We welcome guest blogger Elizabeth Maresca. Professor Maresca runs the tax clinic at Fordham Law School. She also serves as a Senior Legal Advisor to the National Consumer Law Center. When I saw the IRS announcement she discusses, I reached out to the National Consumer Law Center to see if it had thoughts on this decision. We are fortunate that Professor Maresca has provided a response. We do not always think of taxpayers as consumers but certainly aspects of the role of taxpayer involves consuming tax services. In that role the way the IRS handles their cases can have an important impact not only on the taxes themselves but collateral matters. The discussion here points to a potentially negative collateral consequence of the decision for handling cash tax payments. Keith
Earlier this summer, the IRS announced that it would allow certain “retail partners,” to accept cash tax payments for IRS. Most disturbingly, these retail partners include payday lenders, in particular ACE Cash Express. Payday lenders engage in practices that entrap lower-income individuals in a long-term cycle of exorbitantly-priced debt that often brings serious financial harm. In addition, the IRS use of retail partners imposes a fee on taxpayers, and is cumbersome in that it requires internet access, takes three steps, and several days to complete.
The Perils of Payday Lending
Payday lenders typically offer their borrowers high-cost loans, often with short terms such as 14-days. The loans are marketed as a quick fix to household financial emergencies with deceptively low fees that appear be less than credit card or utility late fees or overdraft fees. Background on the abuses of payday loans is available here and in National Consumer Law Center, Consumer Credit Regulation, 2d ed. 2015, Chapter 9. The loans are marketed to those with little or no savings, but a steady income.
Fees for payday loans generally translate into APRs of 200% to 400%. The payday loan business model requires the borrower to write a post-dated check to the lender – or authorize an electronic withdrawal equivalent – for the amount of the loan plus the finance charge. On the due date (payday), the borrower can allow the lender to deposit the check or debit the account – or the borrower can pay the initial fee and roll the loan over for another pay period and pay an additional fee. The typical loan amount is $350. The typical annual percentage rate on a storefront payday loan is 391%.
Rollover of payday loans, or the “churning” of existing borrowers’ loans creates a debt treadmill that is difficult to escape: The Consumer Financial Protection Bureau found that over 75% of payday loan fees were generated by borrowers with more than 10 loans a year. And, according to the Center for Responsible Lending, 76% of all payday loans are taken out within two weeks of a previous payday loan with a typical borrower paying $450 in fees for a $350 loan.
Use of Retail Partners Imposes Burden and Fees on Taxpayers
In addition to using these payday lenders as tax payment agents, the new IRS arrangement poses other problems for taxpayers. Since as early as 2007, the IRS National Taxpayer Advocate has criticized the IRS for the lack of available Taxpayer Assistance Centers that accept cash payments from taxpayers. Although taxpayers can still pay in cash at some of these Centers, appointment are required, and can take upwards of 30 to 60 days to schedule.
While the IRS solution of using retail partners reduces costs for the agency, it adds significant costs and burdens on taxpayers. There is a fee of $3.99 per payment, and each payment is limited to $1,000. Before using a “retail partner,” the taxpayer must visit the “Official Payments” website, which effectively excludes any taxpayers who are not comfortable with using the Internet. Emails are then sent from both Official Payments and PayNearMe. The PayNearMe email includes a payment code that the taxpayer must print or display on a smartphone at the retail partner. The entire process takes five to seven business days and must be completed before the payment due date.
The IRS should exclude Payday Lenders from Retail Partner Program
Unfortunately, the new IRS arrangement will almost certainly bring new customers into payday lending stores and leave them susceptible to high-cost loan products and the debt treadmill. Indeed, the individuals most likely to pay their tax liability at a retail partner have some of the characteristics – low-income, BIPOC, female, elderly – that make them prime targets for payday lenders.
The IRS should recognize that using payday lenders as tax payment agents poses a threat to low-income taxpayers. Their services can trap them in debt, and jeopardize their ability to pay their tax debts, and other necessary expenses, such as food and rent. The IRS should stop allowing payday lenders to accept cash payments for federal taxes, but instead should provide taxpayers with safe and convenient alternatives.