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Unregulated Storefront Tax Preparers Collect Fees from Low-Income Americans, and Local Advocates Want to Change That 

For the famous dancing mascots of Liberty Tax Service, gloves and earmuffs are as essential to the Cleveland uniform as the crushed velvet robes and foam crowns.

That's because tax season (January 1 through April 15) is more or less coterminous with wintertime in Northeast Ohio. So the "wavers" (that's the official Liberty designation) have to cope with the elements as they jive and gyrate and spin signs imploring you to "Honk if you love Liberty" and "Get $50 Now!"

You've seen them. There are nine Liberty Tax Service branches in the city of Cleveland, 157 across Ohio and more than 4,000 nationwide. Thanks to the wavers, Liberty is probably the most recognizable brand, if not the biggest (that would be H&R Block), in the storefront tax preparer industry. It's an industry, local politicians and policy advocates say, wreaking havoc on the financial wherewithal of millions of low- and middle-income Americans.

The Liberty wavers earn wages in accordance with their sign-spinning skills. And the marketing folks at Liberty Corporate, proficient in another sort of spin, encourage them to improve their spinning to improve their paycheck — they even host a national wavers contest via YouTube — and suggest that one day, the wavers might become bona fide tax preparers. The tax preparers are likewise encouraged to envision a loftier future: Might they see themselves owning a Liberty franchise down the road?

Anyone can do it. "No tax experience necessary," touts the "Own a Franchise" overview on Liberty's website; and why would it be? Storefronts like Liberty, H&R Block, Jackson-Hewitt and scores of smaller pop-up operations are totally unregulated by federal statute. There are no required educational credentials for individual preparers, no required certifications or standardized training, no best practices for fees and their disclosure, no required proof of any kind that these places are any more qualified to do your taxes than Martha Stewart.

"It's open season," said David Rothstein, director of resource development and public affairs at Neighborhood Housing Services of Greater Cleveland (NHS), when he spoke to Scene about the state of affairs.

The IRS tried, and failed, to institute some basic regulations in 2011. But the federal courts sided with the tax preparers (in the case of Loving v. IRS), ruling that the IRS didn't have the statutory authority to regulate.

"It's actually pretty remarkable," said Rothstein. "It's sort of akin to saying the Department of Defense couldn't require that military contractors register with the federal government before they get a contract with the DOD. It's odd to suggest that a government agency that's supposed to be in charge of tax returns wouldn't be able to set up a system so they could track who's actually doing tax returns. It's mind-boggling."

Since then, a few states and cities have cobbled together their own regulatory structures, but Ohio and Cleveland aren't among them.

That might change soon. City councilman Anthony Brancatelli told Scene he's pursuing legislation to regulate storefront preparers. He wants to pass a bill this summer, in time for next year's tax season, that would, at the very least, establish some minimum licensing requirements.

"The classic comparison is a barber shop or nail salon," Brancatelli said. "If you go to get your hair or nails done, everybody doing it has to be licensed. There's an assumption that when you walk into a tax preparer's, those folks are all licensed too. But they're not. A lot of times they have no idea what they're doing."

Sen. Sherrod Brown is in the mix too. He's a member of the U.S. Senate Finance Committee and helped secure passage of a bill in December that expanded the Earned Income Tax Credit (EITC). The EITC is a huge boost for the working poor and has become a chief source of income for storefront preparers, who generally take their fees directly out of their clients' refunds. (As refunds grow thanks to the EITC, so too do preparers' fees.) Brown, like many local advocates, wants to make sure that his constituents are getting the money they deserve.

At an NHS press event in February, Brown reacted to stories of people celebrating their refunds. At the free "Super Saturday" tax prep events Feb. 6 at Cleveland Central Catholic and Saint Ignatius, multi-year returns were, in rare instances, as high as $8,000 to $10,000. (The average EITC refund in 2014 was about $2,400 per household.)

"It's like winning the lottery," Brown said. And then quietly: "Except they earned it."

A regional EITC coalition led by Enterprise Community Partners has been raising awareness about free Volunteer Income Tax Assistance (VITA) sites across the county (there are 60 of them). Education is one of the coalition's primary functions and goals. With a targeted ad campaign and a robust word-of-mouth network, the aim is to drive folks who might be enticed by storefront preparers to the VITA sites.

Unlike storefront shops, the VITA sites are manned by trained, IRS-audited volunteers, many of whom are full-time students or employees at local banks that partner with the Coalition.

The efforts are working. In 2015, the EITC Coalition directed 13,741 clients to free tax service. More than 4,500 of them claimed the EITC. Program director Kathy Matthews told Scene that the 2016 numbers are trending upwards, but that there's still room for "a dramatic increase" in the Coalition's reach.

In the meantime, the worst of the fly-by-night storefront preparers may be getting squeezed out of the market.

"There used to be five on the corner of Broadway and East 55th Street," said Lou Tisler, NHS's executive director, at the Sherrod Brown event in February. "Now there are only two. So we encourage the dancing Statue of Liberty as much as possible. It brings attention to the kiosk that has a free tax prep sign: 'Call 211 and get free prep.' We hope people see that and say, 'Oh, I can get my taxes done for free.'

WHY WOULDN'T YOU GET YOUR TAXES DONE FOR FREE?

Probably for the same reason you don't.

Basic tax forms, to quote Councilman Brancatelli, "aren't rocket science," but they're still intimidating, and navigating the maze of multiple W-2s, side income streams and dependents (especially in single-parent households) often requires help. That help tends to be most readily available at the tax prep storefront down the street. The prevailing assumption is that when you take your paperwork to a preparer, they'll sort everything out. Not only will they not make a mistake, they'll find ways to maximize your refund. You pay for the convenience and the expertise. "Fast, accuracy, guaranteed" was a grammatically bothersome Liberty tagline a few years back.

"There's also an assumption that if something is free, it can't be high quality," Kathy Matthews said.

But the bigger issue, to quote Rachel Ruffing, who owns three local Liberty branches, is that "people around here need their money yesterday." That's why January is a lot busier than March and April, at least for her. For many low-income families, the federal tax refund is the largest financial transaction of the year, and the W-2 is interpreted, more or less, as a check to be cashed.

And "as tax refunds have increased," NHS wrote in a 2015 study, "clients have become less sensitive to price, since costs are deducted from the refund rather than paid outright."

Matthews said that some preparers will even allow clients to use a year-end pay stub as a proxy for the W-2, and then provide a refund anticipation product — basically a cash advance.

"But they'll charge a pretty ridiculous fee to do that," Matthews said. "Say your refund is $1,000. You'll get a check today for $600. And the preparer will take $400 for the preparation, the e-file, maybe the state, and then a fee for giving you the money today. For a low-income family, that $400 is huge. They're making, on average, $18,000 per year."

If that same person got his or her taxes prepared at a VITA site, he or she would get the full $1,000. But Matthews said the VITA sites can't prepare returns without valid W-2s and that they e-file, so the refunds arrive, via direct deposit, in seven to 10 days. That makes it difficult to compete with storefront preparers: They offer a fraction of the refund but they offer it immediately.

The Coalition's research shows that low-income clients spend their refunds on "immediate and urgent" financial needs. It's often basic expenses like rent, utility bills and food. Credit card bills and auto repair are also near the top of the list.

In 2013 in Cuyahoga County, there were roughly 120,000 people who claimed the Earned Income Tax Credit. Of those, Matthews said, nearly half went to a paid preparer. That represents millions of dollars in fees.

One of the reasons the Coalition exists is because those millions of dollars in fees, it reckons, ought to be going back into the local economy. In its literature, the Coalition boasts that it returns $30 to the local economy for every $1 spent on program costs. However: "Equally important is the immediate positive impact on the personal lives of those who seek the Coalition's services."

HOW, AGAIN, DOES THE STOREFRONT TAX PREP BUSINESS MODEL WORK?

"We all know know how the business model works," Councilman Brancatelli said. He was the Slavic Village community development corporation director before he became a councilman and he saw the storefront preparers operate firsthand. And the business model stings in a special way because so many of his ward constituents —about half — are EITC eligible.

"If you can stay open three months a year and pay rent for the whole year, it tells you how much money these guys are making," Brancatelli said.

And if gouging the working poor with bogus fees weren't enough — fees that, as a rule, are never disclosed up front — storefront preparers top it off by improperly preparing returns at a rate much closer to "always" than "most of the time."

"It may not be legally criminal," said Brancatelli, "but it feels criminal."

The 2015 NHS study referenced above was actually a secret shopper study. It found, alarmingly, that at 10 out of 10 (or 100 percent) of tax preparers visited, returns were prepared incorrectly.

One secret shopper, a female, posed as a single parent making $22,700 per year as an administrative assistant, and pulling in about $1,000 on the side selling craft jewelry.

"The scenario was constructed," the study said, "so that the tester was not entitled to claim her daughter as a dependent for the EITC. Testers were instructed to state that the daughter spends weekdays with the father ...and that the father's mother provides childcare during the week."

But when presented with that scenario, all five tax preparers visited by the woman — four large chain preparers and one independent preparer — instructed her to claim her daughter for the EITC.

"Claim your child quickly, before someone else does," one preparer told the tester. "You can always claim the EITC since you are the mom," another chain preparer said.

Additionally, the study reported, two of the tax preparers were on cell phones during the consultation and "not engaging the client." Price estimates were difficult to obtain but were generally between $150 and $400. In neither of the two scenarios were testers provided with actual fee schedules or written estimates of costs.

The EITC misunderstandings have the gravest implications. For starters, there are stiff penalties. You're unable to claim the EITC for two years if the IRS discovers a "reckless or intentional disregard" of EITC rules. The penalty is 10 years if the IRS determines that you've engaged in fraud.

But the storefront shops are incentivized to "over calculate," in Sherrod Brown's terms. And NHS agrees.

"There are people for whom the EITC is a real sweet spot," said Mark Wiseman, the director of NHS's Consumer Law Center. "And because the storefront preparers charge their fees as a function of the refund, that's where the EITC is getting hijacked."

Sen. Brown addressed the EITC issue head on at his Feb. 16 press event, calling the passage of the EITC bill the most important thing he'd done in his 25 years in Washington.

Scene was the only media outlet in attendance, (the event was organized on short notice and the weather was atrocious). After one question — we asked about the training of VITA site volunteers — Sen. Brown walked among the attendees, picking their brains about the issues. It was refreshing to see an elected representative exchange ideas with experts in the field for a solid hour. He asked more questions than he answered.

Brown's position, articulated in various forms that morning, was that the storefront preparers probably weren't all that bad. Inaccurate, maybe, but not quite criminal.

"I hear critics — most of the Republicans in the Senate — who claim there's fraud in the Earned Income Tax Credit," Brown said in his prepared remarks. "The fraud in the EITC is mostly a product of the tax preparers making mistakes. Opponents of the EITC — and keep in mind that a lot of conservative members of the Senate really only think rich people should pay less taxes; they don't think poor people should pay less taxes — say the EITC's got fraud. It does have mistakes, but there's way more fraud among corporations and wealthy taxpayers than there is in the EITC. I'll go to the wall on that one. They are just wrong."

BUT THE STOREFRONT PREPARERS STILL NEED TO BE REGULATED, RIGHT?

Oh, most definitely.

For Tony Brancatelli, licensing and education are the big first steps. He envisions a process through the city's licensing and assessments department where a storefront shop might ultimately have a sticker in the window after preparers have been credentialed in some way: a standardized test, maybe, or an annual training program of some kind. Brancatelli also wants an easily navigable database accessible to consumers by smart phone.

"It wouldn't be like every preparer has to wear a tag, like how we register dogs," Brancatelli joked, "but people need to know these guys have appropriate training. I'm sensitive to the fact that people want money in their pocket faster. It's not like I want to put these [storefronts] out of business; we just want to make sure they're not taking advantage with excessive fees and bad advice."

For David Rothstein, who has provided guidance on the upcoming legislation, fee disclosure is another important component. That might entail a "good faith estimate" before the refund is complete or posting signs indicating standard fees.

"Part of the problem is that people don't know what they're paying for their tax return until their entire return is done and they've been sitting there for an hour and a half with their kids. They can't shop around," Rothstein said. "And again, they don't have a sense of what they're paying because it's deducted from their return. If I come into your store and you tell me I'm getting a $2,500 refund, and you've already taken out your fees, it still sounds like a lot of money to me. People tend to view the EITC as the government's money, not their money."

Rothstein said that if people had to pay out of pocket for their tax returns, instead of as a refund deduction, the prices would be "dramatically lower." Along with a group of consumer advocates, he proposed to the IRS a process called C-netting, where the IRS would cap the amount that can be taken out of the refund.

"If, say, only $250 could be taken from your refund," Rothstein said, "what would magically happen is that you'd suddenly see a floor of $250 for tax prep services."

The IRS would need congressional approval for an action like that, but the fact remains: The Earned Income Tax Credit is one of the biggest federal poverty relief programs in the United States, but the delivery of the service has been effectively privatized.

"Imagine," Rothstein said, "if to get [Supplemental Nutrition Assistance Program] benefits, you had to go to a grocery store and purchase your benefits from the store. That's what this is like."

Sherrod Brown got evocative with some grocery store imagery as well: "The average person making $25,000 per year in this country spends more on fees and financial services than they do on food," he said. "That is a fact."

And it's a fact not lost on Rachel Ruffing, who owns the Liberty Tax on the northeast corner of Detroit and West 65th. She told Scene that that location prepared 800 returns last year and provided 100 of them free of charge.

"That's a requirement at Liberty," Ruffing said. "We have to do a certain number for free every year."

Liberty was in fact started by John Hewitt (he of Jackson-Hewitt) in Canada in 1997, and Ruffing said he broke off from Jackson-Hewitt because he wanted to "put people first." Ruffing said the Liberty wavers are a perfect example.

"Some people look at them and say, 'Oh look, they're forced to be out there in the freezing cold,'" she said. "But the other side of the coin is that, first of all, when it's freezing cold I give them options. Second of all, a lot of these guys don't have opportunities for employment somewhere else. I write letters to their parole officers every week, and I say they love coming to work."

RESOURCES:

Cuyahoga EITC Coalition: www.refundohio.org

(Find a map of all VITA sites here)

Program director: Kathy Matthews (kmatthews@enterprisecommunity.org)

Neighborhood Housing Services of Greater Cleveland: www.nhscleveland.org

NHS Financial Capabilities (Fincap) Team:

Keith Davis (kdavis@nhscleveland.org) / (216) 205-4470

If you make less than $62,000 per year, you can use the IRS Free File Program: www.irs.gov/uac/Free-File:-Do-Your-Federal-Taxes-for-Free

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