Report finds poorer Americans fall prey to tax preparers who deliberately target low-income areas and jack up prices ahead of 15 April filing deadline

This article is more than 4 years old

This article is more than 4 years old

Low-income Americans are falling prey to paid tax preparers, according to a new report published by the Progressive Policy Institute.

The authors found that large tax preparer chains were taking 13% to 22% of low-wage workers’ tax refunds and that tax preparation chains were targeting low-income areas that have a high number of people eligible for the earned income tax credit (EITC), a benefit for working people with low to moderate income.

On average, workers eligible for EITC spent about $400 to get their taxes done. A 2002 study found that low-wage workers spent about $1.75bn of the earned income tax credit refund on tax preparations.

“The stiff fees charged by large chain preparers can quickly erode an EITC refund, weakening a safety net provided by US taxpayers for our most vulnerable workers,” Paul Weinstein, director of Johns Hopkins University’s graduate program in public management, and Bethany Patten, a policy and research manager at Excellent Schools Detroit, wrote in the report. “Congress did not intend that tax credits be used to pad the bottom line of private tax service vendors.”

Often, the EITC paperwork means additional fees. In Baltimore, H&R block charged about $309 and Liberty tax services charged as much as $509 for a complete return, according to the report. In Washington DC, those filing for EITC would pay $315 at H&R Block and about $491 at Jackson Hewitt.



“The pattern of exploitation … persists,” the authors wrote. “Low-wage workers must file tax returns to get EITC refunds, which are intended to supplement their earnings. No less than middle-class taxpayers, many need help filing complicated returns, which makes them susceptible to costly tax preparation services that flock to poor communities.”

Filing taxes can be so complicated and expensive that some Americans skip it altogether, even when they might get a refund. Last month, IRS announced that in 2012 more than one million taxpayers did not file their returns. Overall, they lost out on $950m in refunds.

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Return-free filing

With tax day approaching on Friday, Massachusetts senator Elizabeth Warren has proposed a solution to the tax problem.

On Wednesday, she introduced a bill that would allow Americans to forgo filing tax returns each year. Instead of taxpayers preparing their own returns, Warren’s bill would require the IRS to send them a prepared return form based on the information it already receives, such as W2s and 1099s.

Vermont senator Bernie Sanders, who is running against Hillary Clinton for the Democratic presidential nomination, is one of the bill’s sponsors.

“Tax day has become an opportunity for corporations to profit off of confusion over our complicated tax code. That is wrong,” Sanders said in a statement. “We must make tax filing as easy as possible, not direct profits to private companies at the expense of working families.”

A 2006 analysis of a return-free filing system from the Brookings Institute calculated Americans would save 225m hours and $2bn. “Depending on the structure of the system, experts estimate that a return-free system could completely eliminate returns for anywhere from 8 million to 60 million households,” according to a report issued by Warren’s office.

In its Tax Maze report, Warren’s office notes that tax preparers have long lobbied against such a system. The 15 April deadline is a boon to their business because many of them are able to hike up their prices by as much as 30% as the filing deadline approaches. Warren’s office described it as “the industry’s version of ‘surge pricing’”.