Counties with a better proportion of low-income or residents who’re Black or Hispanic usually tend to even have storefront workplaces of paid tax preparers, in response to a brand new report.
Paid preparers can typically make errors in submitting that may result in errors or smaller refunds, and infrequently leverage their companies to cost excessive charges that offset money from issues just like the Earned Earnings Tax Credit score, wrote Portia Allen-Kyle, chief advisor at Colour of Change, a racial justice group, together with Higher IRS, a gaggle supporting free, direct tax submitting.
“Their preying on EITC claimants is just not accidentally or coincidence; exploiting low-income taxpayers is core to the enterprise mannequin of those corporations,” Allen-Kyle wrote.
“Given the eligibility necessities for the EITC, these taxpayers typically are in economically precarious positions and may fall prey to unscrupulous practices resembling payday lending merchandise that advance claimants their tax refund if they comply with let the tax preparation firm skim off the highest.”
By cross-referencing an IRS record of preparers, the annual IRS Statistics of Earnings information ebook on how returns are filed, and U.S. Census demographic information, Allen-Kyle discovered paid preparers extra prevalent in counties with sure demographic options.
For instance, she discovered counties with extra Black taxpayers and EITC claimants had 7% extra Liberty Tax and 14% extra Jackson Hewitt areas, two main chains within the paid tax preparation trade.
She additionally mentioned counties with extra Hispanic taxpayers and EITC claimants had 11% extra Liberty Tax areas, 8% extra Jackson Hewitt areas and 5% extra H&R Block areas.
The Earned Earnings Tax Credit score, a tax break that reduces the federal revenue tax invoice for working class taxpayers, has been criticized by Republicans for a very long time for having excessive error charges.
The Authorities Accountability Workplace discovered EITC funds made up 7% of all improper federal funds in 2022, funds that shouldn’t have been made in any respect or have been the flawed quantity. Whereas massive, the proportion was not as huge because the Paycheck Safety Program’s, which was 12%.
Allen-Kyle’s research instructed lots of these EITC errors could possibly be traced again to paid preparers.
A GAO research within the early 2000s discovered error charges on EITC returns have been as excessive as 94%. A newer research in 2014 by GAO visited 19 unenrolled preparers — the vast majority of preparers and never topic to IRS regulation — for tax prep and located solely two did the taxes accurately, with the remaining having errors starting from an underpayment of $52 on a refund to an overpayment of $3,718.
Paid preparers may also cost excessive charges or induce prospects to get pre-refund checks or loans that scale back the scale of their EITC. A Progressive Coverage Institute research in 2016 discovered low-income taxpayers in Washington, D.C., and Baltimore have been charged prep charges as excessive as 22% of the scale of their EITC quantities.
Tax prep companies have typically argued the phrases of such merchandise are made clear when they’re supplied and are topic to strict disclosure laws. Additionally they say they will present prospects with comfort by getting them cash quicker.