Would You Trust a Used Car Dealer With Your Tax Refund?

At the Car-Mart in Rogers, Arkansas, or at 150 other Car-Mart locations nationwide, you can both buy a used car and get your taxes done. If that sounds like an unusual combination, it’s not. According to Car-Mart’s website, the used car dealership offers onsite tax preparation services through Tax Max, a Tampa-based company that works with a jaw-dropping 3,000 car dealerships across the country. Tax Max also works with money services businesses (such as check cashers), collections companies, and even mobile home dealers to help them capture a chunk of their customers’ tax refunds. This might be convenient for some, but it is very costly.

The Rogers Car-Mart, for instance, charges $149 to prepare a federal tax return, plus $49 for the state return, according to a salesperson I spoke with when I called recently. I’d also pay a $93 “bank fee” if I got a refund, plus a $27 “check printing fee” if I wanted an advance on my money instead of waiting for the IRS to cut the check. “So that would be a total of $318,” the clerk told me. That’s equal to 15 percent of this year’s average federal refund of $2,201.

And companies don’t just benefit from receiving a cut of these high fees when they partner with a tax preparer like Tax Max. (Auto dealers, for instance, can charge a $99 “dealership incentive fee” for every return they process.) A car dealership or another business can secure part or all of the tax refund itself. “We prepare your customer’s tax return, but your location receives the refund,” boasts the Tax Max site pitch to prospective partners. “This refund can be used for a down payment on a car and/or car insurance. This refund can also be used to collect on past-due obligations by a collection company. The refund may also be used as a down payment for a manufactured home. Some companies can generate revenue by cashing the checks.” 

Would you want to get your tax refund at a used car dealership? This costly system is especially tough on the poor, who get hit with expensive fees and risk their refunds while having fewer resources to navigate tax filing than the middle class or the wealthy. Blame it on a tax code that’s too complex for many people to decipher, and on the utter lack of federal regulation for tax preparers, allowing predators to flourish. 

It might seem counterintuitive that low-income taxpayers are a target of tax preparers since poorer Americans earn less than higher earners. But they are a lucrative market because of their numbers—the median American worker earned $41,535 in 2020—and millions receive large refunds through benefits such as the earned income tax credit and, starting last year, the expanded child tax credit. In 2021, the average EITC refund was $2,411, according to the IRS, but many families qualify for much more. The maximum EITC for a family with three children, for instance, is $6,728 this year, while families with two children qualify for up to $5,980. Sums like these have tax time pop-ups salivating. “There is so much money to be extracted from people facing poverty,” says Joseph Leitmann-Santa Cruz, CEO and executive director of the Washington, D.C.–based Capital Area Asset Builders (CAAB), which offers free tax preparation through a network of nonprofits.

In the tax year 2021, the federal government refunded about $60 billion to workers and families through the EITC, according to the IRS, making it the nation’s largest—and arguably most effective—anti-poverty program. In 2018, the credit pulled 5.6 million Americans out of poverty, according to the Center on Budget and Policy Priorities, including 3 million children. However, too many of these dollars get diverted from families to paid preparers, blunting the benefit’s impact, and keeping tax prep companies rolling in profits.

In Maryland, for instance, where 387,000 taxpayers received an average EITC refund of $2,281 in 2020, at least $50 million “was lost on the EITC to pay tax preparers,” says Robin McKinney, cofounder and CEO of the nonprofit CASH Campaign of Maryland. “That’s just epic bleeding.”

In the D.C. metro area, the fees charged to EITC filers run from $400 to $1,200—making the Arkansas Car-Mart a relative bargain. “I’m a true believer in free market competition, but it makes my blood boil when low-income communities are seen as profit centers,” Leitmann-Santa Cruz says.

Immigrant taxpayers are often charged astonishing fees for the ministerial task of renewing an Individual Tax Identification Number (what the IRS uses for noncitizens who don’t have a Social Security number). Those fees can run $150 per taxpayer, says Alejandro Valenzuela Jr., tax and financial services director for the nonprofit Prepare + Prosper, based in Saint Paul, Minnesota. “If it’s a married couple and they both need to be renewed, that’s $150 each plus the returns, and now you’re looking at over $500 in fees.”

Tax firms also profit from various “refund advance” products for cash-strapped customers. Tax Max, for instance, offers taxpayers advances of up to $6,000 “within 24 hours or less” of applying for a refund. While high-cost “refund anticipation loans” are less prevalent than they used to be—the result of regulatory changes that limited their availability—many firms now offer “refund anticipation checks,” aimed at taxpayers who don’t have bank accounts and can’t receive their refunds by direct deposit from the IRS.

For these customers, the tax preparation firm will open—for a fee, of course—what Leitmann-Santa Cruz calls a “wink-wink” bank account that’s in existence for about three weeks, or just long enough to receive a direct deposit from the IRS. The taxpayer then gets a debit card linked to this temporary account, which charges fees for every withdrawal. “So, it’s not a ‘loan,’ and there is no lending mechanism, and therefore no APR rules that would apply,” Leitmann-Santa Cruz says, referring to statutes about what kind of annual percentage rate can be charged on loans. “It just so happens that the amount of fees that get charged by withdrawing money those three weeks ends up being pretty exactly about a 300 percent interest rate, which is very similar to the interest rate charged by the advance loans that were provided before.”

In 2018, according to the National Consumer Law Center, the tax preparation franchise Liberty Tax earned more than a quarter of its revenues from refund anticipation loans and refund anticipation checks. It sold these products to a little less than half of all of its clients, collecting $42 million in fees. In 2014 (the most recent year for which figures are available), more than 21 million consumers bought RACs, for a combined cost of at least $648 million, according to the NCLC. (Not all taxpayers who purchased a RAC are EITC filers, but one Urban Institute analysis estimates that 42 percent of RAC buyers are EITC recipients.) 

The complexity of the tax code—and the EITC in particular—drives many taxpayers to rely on paid preparers, who file a majority of all tax returns (53 percent in 2018) and a majority of returns that claim the EITC. Another reason low-income taxpayers flock to paid preparers is because of legislation passed in 2015 (the Protecting Americans From Tax Hikes Act, or PATH), which forbids the IRS from processing EITC refunds until February 15. While intended to give the IRS more time to spot fraud, its impact has been to make pricey refund advance products more attractive to consumers who can’t wait. “People are being incentivized to get whatever mechanism gives them money faster,” CAAB’s Leitmann-Santa Cruz says.

Four steps could ensure that more families get the full value of their refunds without the intercession of tax time predators.

The first is to simplify the tax code and the EITC, as numerous advocates and analysts have proposed. As the Center on Budget and Policy Priorities points out, the IRS instructions for the EITC “are nearly three times as long as the 15 pages of instructions for the Alternative Minimum Tax,” which almost exclusively applies to only wealthier taxpayers. Much of the confusion stems from who can claim a “qualifying child” for the EITC (as defined by the IRS)—a question complicated by custody and residency tests, among other factors. Moreover, these criteria are different from what’s required for the child tax credit.

Making these definitions consistent should be a no-brainer. More radical and worth exploring is “return-free filing” for some taxpayers, which 36 countries currently offer. “If we’re using the tax code to administer benefits, there needs to be a more simple, automated process instead of [people] having to go out and find a tax preparer to access it,” CASH Campaign’s McKinney says.

A second step would be to amend the PATH Act so that early EITC filers aren’t singled out for delayed refunds. Equal access to refunds would dampen demand for high-cost refund advance products. And it’s only fair to treat all taxpayers equally. “Any low-income taxpayer who dares to claim the EITC has to wait approximately 45 days longer than a non-low-income individual or taxpayer,” Leitmann-Santa Cruz says. “Here is a situation where there is an assumption—a guilt assumption—that if somebody’s low-income, they must be cheating.”

That “guilt assumption” is especially galling because it’s incorrect. A 2022 paper from the National Bureau of Economic Research finds that tax evasion is much more likely among the top 1 percent of taxpayers than the bottom 50 percent. (The paper concludes that as much as 20 percent of the income earned by the top 1 percent of taxpayers is underreported.) Yet, as a Syracuse University analysis reports, the lowest-income taxpayers are audited at five times the rate of all taxpayers, even though the IRS would presumably have much more to gain by going after higher-income tax dodgers.

Third, Congress should pass proposed bipartisan legislation authorizing the IRS to require minimum training, licensing, and competency standards for tax preparers, which could eliminate some of the shadier fly-by-night tax shops that pop up each spring in low-income neighborhoods. Astonishingly, there is no federal regulation of tax preparers, meaning that anyone can hang out a shingle.

Although the IRS tried to mandate standards during the Obama administration, a federal appeals court (in a decision written by now Supreme Court Justice Brett Kavanaugh) struck down the effort, ruling that the IRS had no authority to regulate paid preparers. “It might be that allowing the IRS to regulate tax-return preparers more stringently would be wise as a policy matter. But that is a decision for Congress and the President to make if they wish by enacting new legislation,” Kavanaugh wrote for the majority on the U.S. Court of Appeals for the D.C. Circuit.

The legislation proposed by Representatives Jimmy Panetta of California and Tom Rice of South Carolina—the Taxpayer Protection and Preparer Proficiency Act—would fix this problem and authorize the IRS to regulate tax preparers.

Such regulation would professionalize and standardize the industry and reduce the number of errors in people’s returns. In a series of “mystery shopper” visits conducted in 2013, the Government Accountability Office found that just two of 19 tax preparers calculated the correct refund, with one preparer erring by as much as $3,718. Minimum competency standards would protect taxpayers from liability for preparers’ mistakes, including back taxes and penalties that low-income consumers, in particular, can ill afford.

Finally, Congress could dramatically expand the availability of free tax preparation services for low-income filers through the Volunteer Income Tax Assistance (VITA) program, which provides grants to qualified local tax help organizations. Though Congress appropriated $30 million to the program in 2021—a big win for advocates—it’s not enough. “We had 60,000 calls to fill 5,600 appointments,” says Maryland CASH’s McKinney, whose organization runs multiple VITA sites as part of its services. In 2019, according to the nonprofit Prosperity Now, VITA volunteers helped 1.5 million households file their returns—a tiny fraction of the taxpayers eligible for VITA help. And unlike paid preparers, VITA volunteers must undergo extensive training and pass a test.

Baltimore resident Carleigh Steele says she relied on paid preparers that saddled her with high fees and errors until five years ago, when she discovered the CASH Campaign and got assistance. She hasn’t looked back. “I have my appointment next week, and then I’ll get my refund,” Steele says. She’ll have peace of mind, knowing her finances are in trusted hands. “I don’t know why I ever thought taxes were confusing,” she adds.

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