What is the minority percentage of customers that utilize paid tax preparers?

Before 2012, low-income tax filers who used paid preparers could get their tax refunds faster with a refund anticipation loan (RAL). RALs were high-cost immediate cash loans from private lenders, backed by the tax refunds the borrowers claimed on their prepared returns (Theodos et al. 2011). RALs proliferated after 1999 when the IRS reinstituted the debt indicator program, which disclosed whether a tax refund would be redirected by the IRS to pay debts.

The IRS has since discontinued use of the debt indicator, essentially eliminating the RAL market. However, most consumers who formerly received a RAL now appear to be using a similar product, the refund anticipation check (RAC). The RAC appears to cost less than the RAL but it can still be quite expensive. RACs are temporary bank accounts opened by paid preparers, where tax filers direct their refunds. Tax filers are allowed to pay fees out of their RACs. When the IRS deposits the refund, the paid preparer subtracts fees from the account, and then the tax filer can access the remainder.

Low-income individuals are especially likely to seek help from paid preparers in filing their taxes: For anyone who receives the Earned Income Tax Credit, or EITC, a refundable tax credit available to low- and moderate-income workers, paid preparers are their most common entry point to the tax system. 

A National Taxpayer Advocate survey of individuals eligible for a Low-Income Taxpayer Clinic concluded that “the low-income population is vulnerable and more likely than the population at large to be taken advantage of by unskilled or unscrupulous tax return preparers.” In fact, citing another study conducted by the National Research Program, National Taxpayer Advocate Nina Olson testified before Congress that nearly half of EITC returns prepared by unenrolled preparers who are not affiliated with a national tax preparation firm contain over claims that average one-third of the amount claimed.

The Earned Income Tax Credit program has become one of the largest national anti-poverty programs in the country, distributing about $67 billion to around 28 million low-income workers and their families. By that measure, it may seem the EITC, implemented in 1975, is a success. But a recent study from Johns Hopkins finds that the dubious practices of some tax preparers mean that many families are losing a sizeable chunk of their annual credit to tax professionals who, aware of how much money was in play, didn't hesitate to charge qualifying families excessive amounts for help filing.

Marlon JacksonComment