For most adults in the United States, the year starts with the tax season. During this time, they have their tax returns prepared and filed and either pay any taxes they owe or receive a refund if they overpaid their taxes throughout the prior year. This year, the tax season began on January 28 and continues until April 15. There are a few different ways one can go about filing their tax return. One way is to purchase an IRS-approved tax preparation software, like TurboTax or TaxSlayer, and file their return on their own. One could also prepare their return manually, but the IRS prefers that people file electronically to decrease potential errors. The last method is to seek out the help of a professional through a commercial tax preparation organization or a non-profit one. Commercial organizations often take advantage of the low-income filers whose returns they prepare and who often qualify for the Earned Income Tax Credit, which results in a larger refund.
The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) provides a subsidy to households with low incomes. It was created in 1975 with the intentions of temporarily lessening the tax-burden for the working-poor after the 1973-1975 recession. In 1978, the Revenue Act turned it into a permanent credit. Since its creation, the EITC has been adjusted many times to make it more effective and requires tax-filers to meet certain criteria to receive it. Since being implemented, the EITC program has distributed about $67 billion to about 28 million families.
Qualifications for the credit include being a U.S. citizen or resident alien all year, not being married while filing separately from one’s spouse, having an investment income of $3,500 or less, not being a qualifying child of someone else, and having a valid Social Security Number by the due date of the return. The amount of money that qualified individuals receive for the EITC depends on factors such as “earned income, gross adjusted income, filing status and whether or not they have a qualifying child.”
Many people choose to file their taxes through for-profit tax-prep organizations. These organizations are often concentrated in areas where a large percentage of the population is made up of people with lower incomes who qualify for significant refunds through the Earned Income Tax Credit program. They prey on the people who need the money from the EITC the most.
In order to increase their profit, they put a great deal of effort into publicizing their services in a way that overshadows the far less expensive, sometimes even free, methods of filing tax returns. Paul Weinstein, who co-authored a study on tax preparers with the Brookings Institution and the Progressive Policy Institute, suggests that most taxpayers could “have their taxes prepared for less than $100.” According to Weinstein, tax-filers spend an average of $275 on the preparation of their taxes during the filing season. The authors of the study found that individuals filing for the EITC spent $309 in Washington D.C. and $509 in Baltimore. This means that these individuals were spending between 13 and 21 percent of their return to cover the cost of tax-preparation.
There has also been evidence that suggests that individuals who qualify for the EITC and file through professional tax-preparers are more likely to have errors in their tax return than those who do not qualify for the EITC. According to an investigation by the Government Accountability Office in 2015, about 60% of all professionally prepared taxes had errors, while between 89% and 94% of filers who qualified for the EITC had errors in their professionally prepared taxes. This is a problem of significant concern, since people with low incomes are more likely to be audited by the IRS. For people who receive the EITC, this could result in their refund being withheld until the end of the auditing process.
Predatory tax-prep organizations may often go unnoticed, but many are recognized and forced to face the legal repercussions of their actions. For example, Laquinta Q. Fisher of Lawton, Oklahoma was found guilty of a tax fraud scheme on January 24, 2017. After lying to her clients and telling them that they could receive a refund for simply having a dependent child, she added fake income and fake dependents to their returns to increase their EIC. She “was sentenced to 18 months in prison, three years of supervised release, and ordered to pay $133,955 in restitution to the IRS…”
Signs of a Predatory Tax-Prep Organization
There are a few warnings signs you may want to look out for if you are concerned that a tax-prep organization may be predatory. Since these groups target low-income tax return-filers, they often tell potential clients that they can promise them a large refund. One red flag to watch for is if a preparer is being paid based on a percentage of the refund their client receives. They have a clear source of motivation for trying to increase the refund.
It is also possible that such an organization would have false credentials. Every tax preparer is legally required to have a Preparer Tax Identification Number (PTIN). The IRS has a directory of PTINs that can be used to look up a preparer with their name and location. The PTIN can tell you if the preparer is “a certified public accountant, enrolled agent or a lawyer.” It is also important to note that the directory does not prove that a preparer is qualified. It is also a red flag if an organization suggests that they are endorsed by the IRS, as the IRS does not endorse any tax preparers.
Another warning sign is if a preparer does their work in “temporary pop-up shops” that will be gone after the tax season ends. In that case, there is no office for you to go to if any problems arise with your tax return. It is a red flag if the preparer says that they will deposit you refunded into their bank account or asks you to sign a return that is incomplete.
Why Is This A Human Rights Issue?
In addition to being ethically questionable, the actions of commercial organizations that prey on low-income households also have the potential to negatively impact people’s access to their human rights. For many people who are targeted by these organizations, every single dollar counts. Every penny of the tax refund they receive is used to pay for the necessities, like food, water, power, rent, and clothing. According to Article 25 of the United Nations’ Universal Declaration of Human Rights, “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services…” Many households rely on the refund they receive to access this right. It is important that we spread awareness of this issue so we can prevent as many people as possible from being exploited by tax-prep organizations and connect them with the resources they need.
Impact America: SaveFirst
Impact America, originally Impact Alabama, is a non-profit organization that was founded to develop “substantive service-learning and leadership development projects for college students and recent college graduates.” SaveFirst is one of Impact America’s programs, which provides free tax preparation services in communities which are often targeted by predatory tax-prep organizations. College students who volunteer with SaveFirst are trained and IRS certified to prepare tax returns. In 2018 alone, SaveFirst was able to prepare tax returns for 13,713 families and saved those families $5.5 million in fees. Since 2007, they have prepared returns for 76,867 families and saved them $26.2 million. The work done by Impact America helps to decrease the number of people that are being exploited by predatory organizations by giving them access to much better resources and services.
If you are interested in scheduling an appointment with SaveFirst at one of their many tax-prep locations, you can do so here.