The “Price of Paying Taxes” Is Highest for Lower-Income Americans

Tax day is upon us, and while most of us growl and bear the annual time (and money) spent on tax preparation, less attention has been paid to how the costs of tax compliance particularly hurt low-income workers.

It’s bad enough that we collectively spent 3.24 billion hours, or nearly 370,000 years, on tax preparation in 2012, at a cost of $37 billion, according to the Tax Foundation. This is more than the entire federal budget for medical research, which supports the National Institutes of Health and 300,000 scientists across the country.

But it is somewhere between insane and obscene how paid tax preparers are profiting mightily from preparing returns for low-income Americans who claim the Earned Income Tax Credit (EITC). The EITC, which puts an average of $2,400 in the pockets of 27.5 million low-wage workers, is one of America’s most effective anti-poverty, income-boosting federal programs.

However, that $2,400 gets sharply reduced for the 59 percent of EITC filers who pay an average of $400 to have their taxes prepared, according to new studies by the Progressive Policy Institute (PPI) and the Consumer Federation of America (CFA). By comparison, 55.5 percent of America’s 150 million taxpayers use an accountant or another type of tax preparer, the Internal Revenue Service (IRS) reports.

“If we want to keep money in the hands of working families, paying $400 for a preparer is crazy,” said Michael Best, an author of the CFA study.

Tax-preparation chains appear to target EITC filers, gouging low-income Americans to complete relatively simple returns. “Zip codes with the highest level of EITC filers have approximately 75 percent more tax preparers per filer than zip codes with fewer EITC filers,” according to Paul Weinstein Jr. and Bethany Patten, who conducted PPI’s research.

Paid preparers are also more likely to make errors on tax returns than taxpayers who prepare their own returns, according to the Government Accountability Office (GAO). “While some error is inevitable,” Best said, the GAO finding that 60 percent of returns by paid preparers contain mistakes is “mind-blowing.”

One reason for this problem is that 55 percent of paid preparers are unregulated. In all but four states – ;Maryland, California, Oregon, and New York – anyone can hang out a shingle to be a tax preparer, without any educational or competency standards.

As a final insult, many tax preparation firms also seduce lower-income Americans into paying for “refund anticipation checks” (RACs) – in part so they can pay their preparer’s fees. Although the IRS has cracked down on the similarly styled “refund anticipation loans,” 21 million Americans opened RAC “accounts” in 2014 for fees of $30 to $55. “They grab people who can’t afford to pay up front,” Best said.

H&R Block, which boasts 12,000 locations throughout the United States, earned revenues of more than $3 billion in 2014, and heavily advertises RACs, issued a statement in response to the PPI report, saying: “There’s simply no other tax company doing more to help low-income families than H&R Block.”

To solve these problems, EITC rules should be simplified so that filers don’t feel the need to turn to paid preparers. Tax preparers should also be required to pass some form of nationally recognized competency test. Programs that offer free tax preparation – such as the Treasury’s Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) initiatives or AARP’s Tax-Aide services – should be better publicized and more widely available.

More radical would be to follow the lead of “exact withholding” countries such as Germany, the United Kingdom, Japan, and Denmark, which have freed most taxpayers from ever having to file a return.

And although former Republican presidential candidate Carly Fiorina’s call for a three-page tax code is unrealistic for an economy as complex as ours, tax laws and regulations should be dramatically simplified to a length closer to Fiorina’s number than the current 10 million-word-long maze of federal tax laws and regulations that is our current tax code – a pile of paper that is literally as tall as a stack of a dozen Bibles.

Andrew L. Yarrow

Andrew L. Yarrow is the author of recent books such as Thrift and Measuring America. He is a public-policy professional, historian, and writer whose articles and books have focused on the relationships between economics, culture, and politics. See: www.andrewlyarrow.com.