Income tax preparation chains target low-income filers, study suggests

Image caption: Paul Weinstein

National tax preparation chains continue to exploit the working poor, many of whom spend a significant portion of a key federal anti-poverty tax credit just to pay for filing their taxes, a new study concludes.

These large tax preparation companies tend to cluster their offices in low-income neighborhoods, according to the study, co-authored by Paul Weinstein, director of Johns Hopkins University's Graduate Program in Public Management. ZIP codes with the highest level of taxpayers eligible for the Earned Income Tax Credit have about 75 percent more tax preparers per filer than neighborhoods with a more modest share of people eligible for the credit, researchers found.

The researchers also found people in Washington, D.C., and Baltimore eligible for the EITC, who are typically low-income workers with children, would spend between 13 and 22 percent of their refund this year at local tax preparation outlets, including H&R Block, Jackson Hewitt, and Liberty Tax Service. Their cost to file a single return could reach as high as $509.

"The stiff fees charged by large chain preparers can quickly erode an EITC refund, weakening a safety net provided by U.S. taxpayers for our most vulnerable workers," the authors write. "Congress did not intend that tax credits be used to pad the bottom line of private tax service vendors."

The report, which will be published by the Progressive Policy Institute and was co-authored by Bethany Patten, a policy and research manager at Excellent Schools Detroit, follows up on a 2002 study by researchers at the Progressive Policy Institute and Brookings Institution. That study found that tax preparations services, clustered in low-income neighborhoods, cost workers eligible for EITC refunds about $1.75 billion in 1999.

The Earned Income Tax Credit was established in 1974 as an anti-poverty measure. It has become the federal government's largest safety net program, last year providing $66.7 billion to 27.5 million Americans. It is especially valuable to low- and middle-income workers, since it provides a direct credit against taxes owed rather than a deduction from reported income. It is also a refundable credit, meaning an eligible worker can receive a refund even if the credit exceeds what would have been his or her federal income tax liability.

Workers eligible for the EITC spend an average of $400 at national tax preparation outlets, the new study found. In Baltimore, where the average EITC refund is $2,335, the cost to file ranged from $309 at H&R Block to $509 at Liberty Tax Service. In Washington, D.C., where the average EITC refund is $2,351, the cost to file ranged from $315 at H&R Block to $485 at Liberty Tax Service.

Although electronic tax filing has surged in popularity over the last two decades, and the share of taxpayers who use paid tax preparation services has fallen, the number of tax preparation services in poor neighborhoods has mushroomed, the authors found. The study found "a clear relationship" between the share of EITC filers in a ZIP code and the area's saturation of tax preparation chains.

"[T]he 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."

The report also noted a consistently high error rate for returns filed on behalf of EITC beneficiaries by paid tax preparers. The Government Accountability Office detected an error rate of 94 percent, the authors said.