Keep Working Families’ Refunds in their Pockets

Alan Berube and Anne Kim
Studio portraits for Anne Kim. Photo by Louis Tinsley/DC Corporate Headshots.
Anne Kim Contributing Editor - Washington Monthly, Author, - “Abandoned: America's Lost Youth and the Crisis of Disconnection"

January 31, 2003

Storefront tax preparation services are a common sight this season in South Atlanta neighborhoods. Touting “fast cash” and hassle-free filing, these outlets will attract thousands of working poor taxpayers this spring.

What they don’t advertise, though, is the price of their promises—which is steep.

This year, tax preparers nationwide will siphon a conservatively estimated $2 billion from the federal Earned Income Tax Credit, which annually provides tax refunds of up to $4,000 to millions of parents who work but earn low wages—a total of more than $70 million for Atlanta’s working families.

Nationally, more than two out of three EITC recipients go to a commercial preparer at tax time. On average, it costs them about $100 to have a basic return prepared and filed. And many low-income filers, including nearly two out of three in Atlanta, pay exorbitant fees for “rapid refunds” that are actually short-term loans with very high interest rates. Last year, a typical rapid refund cost $120 in fees—the equivalent of a 250 percent annual interest rate.

Only four IRS-registered tax services are located in the upper-income neighborhoods of northwest Atlanta. In the lower-income neighborhoods southwest of downtown, where the same number of taxpayers live, it’s never a long walk to one of 21 commercial preparers doing brisk business this time of year.

Regretfully, many services fill a necessary function; without them, many families might not get the EITC.

But the public interest is not served when a significant share of tax credit dollars designed to supplement the earnings of low-income families fuels the profits of a growing, multibillion-dollar industry.

If one of the real goals of Congress and the White House is to get more cash into the hands of families who need it, why not ensure that families receive the full benefit of credits that already exist?

A logical first step would be to simplify taxes for low-income families. The IRS publication explaining the EITC includes 55 pages of instructions. And the child tax credit comes with its own set of rules and an additional form to complete. To mitigate this complexity, Congress should consider combining the EITC, the child tax credit and related provisions into a single, easy-to-claim credit.

Second, we should provide low-income taxpayers with more free tax help in the communities where they live. The IRS sponsors a tax assistance program for low-income taxpayers, but these efforts reach only a small fraction of EITC filers. A $10 million federal grant program, matched with state and local dollars, could support the filing of nearly 1 million returns for low-income taxpayers. Organizations such as the Atlanta/Fulton Family Connection that already coordinate volunteer tax preparation could use those dollars to preserve the value of the EITC for thousands of additional filers each year.

Third, Congress should urge the IRS toward faster processing of all tax returns. By getting EITC dollars into families’ hands sooner, the IRS can lessen the appeal of expensive rapid refunds.

Finally, the IRS should stop aiding and abetting the tax preparation industry. Currently, the IRS helps preparers reduce the risk of making rapid refund loans by providing them with otherwise unavailable taxpayer information. This arrangement essentially amounts to corporate welfare.

Sensible policy changes will help ensure that families in Atlanta and throughout the United States receive the full benefit of the EITC to which they are entitled.