It’s Your Money: Say goodbye to overdraft fee cap, IRS Direct File

NEWS: The federal government is doing away with the $5 cap on overdraft fees that was put into place by the Consumer Financial Protection Bureau last year, and plans to scrap the new IRS Direct File free tax filing program.

WHAT IT MEANS TO YOU: If you’re an average consumer, it means going back to dealing with high overdraft fees and their financial fallout. All taxpayers will also suffer the negative impact of eliminating a service designed to make the IRS more efficient and less costly, and those who benefited from it will have to go back to using a third-party program that may upcharge you for “free” tax filing services.

I know, I know. It’s so hard to keep track of all the ways that new federal policies will have a negative impact on your wallet. We’ll try to keep it simple today and look at two things I wrote about last year that were designed to stop the nickel-and-dime pounding your wallet takes. I described them both as wins for consumers. I hope you didn’t get too excited about them, because they’re going away.

In a future column, we’ll look at the motivation for all of this – the attempt to fund tax cuts for the very wealthy. Today, though, we’ll just look at the inexplicable termination of programs that actually reduced waste, fraud and abuse and made daily living easier for average consumers.

Cap on overdraft fees – gone

I’ve been writing about high and unnecessary overdraft fees and the negative impact they have on consumers who can least afford it since my first It’s Your Money column in December 2021.

In December, when it appeared a cap on those fees was finally becoming law, I wrote about it as a gift to consumers, naively thinking it would become law no matter who was in office. Silly me.

To recap: The CFPB in December announced that it is closing the loophole that allows large banks to charge excessive overdraft fees for account holders. Overdraft fees, or NSF (non-sufficient funds) fees, cost American consumers billions a year, with the biggest negative effect on low-income and marginalized consumers, who can least afford to lose their bank account or pay the cascading effect of fee upon fee.

First proposed in 2023, the rule was supposed to go into effect this coming Oct. 1. Some banks, beginning during the pandemic, had quietly reduced or eliminated them, and when the CFBP got involved, early action by lenders had already saved consumers $6 billion annually. Still, in 2023, Americans still paid $5.8 billion in overdraft fees.

The new rule gave banks the option of:

• Capping overdraft fees at $5, which is the estimated amount it costs lenders to cover the cost of a courtesy overdraft program.
• Cap the fee at an amount that covers costs and losses, with no profit margin.
• Since an overdraft program is a loan, banks must disclose the terms, just like what’s required for any for-profit loan. Customers must choose to open the overdraft credit line, and the bank must provide account-opening disclosures that would allow comparison shopping, send periodic statements, and give the account-holder a choice of whether to pay automatically or manually.

The new rule was aimed at big banks, like JP Morgan Chase and Wells Fargo. Big money brings big clout, and banks fought the rule all the way. The American Bankers Association in December filed a lawsuit against it.

The ABA didn’t have to wait for the lawsuit to wind its way through the courts, though. Last month, the Senate voted 52-48 to repeal the rule. Senate Banking Committee Chairman Tim Scott, R-S.C., who proposed the repeal, said it will be “good for consumers.” On April 10, the House followed, voting 217-211 to repeal it.

Many consumer advocates and economists disagree with Scott and those who opposed the rule, including Consumer Reports, the product and service analysis company. Chuck Bell, advocacy program director at told Bloomberg, “The CFPB’s rule imposes reasonable limits that protect consumers from unfair fees while enabling banks to cover their costs. Repealing the CFPB’s overdraft fee limits will hurt working families who are already struggling with high prices and inflation.”

Here’s a reminder on what was behind the CFPB cap:

If you don’t carry a large balance in your checking account, it happens easily, particularly if you have a lot of automated bill payments. You pay for groceries or gas or some other necessity with your debit card, then an auto payment comes out and you’re overdrawn. The bank charges a fee, maybe as high as $35. Sometimes it’s to cover the overdraft, either by moving money from another account, or simply covering it. In any case, you now have $35 less in your account than what you’d budgeted. If that keeps you overdrawn, you’re charged another fee.

There’s no limit to how many overdraft or NSF fees a bank can charge in a day. They’re not required to notify you when your account is overdrawn. If you don’t check your account every day, or more often, you may not even realize it’s happening until you get an NSF notice in your email a day or more later.

The chaos it can cause to your finances can lead to bills not being paid, lack of money for rent and food, and possibly loss of the account. People who don’t have bank accounts have to look for other places to cash paychecks, pay bills or borrow money. These places often charge for services that banks offer for free. This has a big impact on the ability to build wealth for people who most need to, keeping them in a low-income spiral.

This happens to people both with overdraft protection and without it. The CFPB found that people who have overdraft protection actually pay more in fees than those who don’t. Just because the bank will cover the overdraft doesn’t mean it won’t charge a fee.

Banks argue that overdraft protection helps consumers by allowing a payment that would normally be returned go through, that the fee is just the cost of doing business. But those fees are much higher than what it costs the bank, and are technically a small short-term, very high-interest loans. Most consumers cover the overdraft in three days or less, but still pay that high interest.

And, of course, the banks make huge profits on overdraft and NSF fees.

It all started innocently enough way back when people paid their bills using paper checks, which they popped into an envelope, pasted on a stamp, and mailed. Sometimes the checks would take weeks or more to clear the checking account, at which point the money to cover it may not have been in there. The check would be returned to the person who wrote it, the bill wouldn’t get paid, and the bank would charge a fee for its trouble.

Back in the 1960s, when the Truth in Lending Law was drafted, those fees weren’t really profitable for banks, so they successfully lobbied for a loophole that exempted the fees from the rules other financial fees came under. Included in that was the fact that lenders weren’t required to disclose the fee to customers, the way they are with loans.

Banks began offering overdraft protection for a fee. For $25 or some other amount a month, you’d be protected if your account was overdrawn, up to a certain limit. If you opted out, or went over the limit, you’d be charged a fee for insufficient funds.

As digital banking evolved, those fees began to be huge money-makers for banks. It cost them a lot less to process an overdraft – it no longer took a human being putting your check in an envelope and bouncing it back to you and the other labor-intensive issues. Most banks also stopped offering the optional service that you paid for, but began offering “free” overdraft protection.

This was happening as consumers started “bouncing” a lot more payments because of the speed in which money now moves.

The CFPB said that when people started using debit cards, financial institutions “began raising fees and using the exemption to churn high volumes of overdraft loans on debit card transactions.” Enrollment became automatic – customers don’t even realize they have it until it happens and they’re charged.

By 2023, an average of 23 million Americans were paying overdraft or NSF fees annually.

IRS Direct File – going?

In March 2024, I wrote about how New Hampshire was one of 12 pilot states in the free IRS Direct File program, which allowed many taxpayers to do their return online directly with the IRS, instead of with a third-party tax prep service. This year, it was available in 25 states (for the pilot, the IRS used states that didn’t have an income tax, like New Hampshire, or have online state income tax filing services that can be linked to).

The program allows taxpayers with simple returns who take the standard deduction to file directly online for free, something that consumers had been clamoring for. I mean, how crazy was it that the IRS itself didn’t have an online file program?

The Associated Press reported last week that the Trump administration plans to scrap the program, though the Treasury Department, which oversees the IRS, has not officially made a decision.

The program had been criticized by commercial for-profit tax prep services as a waste of money, when they already provided the service. Many Republican politicians echoed those claims. This is despite the fact that before IRS Direct File was created, the agency was criticized as being behind the times and forcing consumers to go to third-party for-profit tax prep services to get their taxes done online. If you haven’t yet filed your taxes yet this year (Come on! You’re late!), IRS Direct File is still available online.

The IRS surveyed 15,000 users after last year’s pilot, and 90% said that their experience was good or excellent.

Let’s take a look at what’s behind IRS Direct File.

Filing your taxes is supposed to be free, and the IRS does not charge you to file them.

Taxpayers have always been able to file their tax return directly with the IRS by filling out the paper forms (1040, 1040-EZ, etc).

Those forms must be processed by humans, so they’re not efficient for the IRS, particularly as it keeps losing staffing and money. That’s been going on for years and it’s going to get a lot worse – about 50% of the agency’s staff, or 40,000 people, is expected to be fired this year. The IRS for years has tried to shift away from forms, it just hasn’t had the money to do it. That money was provided by the Biden Administration, but is now being cut from the IRS budget, along with the staff it supported.

Before IRS Direct File, the IRS already has free online options, including “free fillable forms,” and IRS Free File.

Free fillable forms are the same as the paper forms, but online. You don’t have to mail them, but they’re still forms. They don’t offer guidance, or help with the math. Someone at the IRS still has to process the information. IRS Direct File, like commercial prep services, asks questions and notes errors.

IRS Free File, not to be confused with Direct File, is for taxpayers below a certain adjusted gross income level (for 2024 taxes, the ones you filed this year, it was $84,000). Adjusted gross income (AGI) is total income – wages, dividends, capital gains, business and retirement income, tips, etc. – minus adjustments (self-employment tax adjustment, retirement account contributions, student loan interest, etc.) It is calculated BEFORE the standardized deduction or itemized deductions, which aren’t included in AGI.

Free file is available in all 50 states for those who qualify, and it hooks up the taxpayer with one of the commercial tax prep companies that partner with the IRS on it. The Free File option is open to any taxpayer who meets the income threshold, despite any complications in their tax return, like being self-employed or not having health insurance.

IRS Direct File differs from Free File in that there’s no income limit, and the software belongs to the IRS, so you’re not choosing a private company to complete your taxes, the IRS is doing them. It’s for taxpayers who file a standardized return (so, not for those who are self-employed, for instance).

And yes, there are companies that offer free commercial tax preparation software for all tax filers. “Free,” though, is a loose term when it comes to these companies.

One reason IRS Direct File was launched is because Turbo Tax, which had agreed to be part of the Free File program, was making IRS Free File virtually impossible to find for people who qualified. Turbo Tax had to pay a $141 million settlement in 2022 for charging customers who were eligible for IRS Free File, but not telling them they were. This included charging a fee to people for things like not having health insurance or being self-employed when they qualified for Free File and would not have had to pay those fees.

Since the IRS launched Direct File, companies like Intuit, the parent company of Turbo Tax, have fired back, saying filing taxes is “completely free” for Americans, so Direct File is not necessary.

Filing taxes IS free if you go directly through the IRS, including using paper or fillable forms, IRS Direct File or IRS Free File. It’s also supposed to be if you use Turbo Tax, H&R Block, or another for-profit commercial tax prep company and have a very basic return. But often it’s not. The Federal Trade Commission last year determined that the majority of people who file their taxes using Turbo Tax pay a fee, despite the fact it advertises that it’s free.

As I mentioned in my column about IRS Direct File last year, my sister, in Maine, checked out Direct File last year. She didn’t qualify because she didn’t live in one of the 12 pilot state (Mainers do qualify this year).

The IRS guided her to IRS Free File, which she qualified for because her AGI was below the cap. She had never heard of Free File, though she used Turbo Tax every year, and her income was always below the cap. Turbo Tax was required to inform her she was eligible for Free File, but it didn’t. She often ended up paying a fee.

IRS Free File also guided her to Maine’s state tax filing link. She got both of her returns, via direct deposit, in days.

There’s no word if IRS Free File is also on the chopping block. If it survives, it’ll be interesting to see if the commercial tax prep companies continue not to inform consumers who qualify. Meanwhile, IRS Direct File, which offered an option for consumers who want to file online directly with the IRS and not be upcharged, and made the IRS more efficient and cost less to operate, is likely going away at a time when the IRS is being eviscerated.

Someone will profit from that, but it won’t be the average American taxpayer or America’s bottom line.

Taxes and ‘waste, fraud, abuse’

If you believe that IRS cuts mean you’ll be less likely to be audited, guess again, unless you’re really wealthy. The easiest people for the IRS to audit are those with low incomes. The wealthier you are, the more complicated and labor-intensive the audit is.

I wrote about the Earned Income Tax Credit earlier this year. People who file for the EITC, which is designed to give low-income taxpayers a break, are the most likely to get audited.

You can claim the earned income tax credit if your AGI is less than $18,591 if you’re filing single, or $25,511 if you’re married filing jointly with no children. The allowed income rises with each child to $59,899 single with three kids; $66,819 married filing jointly with three kids. Income like Social Security, unemployment, alimony, child support, pensions, and some others don’t count. Only what you earn is included in the limit. This year the credit ranges from $632 for single filers with no kids to $7,830 for married filing jointly with three kids.

As many as 20% of those who are eligible for EITC don’t claim it. Of those who do, they’re more likely to get audited at 5.5 times the rate of the rest of the population, according to the Bipartisan Policy Center. This is because unintentional errors are easy for IRS software to catch. If the IRS software detects an error, the taxpayer is mailed a certified letter asking that they fix the issue and document it. The IRS holds the EITC money until the taxpayer straightens it out. Many who get the letter don’t know how to fix the issue, or don’t respond, so they lose the credit.

Studies show these “audits” have an bigger impact on Black and Latino taxpayers. The IRS added staff and updated software under the 2022 Inflation Reduction Act to help fix that inequity, but IRS staff cuts will eliminate much of that progress, if not all of it.

By the way, Americans for Tax Fairness found that audits of millionaires dropped 92% over the past decade as cuts to IRS staff and operating funds increased, but audits of low-income Americans rose sharply.

Tax advocates point out that cuts to the IRS budget that close tax assistance centers – something that happened this year – increase the kinds of things that prompt EITC audits, since most are because of mistakes not deliberate fraud.

Meanwhile, the Senate Finance Committee two years ago revealed that between 2017-20, under the first Trump administration’s watch, 1.5 million wealthy tax evaders failed to pay the  U.S. Treasury up to $66 billion.

Many evaded taxes by not filing at all, and about $34 billion in unpaid taxes was owed by fewer than 1,000 taxpayers, each with an income more than $1 million Americans for Tax Fairness found. This included 58 “taxpayers” who had an annual income of more than $10 million each, but didn’t file a tax return.

Because of lack of funding, the IRS was only able to pursue and prosecute less than 40 of these 1,000-plus individuals or households.

This is just shows how cuts to the IRS are achieving the opposite of what they’re purported to be doing – instead of cutting waste and fraud, they’re encouraging fraud among the most wealthy and costing everyone money.

Former IRS commissioners who served under both Democratic and Republican presidents, including Ronald Reagan and Donald Trump, authored a group opinion piece that was published in the New York Times in February that said that the large-scale firing of IRS employees “will shift the burden of funding the government from people who shirk their taxes to the honest people who pay them.”

We’ve already seen that happening, and there’s bound to be more. So far, cuts at the federal level have decimated programs that range from SNAP to libraries, to school lunch programs, to funding research on diseases like tuberculosis and Alzheimers, to incentives to build housing and for small farmers to help become more efficient and product, for small businesses, and more. All of those things, when they are allowed to work the way they should, support a strong economy, which benefits your wallet.

Scam of the Month

WMUR-TV reported recently about how Sanborn Auto in Laconia got ripped off to the tune of $6,400 in a tire resale scam. That shop isn’t the only one in New Hampshire to be scammed, it turns out. It’s a national scam that targets auto and tire shops.

The way it works is that the scammer calls an order for high-end tires in to the shop. Usually it’s for at least four, often for eight or more. They may say they’re a new business and are trying to establish local connections, or they give some other reason for wanting to bulk purchase tires.

They buy the tires with a credit card, the shop orders them, and someone – not the buyer – picks up the tires when they come in.

Meanwhile, the “buyer” files a credit card dispute, or, in many cases, the person the credit card really belongs to, since these buys are often made with a stolen credit card.

The shop is then on the hook for paying for the tires, which are long gone. Tires are easy to sell and they’re not tracked in any way. A perfect commodity for a scammer.

The website Shopmonkey, which wrote about the tire resale scheme, published an acronym that is useful for anyone looking for red flags that something is a scam, not just businesses that sell tires. I’ve enhanced it a little. The acronym is SPOT. Keep it in mind when dealing with any transaction, particularly one that isn’t solicited. It stands for Suspicious, Pushy or persistent, Out of the blue, Too good to be true or Take the time.

Suspicious and unusual requests. For instance: bulk purchases, back to back orders, requires overnight or expedited shipping, communication is never in person, wants you to wire them money, asks you to refund a charge on a different card, is something your shop (or you) don’t normally see.

Pushy/ persistent behavior. For instance, rushes all charges, insists that you run multiple cards or break up payments, threatens to take their business elsewhere, has an urgent timeline.

Out of the blue. For instance, a customer you’ve never encountered before asking for a service that’s not normal for your shop, an abnormal amount of items being ordered, a purchase process that is different from that of most customers, etc.

Too good to be true/Take the time. If it’s too good to be true, it usually is. It’s worth not getting ripped off to verify that the transaction is on the level. Take the time to get proper documentation and validation.

You can reach Maureen Milliken at mmilliken@manchesterinklink.com