In 2002, researchers from the Brookings Institution and the Progressive Policy Institute (PPI) wrote a groundbreaking study entitled “The Price of Paying Taxes: How Tax Preparation and Refund Loan Fees Erode the Benefits of the EITC.” This report was one of the first to highlight the costly dependence of low-wage workers on national tax preparation chains. The study found that tax preparation and other services cost eligible workers an estimated $1.75 billion in Earned Income Tax Credit (EITC) refunds; that paid preparer services tended to cluster in low-income neighborhoods where large numbers of families claim the tax credit; and, that EITC recipients in Washington, D.C. paid, on average, 10 percent of their tax credit refund to paid preparers.
Subsequent studies by the federal government as well as private researchers have reaffirmed several of the findings from the Brookings and PPI research, while also highlighting other problematic aspects of storefront tax preparers. These include significant error rates on filings and a heavy reliance on EITC filings to generate revenue. Since the “Price of Paying Taxes” study appeared, the practice of charging exorbitant extra fees for filing EITC forms with returns has persisted and grown.
As a longtime advocate for making work pay—PPI called for dramatically expanding the EITC in its very first policy report in 1989—the Institute decided to revisit the 2002 study and take a fresh look at what it costs low-income workers to file tax returns. Our 2016 update yields three major conclusions:
- Workers eligible for the EITC continue to spend large sums—averaging around $400—at national tax preparation chains. In a recent survey of storefront operations in Baltimore and Washington, D.C. we found that low-income taxpayers can expect to spend between 13 and 22 percent of the average EITC refund to file their taxes.
- National tax preparer chains continue to target EITC filers by locating in areas where the largest numbers of EITC claims are made. Zip codes with the highest level of EITC filers have approximately 75 percent more tax preparers, formally referred to as Electronic Return Originators or EROs, per filer than moderate-EITC zip codes. Large tax preparer chains tend to cluster in high-EITC zip codes.
- Government studies as well as those by nonprofit organizations consistently show a high error rate for returns filed on behalf of EITC beneficiaries by paid tax preparers. Two studies by the Government Accountability Office (GAO) found an error rate of 89 and 94 percent respectively. And last year the head of the GAO stated that in an analysis of IRS data, an estimated “60 percent of returns prepared by preparers contained errors.”