Everyone’s least favorite day of the calendar year is upon us. Hopefully you’ve already filed, signed, sealed and delivered your taxes, along with any money due (if you’re lucky, maybe you got money back!), but if you haven’t, this is it. Go time.
For the working poor, tax day is supposed to actually represent a chance at equality: thanks to programs like the Earned Income Tax Credit, along with a system that scales on the basis of income, tax credits and refunds provide opportunities for people by putting money back in their hands every April. Unfortunately, a predatory industry has moved in to take advantage of them, charging unreasonable fees for tax preparation and pocketing a large portion of the money that should be going to the fight against poverty in the United States. The New York Times just ran an expose looking at exploitative tax preparation services, and how they damage the working poor — Colorlines follows up with detailed analysis of the numerous programs in the United States that target the poor, particularly low-income people of color.
Here’s how it works: while anyone can prepare their own taxes, many people prefer to take their taxes to a professional, not least because accountants and tax preparers typically promise that they’ll help people maximize their money back. Ethical tax professionals charge a reasonable hourly rate for handling taxes, and some may offer flat fees or pro-bono work for low-income taxpayers who have very simple needs (such as those who don’t do withholding, and don’t have to factor in investment income and other types of income and assets).
At the same time, there’s a thriving market in services with very high preparation fees, designed to gouge low-income people. Popup tax preparation businesses appear in low-income communities as early as December, promising big refunds for low rates, but when customers actually go to use their services, what they encounter isn’t quite what was advertised. They may not be aware that high fees are suspicious, or that industry rates are much lower. If they are, it might not always be possible to find a tax preparer in their area who will help them, even with people like the volunteer seen above who travels in low-income communities during tax season to help out with tax preparation.
Consequently, they pay far too much for even basic taxes — sometimes hundreds of dollars for a tax preparation session that takes less than half an hour. Their fees may include a number of suspicious “filing fees” and “convenience fees” on top of fees for the services of the tax preparer, creating a hefty bill that the preparer happily takes right out of the tax refund. This is not how tax refunds are supposed to work, or how tax preparation is supposed to be done.
Taxpayers don’t realize that they have better options, and they’re surrounded, as Colorlines points out, by an abusive financial system that exploits low-income people in general. It includes for-profit colleges, payday lenders, exploitative car loans and more, all of which charge high interest and prey on vulnerable people with limited financial literacy. The IRS and Congress have made attempts to reform the tax preparation industry to create stricter standards and help consumers determine who’s a reliable and trustworthy tax preparer and who isn’t, but it’s an uphill battle thanks to industry lobbyists like H&R Block.
The system can be especially problematic for people of color, who are more likely to be low income, and can lack access to opportunities for financial education. Exploitative lending and tax preparation services tend to be especially common in low-income communities of color, especially those with a large immigrant population, where people may be unfamiliar with their rights under the law and uncomfortable with English, making it hard to advocate for themselves.
As yet another tax season draws to a close, it’s time to rethink the loose regulations on tax preparation, because low-income taxpayers clearly need our help.
Photo credit: Charlie Kaijo.
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