(Corrects Jackson Hewitt location in 10th paragraph.)

Jan. 3 (Bloomberg) -- The Internal Revenue Service said it may try to prevent tax preparers such as Jackson Hewitt Tax Service Inc. and H&R Block Inc. from offering customers refund loans and audit insurance because they can encourage fraud.

The plan, if adopted by the IRS, would restrict tax preparers from passing along tax return information to lenders who provide instant refunds and then charge customers predatory interest to repay the loans. Consumer groups and taxpayer advocates have urged the government to crack down on such practices.

Jackson Hewitt fell $4.53, or 14.4 percent, to $26.85 as of 2:13 p.m. in New York Stock Exchange composite trading. H&R Block slipped 70 cents or 3.8 percent to $17.91.

The IRS said in a statement today that tax preparers may be tempted to inflate refunds to get higher fees.

There is a ``financial incentive to take improper tax return positions in order to inflate refund claims inappropriately,'' the IRS said.

Jackson Hewitt offers a refund anticipation loan product called Money Now, and H&R Block calls the product Instant Money. The loans are made by banks including HSBC Holdings Plc, Santa Barbara Bank and Trust, a division of Pacific Capital Bank, and JPMorgan Chase & Co.

Jackson Hewitt spokeswoman Sheila Cort and H&R Block spokesman Dan Smith didn't immediately return calls seeking comment. Joseph Evangelisti, director of press relations for JPMorgan Chase, declined to comment.

IRS Guidance

The IRS also announced today it is adopting rules to help taxpayers understand the services provided by tax preparers -- right down to the fine print. Tax preparer notices will have to be on 8 1/2 inch-by-11 inch paper and written in 12-point type, the IRS said.

The agency also is taking new steps to protect taxpayers' privacy. For example, Social Security numbers must be eliminated if the tax return is sent offshore for preparation.

The regulations update privacy laws that have been on the books since 1974. Tax preparers must follow them to gain customers' consent before sharing their information with third parties.

Public Comment

The rules on refund loans will be studied by the IRS before any final decision. The IRS will solicit public comment for 90 days after any regulations are proposed. Among those opposing the new restrictions are Parsippany, New Jersey-based Jackson Hewitt, the nation's No. 2 U.S. tax preparer, and Intuit, the world's biggest maker of tax software.

The National Consumer Law Center in Boston and similar groups have called for stricter controls on tax preparers to restrict the sale of customer information to third parties.

Refund anticipation loans are popular among taxpayers who don't want to wait the usual two or three weeks for the IRS to send them refunds. Lenders rely on the tax return information from preparers to ensure the IRS will issue refunds to repay the loans.

In June 2006, the Senate Finance Committee proposed a ban on disclosing a customer's tax information to a lender even if the customer consents. The provision never became law.

In filings last year, Jackson Hewitt warned that legislation and regulations ``proposing to regulate the facilitation of RALs and other financial products'' could ``cause our revenues or profitability to decline.''

In September, Jackson Hewitt franchises in three U.S. cities agreed to stop preparing federal tax returns after the Justice Department sued. The government said there was a ``business environment'' where ``fraudulent tax return preparation is encouraged and flourishes.''

The franchises, which prepared more than 105,000 returns last year, were charged with preparing phony W-2 forms, fabricating expenses and fuel tax credits, and claiming fraudulent amounts of earned income tax credits.

To contact the reporter of this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

Last Updated: January 3, 2008 14:46 EST