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."
Cuyahoga EITC Coalition: www.refundohio.org
(Find a map of all VITA sites here)
Program director: Kathy Matthews ([email protected])
Neighborhood Housing Services of Greater Cleveland: www.nhscleveland.org
NHS Financial Capabilities (Fincap) Team:
Keith Davis ([email protected]) / (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