BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 843|
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THIRD READING
Bill No: AB 843
Author: Nunez (D)
Amended: 8/16/05 in Senate
Vote: 21
SEN. BUS., PROF. & ECON. DEV. COMM. : 4-2, 6/20/05
AYES: Figueroa, Florez, Murray, Simitian
NOES: Campbell, Aanestad
NO VOTE RECORDED: Morrow
SENATE JUDICIARY COMMITTEE : 5-2, 7/12/05
AYES: Dunn, Cedillo, Escutia, Figueroa, Kuehl
NOES: Morrow, Ackerman
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : 44-30, 5/19/05 - See last page for vote
SUBJECT : Tax preparers
SOURCE : Author
DIGEST : This bill prohibits a tax preparer who
advertises the availability of a refund anticipation loan
(RAL) from representing the loan as a clients 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.
CONTINUED
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ANALYSIS :
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 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.
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 with California.
6.Establishes various requirements for tax preparers
including obligations to:
A. Register with the CTEC.
B. Obtain a "certificate of completion" based upon
completing a tax education curriculum, as specified.
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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 and
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 offer.
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
conduct.
12.Provides that a person who violates the tax preparer law
is guilty of a misdemeanor offense punishable by a fine
not exceeding $1,000 or by imprisonment in a county jail
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for not more than one year, or by both.
13.Provides that any person may maintain an action or
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 $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.
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 (IRS) 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
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representing clients before the 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 law 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 prepare who is an ERO cannot also be
a lender.
C. All parties to RAL agreements must ensure that
taxpayers 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 charges by EROs must be the same for all
customers.
This bill:
1.Defines "client" as an individual for whom a taxpayer
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.
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3. Defines "borrower" as a client who received the proceeds
of a RAL.
4. Defines "refund anticipation loan fee schedule" as a
listing or table of refund anticipation loan fees that
includes three or more representative refund
anticipation loan amounts. The schedule will not list
separately each fee or charge imposed, as well as a
total of all fees imposed, related to the making of
refund anticipation loans. The schedule will also
include, for each representative amount, the estimated
annual percentage rate calculated under the guidelines
established by the Federal Truth in Lending Act, 15 U.S.
Section 1601, et seq.
5.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.
6.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, or 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.
7. Requires that a tax preparer who facilitates a refund
application loan provide the borrower, prior to the
borrower's completion of the loan application, a clear,
written disclosure containing the following information:
A. The refund anticipation loan fee schedule.
B. That a refund anticipation loan is a loan, and is
not the borrower's actual income tax refund.
C. That the taxpayer can file an income tax return
electronically without applying for a refund
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anticipation loan.
D. The average times, according to the Internal
Revenue Service, within which a taxpayer who does not
obtain a refund anticipation loan can expect to
receive a refund if the taxpayer's return is (1)
filed electronically and the refund is directly
deposited to the taxpayer's bank account or mailed to
the taxpayer, and (2) mailed to the Internal Revenue
Service and the refund is directly deposited to the
taxpayer's bank account or mailed to the taxpayer.
E. That the Internal Revenue Service does not
guarantee that it wilil pay the full amount of the
anticipated refund and does not guarantee a specific
date that a refund will be deposited into the
taxpayer's financial institution account or mailed to
a taxpayer.
F. That the borrow is responsible for repayment of
the loan and related fees in the event that the tax
refund is not paid or not paid in full.
G. The estimated time within which the loan proceeds
will be paid to the borrower if the loan is approved.
H. The fee that will be charged, if any, if the
borrower's loan is not approved.
8. Provides that a tax preparer who facilitates a refund
anticipation loan must provide the borrow, in either
written or electronic form, the following information,
prior to the borrower's consummation of the loan:
A. The estimated total fees for obtaining the refund
application loan.
B. The estimated annual percentage rate for the
borrower's refund anticipation loan, using the
guidelines established under the Federal Truth in
Lending Act.
C. A comparison of the various costs, fees, and
finance charges, if applicable, associated with
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receiving a refund by mail or by direct deposit
directly form the Internal Revenue Service, a refund
anticipation loan, a refund anticipation check or any
other refund settlement options facilitated by the
tax preparation service.
Background
How are RALs Made ? A 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 than
anticipated or is offset by other debts (such as child
support), the consumer still must repay the RAL.
Who Gets RALs ? About one 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 percent
(for a loan of $9,999) to over 700 percent (for a loan of
$200), or 70 percent to over 1,700 percent 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."
Other States' Legislation on RALs . The following states
have introduced RAL legislation in 2005: Connecticut (HB
5830 and SB 1070), Iowa (SF 145), New Jersey (AB 3881), New
Mexico (SB 876 and HJM 100), New York (AB 1366, AB 1971,
and SB 3198), Ohio (SB 59), Oregon (SB 968 and HB 2995),
Texas (SB 1020 and HB 398), Washington (HB 1251, SB 5692
and SB 5796).
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Currently, the states of Connecticut, Illinois, Minnesota,
North Carolina and Wisconsin have imposed regulatory
restraints on RALs.
Previous Similar Legislation . AB 2868 (Nunez), in the
2003-04 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 Commission 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 and was vetoed by
the Governor.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
SUPPORT : (Verified 8/23/05)
CALPRIG
Children's Defense Fund
Jackson Hewitt Tax Service
H & R Block
HSBC
Board of Accountancy
ARGUMENTS IN SUPPORT : According to the author's office,
this 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's office argues that tax preparation businesses
may use questionable techniques when disclosing the terms
and agreements for RALs. Moreover, the author's office
argues that tax preparers may target low-income individuals
who desperately need the money from their tax. While their
tax preparer may make significant profits from the loan,
the consumer often loses significant portions of his or her
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tax refund due to fees and interest. By requiring tax
preparers 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.
ASSEMBLY FLOOR :
AYES: Arambula, Baca, Bass, Berg, Bermudez, Canciamilla,
Chan, Chu, Cohn, Coto, De La Torre, Dymally, Evans,
Frommer, Goldberg, Hancock, Jerome Horton, Jones,
Karnette, Klehs, Koretz, Laird, Leno, Levine, Lieber,
Matthews, Montanez, Mullin, Nation, Nava, Negrete McLeod,
Oropeza, Parra, Pavley, Ridley-Thomas, Ruskin, Saldana,
Salinas, Torrico, Umberg, Vargas, Wolk, Yee, Nunez
NOES: Aghazarian, Blakeslee, Bogh, Cogdill, Daucher,
DeVore, Emmerson, Harman, Haynes, Shirley Horton,
Houston, Huff, Keene, La Malfa, La Suer, Leslie, Maze,
McCarthy, Mountjoy, Nakanishi, Niello, Plescia, Richman,
Sharon Runner, Spitzer, Strickland, Tran, Villines,
Walters, Wyland
NO VOTE RECORDED: Benoit, Calderon, Chavez, Garcia,
Gordon, Liu
JJA:cm 8/24/05 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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