IRS Will Stop Providing Debt Indicators; Exploring Ways for Taxpayers to Use Refunds to Pay Preparers

From the IRS

On August 5, the IRS announced that it will stop providing “debt indicators” to tax preparers and associated financial institutions (IR-2010-89). Currently, when a tax preparer e-files a client’s tax return, the IRS indicates in the acknowledgment file whether the taxpayer will have any portion of the refund offset for delinquent taxes or other debts, including unpaid child support or delinquent federally funded student loans. This is known as the debt indicator, and it is used as an underwriting tool to facilitate refund anticipation loans (RALs).

The IRS is reviewing refund settlement products such as RALs and refund anticipation checks, and in the announcement IRS Commissioner Doug Shulman said, “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.” He encouraged taxpayers to e-file and use direct deposit instead.

The IRS also announced plans to explore the possibility of providing a new tool for the 2012 tax filing season that would allow taxpayers to use a portion of their tax refund to pay for the services of a professional tax return preparer. The IRS says it plans to discuss with taxpayers, consumer advocates, and the tax return preparer community whether providing this option would be a cost-effective way for consumers to pay for tax return preparation services.

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