The information, called debt indicators, has been included on acknowlegements the IRS sent to tax preparers when electronically-filed returns were received by the agency. The indicators served as a warning that some or all of the person's refund might be held back to cover old debt, including back taxes, unpaid child support or delinquent federal student loans.
They are typically used by tax preparers to decide if a taxpayer can get a refund anticipation loan. These short-term loans have been criticized by consumer advocates for charging high interest rates and fees in exchange for providing access to money backed by refunds just a few days before the refund itself arrives.
In 2007, nearly 9 million taxpayers paid more than $900 million in fees for such loans, according to a report by the Consumer Federation of American and the National Consumer Law Center.
"We no longer see a need for the debt indicator in a world where we can process a tax return and deliver a refund in 10 days," IRS Commissioner Doug Shulman said in a statement. "We encourage taxpayers to use e-file with direct deposit so they can get their refunds in just a few days."
Shulman noted that refund anticipation loans are often targeted at low-income taxpayers who may need their money quickly.
Companies like H&R Block Inc. and Jackson Hewitt Tax Services Inc. that facilitate refund anticipation loans argue that taxpayers who are strapped for cash benefit by being able to get their money faster, and often can have their preparation fees covered by their refunds rather than paying upfront to get their returns filed.
The market for these loans was disrupted in the most recent tax season after Jackson Hewitt lost some of its backing, and H&R Block scaled back its advertising for the products, leading some customers to believe they no longer offered them.
Jackson Hewitt stock dropped sharply after the IRS news was released. Shares fell 18 cents, or 17 percent, to 88 cents in afternoon trading. H&R Block shares also dipped, giving up 37 cents, or 2.4 percent, to $15.04.