Refunds Used to Secure Loans Seized by IRS

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 will indeed 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 of their refunds nor how many who did apply were subject to offsets.

IRS officials said they hope to have figures this week.

Lenders, meanwhile, are on their own in trying to collect the loans they made.