March, 16 2009, 06:04pm EDT
New Report Finds Low-Income Families Lose Billions to Predatory Commercial Tax Preparers
Report Highlights Importance of Tax Credits for Working Families in Tough Economic Times
WASHINGTON
Today the Children's Defense Fund released a report finding that in tax year 2006, low-income families lost $3.1 billion of their Earned Income Tax Credit (EITC) benefits to high-interest, short-term loans, tax preparation fees and other financial products issued by commercial tax preparers. With the 2008 tax filing deadline fast approaching and millions of families struggling in the economic recession, the report warns low-income families to avoid Refund Anticipation Loans whose high interest rates can eat up a significant percentage of their refund in exchange for receiving their money only a little earlier.
"When money goes to pay for high-interest Refund Anticipation Loans from commercial tax preparers, families and communities lose important resources," said CDF President Marian Wright Edelman. "In this economic downturn, both families and our economy need important investments like the Earned Income Tax Credit. These benefits will provide urgently needed assistance to hard-pressed families who are likely to stimulate our economy by quickly spending the money to meet urgent needs."
The EITC is a refundable federal tax credit for low- and modest-income workers and is one of the most effective tools for lifting families out of poverty. With growing numbers of working families struggling against the rapid downturn in the economy, it is especially important that all eligible families and individuals know about the EITC and how to take full advantage of it. According to CDF's analysis of Internal Revenue Service (IRS) data, in tax year 2006, more than 22 million taxpayers received the EITC, with an average benefit amount of $1,950. According to the Center on Budget and Policy Priorities, the most recent estimates show that the EITC lifted 4.4 million low-income Americans out of poverty--including 2.4 million children.
Despite these resources, families lost $3.1 billion in tax preparation fees, Refund Anticipation Loans, and other products used to access tax returns. This is in part due to commercial tax preparers' aggressive marketing of Refund Anticipation Loans to lower-income communities and people with low financial literacy. These Refund Anticipation Loans often carry triple-digit interest rates and can cost a taxpayer a sizeable portion of his or her refund, all for only a slightly quicker return. According to the report, areas of the country hit hardest by Refund Anticipation Loans include North and South Dakota and states in the Deep South such as Mississippi, Georgia and South Carolina.
The report asks individuals, communities and policy makers to step up and take action that lifts children out of poverty by helping their working families keep more of the benefits they've earned:
- Local communities can expand access to free tax preparation by opening more free tax preparation sites in their communities to give families a viable alternative to predatory commercial tax preparers.
- Congress can strengthen consumer protections. Lawmakers can pass legislation that would ensure commercial tax preparers fully disclose all rates and terms of loans so they are less likely to take advantage of low-income families.
- Local business and civic leaders can connect working families to mainstream financial services. Improving the financial literacy of low-income families will not only help them build a stronger financial future for themselves and their children but is also an important tool to forge and secure a more stable economic future.
- Policy makers can institute more state and local EITCs to help low-income families and stimulate their local economies. Although eligible individuals in any state could benefit from the federal EITC, only 23 states and the District of Columbia currently have a state EITC in effect. In addition, New York City, San Francisco, and Montgomery County, Maryland, offer local EITCs.
To read the report in its entirety or for more information on the Earned Income Tax Credit, visit www.childrensdefense.org/RALreport.
The Children's Defense Fund (CDF) is a non-profit child advocacy organization that has worked relentlessly for 35 years to ensure a level playing field for all children. We champion policies and programs that lift children out of poverty; protect them from abuse and neglect; and ensure their access to health care, quality education, and a moral and spiritual foundation.
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