Sunday, February 01, 2009
by STEPHEN FOSTER BLACK
As we move into a new tax-filing season, in the midst of the most severe recession in three generations, the Earned Income Tax Credit has never been more critical to the working people of our state. Considered to be the single most important federal anti-poverty program in the nation, the EITC is a refundable tax credit for working families with low to moderate incomes, representing a $1 billion annual investment to 491,000Alabamafamilies and the communities in which they live and work.
Lifting nearly 5 million Americans, including almost 3 million children, above the poverty line each year, the EITC gives working parents the ability to better support their families. In 2006, the average total refund forAlabamataxpayers claiming the EITC was $3,200. Often, the largest check a lower-income, working family will see all year, this money helps families cover expenses like housing, utilities, food and child care–making it easier for working Alabamians to keep working.
Unfortunately, despite the obvious benefit of the EITC, an estimated 20 percent to 25 percent of eligible Alabama families and individuals do not claim the credit, leaving approximately 11 percent of the money ($134 million) on the table.
Money diverted:
The impact of the EITC is also dramatically undermined because money that was intended for working families is diverted to commercial tax preparers and refund lenders. Encouraged by clever television ads, and often unaware they are simply speeding up the refund process by as little as five days, many consumers are convinced to take out a refund anticipation loan– a one-week loan secured by and repaid directly from the proceeds of a consumer’s tax refund, offered at exorbitantly high interest rates, ranging from about 50 percent to more than 800 percent. Millions of working families pay $200 to $400 each in fees, essentially borrowing their own money for five to seven days at extremely high interest rates.
In total, more than 75 percent of EITC recipients in Alabama pay a commercial preparer to complete their taxes, losing more than $78 million annually to tax preparation and refund anticipation loan costs– a figure that places us 49th worst in the nation. That extra $78 million could have gone a long way in helping lower-income families secure health insurance, pay down debt or put food on the table.
Those preparing taxes include many highly trained pros, such as certified public accountants and enrolled agents, who face considerable professional regulation. But it also includes thousands of other commercial preparers acrossAlabamareferred to as unenrolled agents, who target lower-income families with their services and products.
There are currently no educational qualifications, no training standards and no licensing requirements that must be met to become a paid tax preparer inAlabama. Anyone who can rent a storefront or pass out flyers from their home can set up shop as a paid tax preparer.
Although there are many competent and knowledgeable paid preparers who operate with integrity, a recent undercover review conducted by the nonprofit organization Impact Alabama uncovered evidence of significant fraud and negligence. All 13 returns that were prepared across the state contained negligent mistakes, and 11 (85 percent) of the 13 contained misstatements and omissions considered to have been willful or fraudulent. Many commercial tax preparation companies across our state exploit and defraud low-income taxpayers with poor disclosures, exorbitant fees and intentional miscalculations.
Over the past six months,UniversityofAlabamastudents working with the UA Center for Ethics & Social Responsibility conducted research and helped draft needed reforms. A coalition of college students from more than 10 campuses statewide was organized to raise awareness and gain support from the Legislature and governor to pass these needed reforms. More than 5,000 student letters supporting this legislation have been written to legislators across the state.
Under the leadership of state Sen. Quinton Ross, Rep. Tammy Irons and a bipartisan coalition of legislators, the Alabama Taxpayer Protection and Assistance Act will be filed in both chambers of the Legislature this week.
The act would require individual tax preparers to pass a proficiency exam, obtain a license and fulfill a continuing education requirement (excluding CPAs, enrolled agents and lawyers already required to obtain licenses). It would also use a portion of the licensing fees to expand informational outreach efforts to individuals eligible for the EITC and provide grant support to IRS-certified free Volunteer Income Tax Assistance nonprofit sites throughout state. To be a hairdresser, an individual must have certain training and obtain a license to do business inAlabama. Shouldn’t we expectAlabama’s tax preparers to have a basic level of competency and be accountable for their work?
Grass-roots effort:
This type of grass-roots mobilization of students (including more than 400 students preparing free tax returns for 4,000 families throughout the state) not only brings more attention to this important issue, but it also inspires the students themselves to believe in the value of collective action and to continue to work for structural changes to solve societal problems.
In these difficult economic times, awash in well-earned cynicism toward “business as usual” in Montgomery, this is an effort we should all embrace. Our future depends on being able to look into the eyes of our most talented young people, and say, honestly: Your state needs your vision and energy, and public legislative action still can be noble and just.
Stephen Foster Black is the director of the University of Alabama Center for Ethics & Social Responsibility and president/founder of ImpactAlabama. E-mail: stephen.black@ua.edu.
