The federal Earned Income Tax Credit (EITC), established by Congress in 1975 for low-wage, working individuals and families, is a refundable tax credit designed to “make work pay.” The EITC is the largest federal income subsidy program aimed at helping the working poor and has been extremely successful in lifting families and children away from poverty as well as providing a positive incentive for individuals, especially single mothers, to find work. Many low-income households are eligible for the EITC and other tax credits, but are unaware of their existence and thus do not apply for the annual refunds. Moreover, many who do not have the resources or knowledge to file their own taxes instead rely on costly commercial tax preparers.
Each year, 500,000 working families throughout Alabama, 80,300 families in Tallahassee and Pensacola, 177,000 families in Memphis, and 42,700 families in Orangeburg and Spartanburg, claim an estimated $2.2 billion through the federal EITC (Brookings data TY12). However, with approximately 60% of EITC recipients paying a commercial preparer to complete their taxes, these families lose approximately $188 million each year to commercial tax preparation costs. That extra $188 million could have made a tremendous contribution to helping lower-income families secure health insurance, pay down debts or put food on the table.
While some commercial tax preparers operate with integrity, many others operate with unscrupulous business practices, charging exorbitant fees for minimal services or preparing taxes despite a lack of qualifications. Preparers in low-income neighborhoods charge much higher fees than local or national averages for tax preparation, often charging up to $400 for a relatively simple return (Weinstein and Patten, 2016).
Moreover, a typical commercial tax preparer in a low-income community is not subject to any education or licensing requirements from either the state or the IRS, unbeknownst to many taxpayers that they serve. A 2002 GAO undercover sampling of nineteen tax preparers found that all preparers made mistakes on all returns sampled, and many offered fraudulent tax advice intended to maximize a fictitious taxpayer’s refund. An updated GAO study of tax returns prepared from tax years 2006 through 2009 showed that tax returns by commercial preparers had a 60 percent error rate. Because the taxpayer is ultimately responsible for the information reported on his or her tax return, an error on the part of the tax preparer, whether fraudulent or simply negligent, can cost the taxpayer for years to come.
