BILL ANALYSIS
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|Hearing Date:June 20, 2005 |Bill No:AB |
| |843 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC
DEVELOPMENT
Senator Liz Figueroa, Chair
Bill No: AB 843Author:Nunez
As Amended:March 31, 2005 Fiscal: Yes
SUBJECT: Tax preparers.
SUMMARY: Prohibits a tax preparer who advertises the
availability of a refund anticipation loan (RAL) from
representing the loan as a client's actual tax refund and
from engaging in other activities regarding a RAL as
specified, and requires a tax preparer that offers to make
or facilitate a RAL to clearly and conspicuously disclose
certain information in a specified manner regarding a RAL.
Existing law (Tax Preparer Law):
1)Defines "tax preparer" as a person who, for a fee or for
other consideration, assists with or prepares tax returns
for another person or who assumes final responsibility
for completed work on a return on which preliminary work
has been done by another person, or who holds himself or
herself out as offering those services.
2)Defines "tax preparer" as a corporation , partnership ,
association , or other entity that has associated with it
persons who have as part of their responsibilities the
preparation of data and ultimate signatory authority of
tax returns or that holds itself out as offering those
services or having that authority.
3)Specifies that a "tax preparer" does not include an
employee who, as part of the regular clerical duties of
employment, prepares his or her employer's income, sales
or payroll tax returns.
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4)Defines "tax return" as a return, declaration, statement,
refund claim, or other document required to be made or
filed in connection with state or federal income taxes or
state bank and corporation franchise taxes.
5)Establishes the California Tax Education Council (CTEC)
that is made up of various representatives of
professional associations that represent tax preparers,
enrolled agents, attorneys, or certified public
accountants, and representatives from each for-profit tax
preparation corporation within California.
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6)Establishes various requirements for tax preparers
including obligations to:
a) Register with the CTEC.
b) Obtain a "certificate of completion" based on
completing a tax education curriculum as specified.
c) Maintain a surety bond of $5,000 payable to State
of California. The bond shall be for the benefit of
any person or persons damaged by any fraud,
dishonesty, misstatement, misrepresentation, deceit,
or any unlawful acts or omissions by the tax preparer.
7)Requires that a tax preparer not disclose confidential
information regarding a client without the written
permission of the client, except in specific instances as
provided.
8)States that it is the intent of the Legislature to
encourage all persons who prepare state income tax
returns, including tax preparers, to inform their clients
in writing, prior to completion of any state income tax
returns, that they may make a contribution to any
voluntary contribution check-off on the state income tax
return if they so choose.
9)Makes it a violation for tax preparers to: fail to
register with CTEC; make fraudulent, untrue or misleading
statements to customers; fail to sign a customer's tax
return when payment for services rendered has been made;
fail to return a customer's records upon his or her
request; knowingly give false or misleading information
to the consumer, the surety company or CTEC; or commit
any other acts or omissions as specified.
10)Provides that the Franchise Tax Board, pursuant to an
agreement with CTEC, may cite and fine tax preparers for
any violations, as specified, or issue a cease and desist
order.
11)Provides that the Superior Court in the county where any
person acts as a tax preparer in violation of the tax
preparer law, may, upon petition by any person, issue an
injunction or other appropriate order restraining the
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conduct.
12)Provides that a person who violates the tax preparer law
is guilty of a misdemeanor offense punishable by a fine
not exceeding one thousand dollars ($1,000) or by
imprisonment in a county jail for not more than one year,
or by both.
13) Provides that any person may maintain an action for
enforcement of any duties specifically imposed upon the
tax preparer pursuant to the tax preparer law or to
recover a civil penalty in the amount of one thousand
dollars ($1,000), or for both enforcement and recovery,
and provides the prevailing plaintiff with attorney's
fees and costs in addition to the civil penalties.
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14)Exempts the following entities from compliance with the
tax preparer law:
a) Certified Public Accountants (CPAs) licensed by the
California Board of Accountancy;
b) active members of the California State Bar and
their employees;
c) trust company and trust business employees, as
defined;
d) financial institutions regulated by the federal
government, as specified;
e) persons enrolled to practice before the Internal
Revenue Service pursuant to federal regulations.
Existing law (Civil Code) requires that any person in a
trade or business who negotiates primarily in Spanish,
Chinese, Tagalog, Vietnamese, or Korean, orally or in
writing, in the course of entering into a contract, a loan
or extension of credit, a lease or rental agreement, shall
deliver to the other party a translation of the document(s)
used for those purposes prior to the execution of the
contract, loan, extension of credit, lease, or rental
agreement.
Existing federal law:
1)Establishes various laws, rules and regulations that govern
the activities of attorneys, certified public accountants,
enrolled agents, and other persons representing clients before
the Internal Revenue Service (IRS). Some of those laws are
the Gramm-Leach-Bliley Act, the Internal Revenue Code and
Regulations and the IRS Revenue Procedure 2000-31.
2)Provides various laws and regulations governing RALs. The key
provisions of IRS Revenue Procedure 2000-31 and the Handbook
for Authorized IRS e-file Providers of Individual Income Tax
Returns require:
a) Tax returns involving a RAL must be electronically filed
with the IRS, which requires the tax preparer to be a
federally-regulated Electronic Return Originator (ERO).
b) A tax return preparer who is an ERO cannot also be a
lender.
c) All parties to RAL agreements must ensure that taxpayers
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understand that RALs are interest bearing loans and not
substitutes for or a faster way of receiving a tax refund.
d) Reference to funds advanced must clearly and in readable
print refer to a loan, not a refund.
e) Ads must clearly indicate the taxpayer is borrowing
against the anticipated refund and not obtaining the refund
itself from the financial institution.
f) Fees charged by EROs must be the same for all customers.
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This bill:
1)Defines "client" as an individual for whom a tax preparer
performs or agrees to perform tax preparation services.
2)Defines "refund anticipation loan" as a loan, whether
provided by the tax preparer or another entity, such as a
financial institution, in anticipation of, and whose
payment is secured by a client's federal or state income
tax refund or by both.
3)Prohibits tax preparers who advertise the availability of
a RAL from directly or indirectly representing the loan
as a client's actual refund. Any advertisement that
mentions a RAL shall state conspicuously that it is a
loan and that a fee or interest will be charged by the
lending institution. The advertisement shall also
disclose the name of the lending institution.
4)Requires tax preparers who offer to make or facilitate
RALs to display a schedule showing the current fees
related to a RAL for the electronic filing of the tax
return, for setting up a refund account and any other
related activities necessary to receive a RAL, and
requires that the fee schedule also include a statement
indicating that the client may have the tax return filed
electronically without also obtaining a RAL.
5)Mandates that postings be displayed in a prominent
location at each office where any tax preparer is
offering to make or facilitate a RAL required postings
shall be made in a specified manner.
6)Requires the tax preparer to provide the client with a
written notice containing specified information presented
in a prescribed manner to assure that the client is
informed of the following: (1) a RAL is a loan, (2) the
estimated annual percentage rate (APR) on the loan, (3)
the refund will be used to repay the loan, (4) the amount
the client will be charged for the loan including fees,
interest, and other charges, (5) the client can get a
full refund if they file they file there tax return
electronically in about 10 to 14 days or in about 21 days
if they file their return by mail, and (6) the client
will be charged additional interest if the refund is
delayed.
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7)Requires that the written notice also contain the name
and address of the lender, and the estimated time the
loan proceeds will be made available to the client if the
loan is approved.
8)Requires tax preparers to provide a blank written notice
to the client upon being notified that the client wishes
to apply for a RAL, and that before entering into a RAL
agreement, the tax preparer shall provide the client with
a completed written notice.
9)Requires that documents, including any advertisements,
schedules, postings or notices, be translated into
Spanish, Chinese, Tagalog, Vietnamese, or Korean if the
RAL was negotiated in that language.
10)Prohibits a tax preparer who makes or facilitates RALs
from:
a) Requiring a client to enter into a loan arrangement
in order to complete a tax return;
b) Misrepresenting a material factor or condition of a
RAL;
c) Failing to process the application for a RAL
promptly after the client applies for the loan;
d) Engaging in any transaction, practice, or course of
business that operates a fraud upon any person in
connection with a RAL; and,
e) Facilitating a RAL for which the fee is different
than the amount posted.
11)Specifies that all tax preparers shall comply with the
provisions of this measure and would also require the
following professions and entities to comply with the
provisions of this measure:
a) Certified Public Accountants (CPAs) licensed by the
California Board of Accountancy;
b) active members of the California State Bar and his
or her employees;
c) trust company and trust business employees, as
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defined;
d) financial institutions regulated by the federal
government, as specified;
e) persons enrolled to practice before the Internal
Revenue Service pursuant to federal regulations.
FISCAL EFFECT: According to the Assembly Appropriations
Committee analysis, dated April 13, 2005, minor
nonreimbursable local law enforcement costs offset in part
by fine revenue.
COMMENTS:
1.Purpose. According to the Author, the bill will ensure
that California consumers have the necessary information
to make informed decisions about RALs. A RAL offers
taxpayers instant money from their tax returns in just
days, as opposed to waiting two to three weeks to receive
the actual refund from the IRS. However, the Author
argues that tax preparation businesses may use
questionable techniques when disclosing the terms and
agreements for RALs. Moreover, the Author argues that
tax preparers may target low-income individuals who
desperately need the money from their tax. While the tax
preparer may make significant profits from the loan, the
consumer often loses significant portions of his or her
tax refund due to fees and interest. By requiring tax
prepares to clearly and conspicuously display fees,
interest rates, and other tax return options, consumers
will be prepared to make an informed decision and prepare
for future tax refunds.
2.Background.
How are RALS made? A Refund Anticipation Loan (RAL) is a
high interest, short-term loan generally made by a bank,
but offered through a tax preparer. When a consumer uses
a tax preparer to calculate his or her taxes and is
eligible for a refund, the preparer then offers the
consumer a way to get the money in just a few days with a
RAL. From the consumer's perspective, the RAL may be
attractive because the money is available in a day or two
rather than the two to three weeks it takes to get an
electronic refund or check from the IRS. The loan is
repaid when the tax refund is deposited into a temporary
account controlled by the bank. If the refund is less
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than anticipated or is offset by other debts (such as
child support), the consumer still must repay the RAL.
Who gets RALS? About 1 in 10 American tax preparers took
out RALs in 2002, over half of them low-wage workers who
receive a refundable credit provided through the tax
system and intended to boost low-wage workers out of
poverty. The rates for these 10-day loans range from
about 40% (for a loan of $9,999) to over 700% (for a loan
of $200), or 70% to over 1,700% if administrative or
application fees are included. According to the National
Consumer Law Center, "Consumers paid an estimated $1
billion in RAL fees, plus an additional $389 million in
administrative or application fees in 2003 to get quick
cash for their refunds; essentially borrowing their own
money at extremely high interest rates."
3.Other States' Legislation on RALs. The following states
have introduced RAL legislation in 2005: Connecticut (HB
6830) (SB 1070), Iowa (SF 145), New Jersey (AB 3881), New
Mexico (SB 876) (HJM 100), New York (AB 1366) (AB 1971)
(SB 3198), Ohio (SB 59), Oregon (SB 968) (HB 2995), Texas
(SB 1030) (HB 398), Washington (HB 1251) (SB 5692) (SB
5796).
Currently the states of Connecticut, Illinois, Minnesota,
North Carolina and Wisconsin have imposed regulatory
restraints on RALs.
4.Previous Similar Legislation. AB 2868 (Nunez), in the
2003-2004 Session, would have enacted the Refund
Anticipation Loan Act for the purpose of protecting
consumers who enter into RALs, ensuring that those
consumers are fully informed of the costs and
consequences of those loans. The bill would have
required the registration with the Commissioner of
Corporations of persons and facilitators, as defined,
soliciting the execution, processing, receiving, or
accepting of an application or agreement for, a refund
anticipation loan; moreover, AB 2868 would have
authorized the commissioner to revoke a registration upon
making specified findings and to effectuate the purposes
of the bill. The bill passed out of both houses but was
vetoed by the Governor.
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5.Arguments in Support. The Children's Defense Fund (CDF)
supports
AB 843 arguing that each year California taxpayers are
tempted by the promise of instant tax money by tax
preparers and often these Californians are the ones who
least can afford it. Low and moderate income taxpayers
lose a significant portion of their tax refund to
interest and fees, and the CDF states that this money
could be used for more essential needs such as housing,
child care, and transportation. If AB 843 becomes a law,
Californians will be better informed to make decisions
regarding RALs.
6.H & R Block Suggested Amendments. This Committee has
received what are suggested amendments to AB 843 from H&R
Block and they have indicated they have also provided
these amendments to the Author's office. The Committee,
however, is not in receipt of any letter justifying the
need for these amendments nor has the Author's office
responded.
7.Policy Concern : Are the requirements which AB 843
establishes for tax preparers in providing RALS
enforceable? The tax preparer law provides appropriate
legal remedies for any violations regarding tax
preparers, it is in effect a self-enforcing law. Section
22256 of the Business and Professions Code provides for
injunctive relief for any violation of the tax preparer
law and provides that it shall be a misdemeanor for
anyone who violated the tax preparer law by a fine not
exceeding $1,000 or by imprisonment in a county jail for
not more than one year, or by both. Section 22257
provides that if a tax preparer fails to perform a duty
specifically imposed upon him or her pursuant to the tax
preparer law, then any person may maintain an action for
enforcement of those duties or to recover a civil penalty
in the amount of $1,000, or for both enforcement and
recovery, and that the prevailing plaintiff shall be
entitled to reasonable attorney's fees and costs in
addition to the civil penalty.
8.Policy Concern : Would CTEC be responsible for enforcing
the provisions regarding RALs? The CTEC was established
by the California Legislature with the sole purpose of
approving tax education providers and issuing
Certificates of Completion and Statements of Compliance
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to tax preparers (not CPAs, enrolled agents or attorneys)
who meet specified bonding and education requirements.
Enforcement of any of the provisions regarding RALs would
be beyond the scope of what the Legislature intended with
the establishment of CTEC. As explained above, legal
remedies were built into the tax preparer law to allow
for enforcement of any violations regarding tax
preparers.
As indicated by the Author, there is no intent for the CTEC
to enforce the new provisions of the tax preparer law
regarding RALs, and CTEC would not be an appropriate
entity to enforce such provisions.
9.Policy Concern : Should exempted professions and entities
under the tax preparer law be required to meet all of the
requirements regarding RALs contained within SB 843?
Amendments to AB 843 on March 31, 2005 included a new
subsection (j) under Section 22253.1 of this measure
(page 5, lines 30 to 33). This subsection states that
the provisions of Section 22253.1, which specifies all of
the requirements regarding RALS, shall apply to all tax
preparers as defined, including those persons exempted
form the requirements of the tax preparer law. Those
person, professions and entities excluded from the tax
preparer law include: CPAs, attorneys, employees of any
trust company or trust business, a financial institution
and its employees thereof, and enrolled agents who are
licensed by the IRS.
The California Board of Accountancy has a "support if
amended" position on this bill because of the inclusion
of CPAs in the provisions of this bill, and indicate that
with this new subsection (j), CPAs would have to comply
with the same requirements that this bill would establish
for tax preparers. The Board notes that provisions
governing CPAs are more appropriately located in the
Accountancy Act and that locating these provisions in the
portion of the Business and Professions Code governing
tax preparers could result in confusion and/or
unintentional noncompliance by CPAs and public accounting
firms. The Board suggests that subsection (j) of Section
2253.1 be amended so it no longer applies to CPAs. The
Board indicated that they are also reviewing whether
provisions of the Accountancy Act and applicable
regulations already prohibit CPAs from making RALs or if
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there are existing disclosure requirements.
It is questionable whether subsection (j) of Section 2253.1
is necessary since specifying that this section applies
to tax preparers is redundant. Tax preparer is already
defined under the tax preparer law and all of the
provisions of AB 843 relate to a tax preparer regarding
the requirements in providing RALs. Also, it does not
appear that the exempted professions and entities under
the tax preparer law are involved to any significant
degree in making RALs at this time. The Author may want
to consider striking subsection (j) from the bill.
Suggested Amendment: On Page 5, strike lines 30 through
33.
NOTE : Double-referral to Judiciary Committee
SUPPORT AND OPPOSITION:
Support:
CALPRIG
Children's Defense Fund
Oppose Unless Amended:
California Board of Accountancy
Opposition: (None received as of June 15, 2005.)
Consultant: Bill Gage