The Internal Revenue Service’s Office of Professional Responsibility warned tax preparers against endorsing or negotiating taxpayers’ federal refunds.
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The OPR cautioned against the common scenario where a tax preparer and taxpayer mutually agree to share or split the payment, as an easy fix, because the taxpayer cannot afford to pay for the practitioner’s services other than through the expected refund or because the taxpayer is unbanked.
The longstanding prohibition comes from Circular 230, Regulations Governing Practice before the Internal Revenue Service (Section 10.31), which states that a practitioner may not endorse or negotiate any check issued to a client by the government with respect to a federal tax liability. It does not legally matter if the client has given their oral or written consent to the practitioner.
Practitioners who violate section 10.31 are subject to investigation by the OPR, based on referrals from IRS personnel or complaints from taxpayers. The consequences of noncompliance vary by situation. For instance, in non-egregious cases of one or two isolated instances, the practitioner may receive a warning letter from the OPR. In more serious cases — like a single violation of section 10.31 along with several violations of other sections — the OPR may pursue a disciplinary sanction. Sanctions may include censure, suspension from practice before the IRS, disbarment and monetary penalties.
Endorsements and negotiations should not be confused with Refund Anticipation Loans, which advance funds to a taxpayer as a borrower based on their anticipated income tax refund. Refund anticipation checks are contracts between the taxpayer and the lender, and the IRS is not a party to the contract or involved in the transaction.
The OPR shared this warning as a refresher or gap filler to tax preparers in its monthly issue of guidance.
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