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WASHINGTON — The Internal Revenue Service today announced that starting with next year’s tax filing season it will no longer provide tax preparers and associated financial institutions with the “debt indicator,” which is used to facilitate refund anticipation loans (RALs).

[TaxMama note: please see the related story.]

“As we prepare for tax season every year, we look at past practices and consider whether they still make sense. We no longer see a need for the debt indicator in a world where we can process a tax return and deliver a refund in 10 days,” IRS Commissioner Doug Shulman said. “We encourage taxpayers to use e-file with direct deposit so they can get their refunds in just a few days.”

So far this year, more than 95 million tax returns have been e-filed, representing more than 70 percent of tax returns.

“Refund Anticipation Loans are often targeted at lower-income taxpayers,” Shulman said. “With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”

The IRS has been reviewing refund settlement products, such as RALs and Refund Anticipation Checks (RACs), as part of the Return Preparer Review released in January. Specifically, the IRS announced that it would study refund settlement products.

RALs are loans secured by a taxpayer’s anticipated tax refund. Currently, tax preparers who electronically submit a client’s tax return receive in the acknowledgment file an indication of whether an individual taxpayer will have any portion of the refund offset for delinquent tax or other debts, such as unpaid child support or delinquent federally funded student loans. This acknowledgment is known as the debt indicator, and is used as an underwriting tool for RALs.

The IRS announcement would remove the debt indicator starting with the upcoming 2011 tax filing season. The IRS noted that taxpayers will continue to have access to information about their tax refunds and any offsets through the “Where’s My Refund?” service on IRS.gov.

RACs are temporary bank accounts established on behalf of a taxpayer into which a direct deposit refund can be received and out of which a bank typically issues a payment to the taxpayer.

With both RALs and RACs, tax preparation and product fees are subtracted directly from the refund, and the taxpayer does not make any “out-of-pocket” payments. They are frequently marketed to taxpayers who do not have cash to pay for professional tax preparation services.

In a related effort, the IRS plans to explore the possibility of providing a new tool for the 2012 tax filing season to give taxpayers a mechanism to use an appropriate portion of their tax refund to pay for the services of a professional tax return preparer. The IRS plans to engage with taxpayers, consumer advocates and the tax return preparer community to consider whether providing this option would be a cost-effective way for consumers to pay for tax return preparation services.

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This morning TaxMama received a press release from Harry W. Buckley, president and chief executive officer of Jackson Hewitt Tax Service Inc. in response to IRS’s announcement yesterday about removing the debt indicator from the electronically filed tax returns at the time of filing.

Mr. Buckley has strong concerns regarding the recent IRS announcement that it will eliminate the debt indicator for the 2011 tax season. In his opinion, this move has significant implications for taxpayers:

“The IRS decision to not provide debt indicator data to taxpayers through the electronic tax filing process will make it difficult for the millions of taxpayers who desire to receive cash quickly in connection with the electronic filing of their annual tax return. This form of credit, especially important to middle and low income, often unbanked, taxpayers, may well continue to be available in our industry.”

And the release goes on.

I am not surprised to get such a statement from a storefront-type operation like Jackson Hewitt whose target customer is the lower income taxpayer. They, and chains like them who push the Refund Anticipation Loans (RALs) will lose millions of dollars in income as clients are no longer able to get instant refunds.

In fact, if there is no incentive to come to a refund mill, they just might lose those clients altogether as they learn about no-charge tax preparation serices at VITA sites around their community, in their houses of religion, schools, libraries, etc.

For years, I have been speaking out strongly against the practice of pushing low-income taxpayers to get these quickie refunds. In fact, in my annual online filing article for MarketWatch.com, I have eliminated all the tax preparation sites who make the RALs a prominent feature – to the chagrin of certain major companies.

The problem is, most of the clients who get RALs don’t understand that they don’t have to pay for such a service. Their refunds will arrive in about 2 weeks anyway even if they don’t pay an extra $40 – $60 or more the ‘instant’ refund. They are often encouraged to believe this is the only way to get their refund. The National Taxpayers Advocate, Nina Olson, has been railing against this practice for years. IRS Commissioner Doug Shulman has actively discouraged the practice, to the point of excluding companies that push RALs from the FreeFile Alliance program.

I applaud IRS Commissioner Doug Shulman for taking this bold step to pull the rug out from under the entire RAL program.

Yes, some people who really need the money within a day or two to keep from getting evicted will be harmed. But, honestly, don’t you think it’s time that working people whose finances are that close to the vest learned more about how to get the refunds in advance?

Yes, you can get a substantial part of your Earned Income Credit refund in advance using Form W-5 to have some of that money added to your paycheck.
www.irs.gov/pub/irs-pdf/fw5.pdf

Perhaps the refund mills will earn some extra fees by helping these folks prepare those W-5s so they can get the money they desperately need to pay their monthly rent and groceries – so they face fewer financial emergencies requiring them to pay high fees to get their own money.

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Taxpayers need to be careful to protect their personal information. Identity thieves use many methods to steal personal information and then they use the information to file a tax return and get a refund. Here are 10 things the IRS wants you to know about identity theft so you can avoid becoming the victim of an identity thief.

1. The IRS does not initiate contact with a taxpayer by e-mail.

2. If you receive a scam e-mail claiming to be from the IRS, forward it to the IRS at phishing@irs.gov.

3. Identity thieves get your personal information by many different means, including:

• Stealing your wallet or purse


• Posing as someone who needs information about you through a phone call or e-mail


• Looking through your trash for personal information


• Accessing information you provide to an unsecured Internet site.

4. If you discover a website that claims to be the IRS but does not begin with ‘www.irs.gov’, forward that link to the IRS at phishing@irs.gov.

5. To learn how to identify a secure website, visit the Federal Trade Commission at www.onguardonline.gov/tools/recognize-secure-site-using-ssl.aspx

6. If your Social Security number is stolen, another individual may use it to get a job. That person’s employer may report income earned by them to the IRS using your Social Security number, thus making it appear that you did not report all of your income on your tax return.

7. Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don’t know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice.

8. If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification – such as a Social Security card, driver’s license, or passport – along with a copy of a police report and/or a completed Form 14039, Identity Theft Affidavit. As an option, you can also contact the IRS Identity Protection Specialized Unit, toll-free at 800-908-4490. You should also follow FTC guidance for reporting identity theft at www.ftc.gov/idtheft.

9. Show your Social Security card to your employer when you start a job or to your financial institution for tax reporting purposes. Do not routinely carry your card or other documents that display your Social Security number.

10. For more information about identity theft – including information about how to report identity theft, phishing and related fraudulent activity – visit the IRS Identity Theft and Your Tax Records Page, which you can find by searching “Identity Theft” on the IRS.gov home page.

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As you know, TaxMama is the author of Small Business Taxes Made Easy, which some people use as their business bible. Each of IRS’s tips is expanded, in detail, in Small Business Taxes Made Easy, – I’ll add the chapter references to IRS’s tips for you.

A new edition of the book is due out this winter. But, if you’re starting a business now, don’t wait for the new book. Use the current version – and these IRS tips. Note: These tips can be useful even if you’re already in business. Many people who’ve been in business for a dozen years or more have told me how helpful and eye-opening the information has been for them.

Are you opening a new business this summer? The IRS has many resources available for individuals that are opening a new business. Here are six tax tips the IRS wants new business owners to know – and one from TaxMama.

1. First, you must decide what type of business entity you are going to establish. The type of business entity will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation. (Chapter 3 – Small Business Taxes Made Easy )


2. The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax. (Chapter 1 Small Business Taxes Made Easy)


3. An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov. (Chapter 1 Small Business Taxes Made Easy )


4. Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes. (Chapter 4 Small Business Taxes Made Easy )


5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used. (Chapter 4 Small Business Taxes Made Easy )


6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them. (Chapter 4 Small Business Taxes Made Easy )


7. TaxMama tip – Every business needs a business plan. That’s the road map your business will follow to success. It also helps you know just what goals and target you need to reach each week or month or year. (Chapter 2 Small Business Taxes Made Easy)

IRS Publication 583, Starting a Business and Keeping Records, provides basic federal tax information for people who are starting a business. This publication is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676). Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.

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Did you know that you may be able to deduct some of your job search expenses on your tax return?

Many taxpayers spend time during the summer months updating their résumé and attending career fairs. If you are searching for a job this summer, you may be able to deduct some of your expenses on your tax return. Here are six things the IRS wants you to know about deducting costs related to your job search.

1. To qualify for a deduction, the expenses must be spent on a job search in your current occupation. You may not deduct expenses incurred while looking for a job in a new occupation.


2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.


3. You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.


4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.


5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.


6. You cannot deduct job search expenses if you are looking for a job for the first time.

For more information about job search expenses, see IRS Publication 529, Miscellaneous Deductions. This publication is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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