FOR IMMEDIATE RELEASE
April 14, 2016
Contact: Cody Tucker, ctucker@ppionline.org, 202-775-0106,
or Steven Chlapecka, schlapecka@ppionline.org, 202-525-3926
PPI Report: Tax Prep Chains Target Low-Income Workers
Taxpayers eligible for the EITC spend as much as 22 percent of their refund to file
WASHINGTON—National tax preparation chains continue to exploit the working poor, many of whom spend a significant portion of a key federal anti-poverty tax credit—the Earned Income Tax Credit (EITC)—just to pay for filing their taxes, according to a report released today by the Progressive Policy Institute.
The report, coauthored by Paul Weinstein Jr., PPI Senior Fellow and Director of the Public Management Graduate Program at the Johns Hopkins University, and Bethany Patten, a policy and research manager at Excellent Schools Detroit, found that 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., they found that those eligible for the EITC, who are typically low-income workers with children, would spend between 13 and 22 percent of their refund this year at local tax preparation outlets. In Baltimore, where the average EITC refund is $2,335, the cost to file ranged from $309 at H&R Block to $509 at Liberty Tax Service. In Washington, D.C., where the average EITC refund is $2,351, the cost to file ranged from $315 at H&R Block to $485 at Liberty Tax Service.
Additionally, Weinstein and Patten found that national tax preparation 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 per filer than moderate-EITC ZIP codes. The study found “a clear relationship” between the share of EITC filers in a ZIP code and the area’s saturation of tax preparation chains.
Lastly, 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.”
“These realities demand a public response. But proposals to further complicate the tax code in the name of reducing fraud would only make the problem worse,” write Weinstein and Patten. “Instead, U.S. policymakers should establish a national goal of reducing the dependence of low-wage workers on paid tax preparers. Specifically, this would mean taking steps to simplify EITC rules and requirements, by requiring all paid preparers to take competency exams, increasing access to free filing programs, and/or streamlining the federal income tax code in its entirety. A combination of these reforms would allow low-income workers to keep more of their tax credit while also raising standards within the paid tax preparation sector.”
The report follows up on a 2002 study by researchers at PPI and Brookings Institution, which found that tax preparations services, clustered in low-income neighborhoods, cost workers eligible for EITC refunds about $1.75 billion.
The Earned Income Tax Credit was established in 1974 as an anti-poverty measure. It has become the federal government’s largest safety net program, last year providing $66.7 billion to 27.5 million Americans. It is especially valuable to low- and middle-income workers, since it provides a direct credit against taxes owed rather than a deduction from reported income. It is also a refundable credit, meaning an eligible worker can receive a refund even if the credit exceeds what would have been his or her federal income tax liability.
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