC) prohibition against the assignment of that refund. Specifically, 26 U.S.C. § 6695(f) provides, in pertinent part:
“Any person who is a tax preparer who endorses or otherwise negotiates (directly or through an agent) any check made in respect of the taxes imposed by this title which issued to a taxpayer (other than the tax return preparer) shall pay a penalty of $500 with respect to each such check.”
The same concept is found in IRS Circular 230, Section 10.31, which provides: “Tax practitioners may not negotiate any checks issued to clients related to a federal tax liability.”
If the IRS no longer believes the foregoing sections are necessary to protect the integrity of the tax system, thus providing no safeguards or any beneficial impact, it would be helpful to understand that flexibility and how such a major policy change will be implemented in the tax system.
The Split-Refund Option Raises Serious Concerns About Increased Fraud
With regard to the potential use and misuse of Form 8888, a split-refund option could potentially increase the risk of fraud and abuse in our tax system. Currently, refund transfers (“RTs”) require the opening of a bank account and are administered by government-regulated banks. Allowing the use of Form 8888 to split refunds would be outside the strict compliance, legal controls and oversight that govern the opening and use of a bank account. Today, there is no government oversight at all on Form 8888, and there are serious questions as to whether the Service has the resources to monitor and address fraud concerns.
The Split-Refund Option: Is Proper Oversight Even Possible?
A split-refund policy itself should be comprehensively reviewed by the Service before implementation, with an emphasis on whether proper oversight is even possible. A split-refund policy in any manner may pose an extraordinary risk to the integrity of the tax system, and clearly would create an enormous new burden for the Service to oversee, regulate, investigate and review millions of additional transactions. The safety, reliability and integrity of the tax system and refund disbursement process may dictate that the split refund concept is too risky and resource intensive to be implemented. Karen Hawkins, the Director of the IRS Office of Professional Responsibility, has commented publicly that the use of Form 8888 to split refunds is “fraught with danger.”
A Split-Refund Option Poses Operational Concerns
A split-refund option also poses operational concerns, including the use of scarce IRS resources to expand customer service and technology infrastructure, both of which are significant factors in providing and satisfying customer needs and demands. Each year, millions of Americans freely choose a RT after they determine that this convenience service suits their individual needs and financial circumstances. Today, customer service calls normally are directed to tax preparers or banks offering RTs. Under the scenario envisioned by the consumer groups, such future calls would necessarily be directed to the IRS instead.
The IRS Should NOT Be in the Business of Setting Fees
The “consumer groups” that support the split-refund option suggest that the IRS should administer a regime of oversight regarding tax preparation services and fees as a part of this proposed change in how a split refund might be used. The groups state: “The dollar amount of the split refund to the tax preparer should be limited to avoid abuses, but sufficient to pay for basic tax services.”
The suggestion that the IRS should assume a market-management role over the pricing and offer of commercial products and services, on top of creating a new split refund program and customer support operation, would further threaten the ability of the IRS to perform its core mission (e.g., tax administration, customer support, revenue collection, and compliance enforcement and investigation). Robust market competition today provides consumers with a wide range of products, services and price points for tax preparation (including for free). Expanding the mission of the IRS to manage that marketplace via a split refund program involves very substantial policy and resource questions.