If you’ve watched TV (or been exposed to any online advertising) in the last couple of months, you’ve almost certainly seen one of my favorite actors (and fellow Mizzou alumnus) John Hamm serve as the pitchman for a series of commercial spots promoting the tax services of H&R Block. April 15th is just around the corner!
Using slick advertising (explosions, zombies, and period-costumes) that will remind viewers of the hit TV show he is best known for, Mad Men, Hamm urges the viewer: “Don’t just get your taxes done, get your taxes won!”
Normally, I would give Hamm a pass on his role as a product pitchman; after all what celebrity hasn’t tried to benefit from their status? However, my years on MDC’s economic security team have brought me face-to-face with tax preparation business practices that prey on low-income working families by charging exorbitant fees. Those questionable fees and practices have taken a large bite out of one of our country’s largest anti-poverty programs: the Earned Income Tax Credit (EITC).
Quick primer on the Earned Income Tax Credit
The EITC is one of the few federal programs that have received bi-partisan support since its initial passage. Signed into law under President Ford, and expanded by Presidents Reagan, Clinton, Bush, and Obama, the EITC has had a significant impact on reducing poverty. In fact, President Reagan referred to the EITC as “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” Analysis by The Brookings Institution found that from 2009 to 2011, 2.2 million Southerners were kept out of poverty by the EITC alone.
For the 2016 tax year, as shown in the chart below from the Center on Budget and Policy Priorities, a single parent with two children that has gross household income between roughly $14,000 and $18,000 may be eligible for the maximum credit of $5,572. Similarly, a married couple with two children and income between roughly $14,000 and $24,000 may be eligible for that same maximum credit. For families living paycheck-to-paycheck, the promise of a significant cash infusion from the EITC each year too often masks the effect of the cut that paid preparers take for their services. The magnitude of the tax refund dollars (driven primarily by the refundable EITC) that are diverted from our country’s low-income tax filers is astounding.
In tax year 2014, 49 percent of North Carolina’s tax filers claiming the Earned Income Tax Credit used paid preparers. Using a conservative estimate for the average tax preparation fee of $200, over $91 million dollars were diverted from low-income households. Does $200 for tax preparation assistance sound egregious to you? Well, keep in mind that 60 percent of EITC-claiming tax households make less than $20,000 in adjusted gross income for the year. According to the NC Justice Center, the value of tax refunds diverted to paid preparers is equal to 85 percent of what the state of North Carolina spent on a state-based version of the EITC in 2014 before the General Assembly ended the program ($107 million).
While the tax preparation industry has shifted a good chunk of its advertising to its online products (which typically offer lower prices with fine-print caveats), brick and mortar stores are still where a large proportion of low-income households file their taxes. Most of the largest tax preparation firms operate a franchise model lending the weight of their corporate name to independent operators in communities across the country. These in-person locations typically charge consumers much higher rates to file their state and federal returns – and often charge extra for consumers claiming the EITC or to complete the necessary forms that to reconcile tax credits (financial assistance) received through the Affordable Care Act.
The high rates low-income households pay to meet their tax filing obligation isn’t the whole story. Consumer advocates have raised concerns about the lack of oversight and standards for the paid-preparer industry, but have not succeeded in securing protections against predatory practice. In testimony to the U.S. Senate Committee on Finance in 2014, Chi Chi Wu from the National Consumer Law Center noted that while CPAs, enrolled agents, and volunteers with the Volunteer Income Tax Assistance Program must complete testing and operate under strict regulatory oversight, private preparers can open businesses and operate without licensing or regulation.
Liberty Tax Service, recognized by the chain’s prominent use of contractors dressed up like the Statue of Liberty roaming strip mall parking lots and busy street corners, promises prospective business owners that with a $40,000 franchise fee (and other associated start-up and operations costs) in as little as 60-90 days anyone can begin helping consumers file their most sensitive and important financial documents. Last year, an article by The Virginian-Pilot highlighted dozens of lawsuits and forced closures of franchise locations between 2014 and 2016. In at least one these cases, a franchise owner with 50 locations had his e-filing privileges suspended in connection to reports of widespread fraudulent returns.
Another prominent national chain, Jackson Hewitt, was the focus of a recent local news story out of Knoxville, TN where a local independent contractor purportedly charged a mother of two who only earns a little over $25,000 roughly $600 to prepare a simple two-page return. According to the statement from the corporate office, the error was simply a lack of communication with its franchise operators about the fee caps on preparation services.
Strengthening our civic infrastructure for the low-income tax-filer
While the tax filing season is winding down, Southern communities should take the time to reflect on the important role that free tax preparation programs (both in-person and online) play in ensuring upward economic mobility for hard-working, low-income families. While large corporate tax-filing companies like H&R Block may have the most effective and beautifully crafted commercials (and John Hamm), they clearly don’t provide the best service for our region’s working poor. Instead, we should be looking to leaders in the South, like MDC’s Board Member Stephen Black of Impact America, that refuse to accept the current realities of the massive redistribution of the EITC to the paid preparer industry. In 2016, Mr. Black’s SaveFirst initiative supported a cadre of 675 IRS-certified student volunteers from universities across the South in completing nearly 16,000 tax returns and assisting clients in securing more than $20.4 million in tax refunds. Similar models of free tax preparation are offered by local volunteers (the majority of whom are retired CPAs) at VITA locations (the IRS Volunteer Income Tax Assistance Program). For consumers that prefer the independence of filing their return online, there are free tax-filing programs like The Benefit Bank or free programs that are verified by your state’s department of revenue. While programs like VITA and The Benefit Bank may be lesser known, and have much smaller marketing budgets than their commercial counterparts, they are providing valuable high-quality assistance to the working households in your community striving to achieve economic mobility.