A new study has found that counties with a higher proportion of low-income or Black or Hispanic residents are more likely to have storefront offices of paid tax preparers. These paid preparers can often make mistakes in filing that lead to errors or smaller refunds, and they may charge high fees that offset cash from tax credits like the Earned Income Tax Credit (EITC). Exploiting low-income taxpayers is core to the business model of these companies, according to Portia Allen-Kyle, chief advisor at Color of Change, and Better IRS, a group supporting free, direct tax filing.
By cross-referencing data from the IRS, the annual IRS Statistics of Income data book, and U.S. Census demographic data, Allen-Kyle found that paid preparers are more prevalent in counties with certain demographic features. For instance, counties with more Black taxpayers and EITC claimants had more Liberty Tax and Jackson Hewitt locations, while counties with more Hispanic taxpayers and EITC claimants had more Liberty Tax, Jackson Hewitt, and H&R Block locations. The EITC, a tax break for working class taxpayers, has been criticized for its high error rates, with the Government Accountability Office finding EITC payments made up 7% of all improper federal payments in 2022.
The study suggested that many of these EITC errors could be attributed to paid preparers. A GAO study from the early 2000s found error rates on EITC returns as high as 94%, and a 2014 study found that the majority of preparers made errors on their tax prep. Paid preparers can also charge high fees or offer pre-refund checks or loans that reduce the size of the EITC. While tax prep firms argue that the terms of such products are clear and subject to disclosure regulations, studies have shown that low-income taxpayers can be charged fees as high as 22% of their EITC amounts.
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