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.'


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."

About The Author

Sam Allard

Sam Allard is the Senior Writer at Scene, in which capacity he covers politics and power and writes about movies when time permits. He's a graduate of the Medill School of Journalism at Northwestern University and the NEOMFA at Cleveland State. Prior to joining Scene, he was encamped in Sarajevo, Bosnia, on an...
Scroll to read more Cleveland News articles
Join the Cleveland Scene Press Club

Local journalism is information. Information is power. And we believe everyone deserves access to accurate independent coverage of their community and state.
Help us keep this coverage going with a one-time donation or an ongoing membership pledge.


Join Cleveland Scene Newsletters

Subscribe now to get the latest news delivered right to your inbox.