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The High Cost of Tax Preparation

More than 60 percent of taxpayers who claim the EITC use a commercial tax preparation agency, paying on average $75 for simple returns, and often, as IRS data shows, with no better accuracy than self-preparation.3 In addition, many paid preparers sell Refund Anticipation Loans (RALs) that promise taxpayers their tax refund in one to two days (instead of 8-10 days if filed electronically, using direct deposit to a bank account). The average $200 fee for a RAL, if it is annualized, can amount to an interest rate as high as 800 percent.4 The Brookings Institution estimates that in 2003 over 5.4 million EITC recipients in 122 of the nations’ largest cities utilized a RAL, at an aggregated cost of at least $740 million in potential EITC benefits taken out of the pocket of poor families.5

Data from the EITC Campaign intake survey showed twenty-three percent of our customers paid someone to prepare their tax return last year and 6% paid someone and received an instant refund.

Tax Customers were asked how they planned to use their tax refund, below are their responses:6

• 62% - Pay Bills
• 9% - Use for a major purchase
• 11% - Save most of it
• 14%- Save some of it
• 9% - Send money to family
• 11% - Other
• 12% Don’t Know

3 The Annie E. Casey Foundation, 2003, "The High Cost of Being Poor: Another Perspective on Helping Low-Income Families Get By and Get Ahead," Annie E. Casey Foundation, Baltimore, MD, page 13.
4 Wu, Chi Chi, Jean Ann Fox and Elizabeth Reunart, 2002, "Tax Preparers Peddle High Cost Tax Refund Loans," Consumer Federation of America and National Consumer Law Center, Washington, DC.
5 Berube, Alan, "Step in the Right Direction; Recent Declines in Refund Loan Usage Among Low Income Taxpayers," The Brookings Institution, Washington, DC, April, 2005.
6 % does not equal 100 because customers could respond more than once