Since the advent of electronic tax filing a few years ago, an industry has grown up to help taxpayers zip their returns to the tax collectors via computer, and in some cases to give taxpayers an ultra-quick refund in the form of a loan.
With the help of computers, a tax preparer can send in a return and get a quick acknowledgment from the Internal Revenue Service that a refund indeed will be forthcoming. Relying on that notification, lenders across the country have been advancing money to taxpayers.The loans are secured by the refund, which the IRS deposits electronically in the lender's account.
But last month, something went wrong. For more than two weeks - from Jan. 10 to Jan. 27 - the IRS' computers sent out acknowledgments on refunds that in fact would not be coming.
Instead, these refunds were "offset," that is, seized by the IRS to pay back taxes and other debts owed the government, such as student loans.
Lenders, however, relying on the acknowledgments, continued to issue loans against the refunds.
The problem has been corrected, an IRS spokesman said, and "no taxpayers lost any money." But at this point no one knows how many taxpayers got loans for refunds that aren't coming.
The IRS received 1.1 million electronic returns during the period, but doesn't know how many of these taxpayers applied for direct deposit.
Lenders, meanwhile, are on their own in trying to collect the loans they made. "That is a transaction between the taxpayer and the financial institution," the IRS spokesman said. "We do not get involved in that process. We are aware of it, of course."
Bankers said the papers signed by taxpayers in applying for the loan obligate the taxpayers to repay. "Now we have to go and collect," said John Russell of Bank One Corp. in Columbus, Ohio.
Russell said Bank One, which makes many "refund-anticipation loans," does not know at this point how many refunds won't come as expected.
He said it has happened before but not on a wide scale.
Russell said that, in the past, the bank has not had trouble collecting, and he noted that when the IRS is involved, most people prefer not to take chances.
But Russell added philosophically, "In the banking business, you have losses."