As some of us scramble to file our income tax returns, others have long since filed. Unfortunately, many lower-wealth tax filers who need the assistance of tax preparers got ripped off with high-cost preparation fees and refund anticipation loans, or RALs – to the tune of $114 million in Illinois in 2006 alone. Faster delivery of refunds by the Internal Revenue Service and a little patience by tax filers can eliminate the demand for RALs, but many will still need the assistance of tax preparers to file their returns. How can tax filers pay for tax preparation services without getting caught up in RALs?
For Earned Income Tax Credit recipients, one of the populations targeted by RAL providers because they are likely to receive thousands of dollars in tax credits for low-wage working families, there are at least two ways they could pay for tax preparation fees if free tax preparation services are not available. Tax filers could save a portion of their EITC refund at tax time for next year’s fees (a one-time deposit). Another option is to save a little each month towards next year’s fees (periodic deposits).
Both of these options have the advantage of separating tax preparation fees from RAL fees and discouraging consumers from taking out RALs to pay for tax services. Preliminary reports from nonprofit groups conducting mystery shopping at tax preparation and RAL provider sites indicate that often consumers are misled or confused about the separate fees for tax preparation versus loan fees.
Ideally, saving via either of these options would occur through bank or credit union accounts, which would offer the additional benefit of bring some unbanked persons into mainstream banking. Using accounts would help consumers keep their money in a safe place and lessen the likelihood that it would be spent on other things. Consumers could also earn interest on their savings and see the benefit of compound interest. Currently banked consumers who use only a checking account could open a savings account and set up automatic transfers from checking to savings each pay period or each month.
In addition to offering basic savings accounts to accumulate assets for tax preparation fees, banks and credit unions should explore the potential of offering restricted, holiday club-type accounts for this purpose. For example, a bank or credit union could offer a higher interest rate than it offers for basic savings accounts for one-time or periodic deposits up to $500 in special “tax prep fee” accounts from which no or limited withdrawals are allowed until January 15. A bonus could also be offered to customers who reach their goal of saving a targeted amount. It would be interesting to do a pilot in which both of these options were offered to see which option consumers prefer and which is more effective in accruing sufficient assets to cover tax preparation fees.
Banks and credit unions that provide tax prep fee accounts should be considered for linked deposit programs in which government entities deposit public funds into institutions who are serving the needs of lower-wealth persons and communities. Banks should also receive favorable consideration under the Community Reinvestment Act for providing such tax prep fee accounts to unbanked and underbanked EITC recipients and other lower-wealth consumers and people of color who are disproportionately targeted for high-cost tax preparation fees and RALs.
Woodstock Institute welcomes feedback on these ideas and would be interested in developing and evaluating a tax prep fee pilot program.