According to the study, tax preparers, particularly storefront chains, focus on communities with a high population of low-earners that are eligible for the sizeable EITC refunds. These companies heavily promote their services, centering their ads on these types of tax filings, which require filling out short, but tricky documentation.
This publicity has the effect of obscuring the fact that those seeking the credit can file their claims for free, either on their own or through alternate services that provide tax assistance to low-earning households. In fact, some of the same services that charge these high rates for in-person assistance also provide software that would allow the same individuals to file for less. According to Paul Weinstein, one of the study’s authors, EITC filers in most places could have their taxes prepared for less than $100, either by using software or by seeking out preparers that don’t charge higher fees.
Nationally, the average amount that Americans spend on tax preparation services is around $275, said Weinstein. The authors conducted a very informal survey of storefront tax operations, where customers can simply walk in and have employees input their tax information. They went to storefront tax operations in two cities and presented each tax professional with identical information, then noted the price. They found that EITC filers would have spent between $309 and $509 in Washington D.C., and Baltimore, which accounted for between 13 percent and 21 percent of the total tax return. That’s well above the averages quoted in the annual reports of major chains like H&R Block and Liberty, which fell below $200 according to the report.
In addition to the marketing, another reason that even low-earners are willing outsource their tax preparation to third parties that charge such high fees is peace of mind and a sense of being safeguarded. “People find it convenient and they are intimidated by the complexity,” Weinstein added. “They're not necessarily comfortable dealing with the IRS and they believe having a third party do their taxes protects them.” This dynamic appeals to most Americans who fear the ramifications of IRS audits and massive bills, but it’s especially alluring for those who may have limited education and rely heavily on their refund for basic necessities.
Despite the promise of accuracy, the record for tax preparers appears to be mixed. Last year, a Government Accountability Office investigation of all professionally prepared taxes found that 60 percent contained errors. For EITC filers using professional services, government studies have found that the rate is significantly higher, between 89 and 94 percent. And those guarantees about accuracy and protection? They’re a bit overblown, Weinstein says. “Yes they are saying, ‘We'll redo it if we get it wrong,’ but if you owe more in taxes you're still going to have to pay and pay the penalties.”