Q.

Why exercise depression-income families use tax preparers?

A.

Many depression-income families owe no income tax but still must file a tax return to receive refundable revenue enhancement credits, including the earned income tax credit. Those who exercise file often seek help, which nearly ever comes from a paid preparer. The cost of that help erodes the internet value of refundable credits. That cost might exist worth bearing if preparers helped their clients claim taxation benefits that otherwise might be missed, just many don't.

TAX Preparation FOR LOW-INCOME FAMILIES

Most people fill out their tax returns with help from paid preparers. In 2010, 56.8 percent of all returns were completed this way. That proportion is slightly lower for lower-income families: 54.5 percent for returns with adjusted gross incomes below $30,000 (table 1). A very small proportion of low-income families reported using Volunteer Income Tax Help clinics.

TPC tabulations of IRS Statistics of Income Public Use File: number of tax returns and tax preparation methods used by AGI class, 2010.

DO PAID PREPARERS Fill OUT More Accurate RETURNS?

Except in a handful of states, paid preparers are not regulated. The Government Accountability Office found that returns completed by preparers were not more accurate than cocky-prepared returns and included errors in computing a tax filer'southward earned income tax credit (EITC)—a problem specific to low- and moderate-income families.

In a small sampling performed by the Authorities Accountability Office, but 2 of 19 returns showed the correct refund amount. On 13 revenue enhancement returns in the sample, preparers overestimated the full refund by $100 or more (McTigue 2014). A larger-scale study of Internal Acquirement Service (IRS) data showed that paid preparers had a higher estimated error rate—60 percent—than returns prepared by taxpayers themselves. Some of these errors are made past the preparer; some are the result of the taxpayer providing incorrect or incomplete information (McTigue 2014).

When it comes to returns with the EITC, a recent report showed that unenrolled return preparers were more than probable to make errors than other paid preparers. An unenrolled return preparer is someone other than an attorney, a CPA, or an enrolled amanuensis—agents licensed by the IRS. Unenrolled preparers completed 43 percent of the EITC returns fabricated past paid preparers, while national tax preparation firms completed 35 percent of these returns (IRS 2014).

One articulate benefit of paid preparation: an earlier study showed that if depression-income workers already know about the EITC, they are more likely to receive it if they utilize a paid preparer than if they fill up out their returns themselves (Maag 2005). Moreover, some preparers not merely inform their depression-income clients of their EITC eligibility, but farther assistance them by identifying other forms of assist for which they might qualify. Some even assist in the application procedure.

Utilise OF REFUND Apprehension LOANS AND REFUND Apprehension CHECKS

Before 2012, low-income tax filers who used paid preparers could go their taxation refunds faster with a refund apprehension 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 programme, which disclosed whether a tax refund would exist redirected by the IRS to pay debts.

The IRS has since discontinued use of the debt indicator, essentially eliminating the RAL market. Still, near 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 tin can however exist quite expensive. RACs are temporary bank accounts opened by paid preparers, where revenue enhancement filers directly their refunds. Taxation filers are allowed to pay fees out of their RACs. When the IRS deposits the refund, the paid preparer subtracts fees from the business relationship, and then the tax filer can access the residuum.

In 2014, the National Consumer Law Centre reported that more than 21 million consumers obtained RACs. Unlike RALs, RACs practise not allow consumers faster access to predictable refunds (Wu 2015). The vast majority of RAC consumers—about 83 percent—have low incomes. In fact, well-nigh half are EITC recipients (Wu 2015).

Kickoff in 2017, a 2d generation of RALs became available, advertised as having no fees or risks to borrowers. The National Consumer Police Eye reports that, as of 2020, interest bearing RALs accept returned and put risk back on the consumer. Moreover, fees associated remain opaque, and potentially quite costly for consumers.

Updated May 2020

Data Sources

Internal Revenue Service. "2010 Statistics of Income Public Use File."

Farther Reading

Berube, Alan. 2006. "The New Safety Internet: How the Taxation Code Helped Low-Income Working Families During the Early 2000s." Washington, DC: Brookings Institution.

Guyton, John 50., Adam K. Korobow, Peter S. Lee, and Eric Toder. 2005. "The Furnishings of Tax Software and Paid Preparers on Compliance Costs." Washington, DC: Urban-Brookings Tax Policy Center.

IRS (Internal Revenue Service). 2014. "Compliance Estimates for the Earned Income Tax Credit Claimed on 2006–2008 Returns." Research, Analysis and Statistics Report 5162. Washington, DC: Internal Revenue Service.

Maag, Elaine. 2005. "Paying the Price: Low-Income Parents and the Use of Paid Tax Preparers." New Federalism: National Survey of America'south Families Report B-64. Washington, DC: Urban-Brookings Taxation Policy Center.

National Consumer Law Center. 2020. "2020 Tax Season: More Delays and College Costs for Struggling Taxpayers", Washington, DC: National Consumer Law Middle. January.

McTigue, James R., Jr. 2014. "Paid Taxation Return Preparers: In a Limited Study, Preparers Made Pregnant Errors." Testimony before the Senate Committee on Finance, Washington, DC, April 8.

Theodos, Brett, Rachel Brash, Jessica F. Compton, Nancy M. Pindus, and C. Eugene Steuerle. 2011. "Who Needs Credit at Taxation Time and Why: A Look at Refund Apprehension Loans and Refund Anticipation Checks." Washington, DC: Urban Institute.

Wu, Chi Chi. 2015. "Taxpayer Beware: Unregulated Tax Preparers and Revenue enhancement-Time Financial Products Put Taxpayers at Take chances." Washington, DC: National Consumer Law Center.