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Preparers’ fees often take bite of tax refunds


BIRMINGHAM, Ala. » In December, they begin showing up in empty storefronts in neighborhoods where empty storefronts are easy to come by. Cars with phone numbers brightly displayed on the doors roll down the streets, and signs pop up along the sidewalks promising fast money.

For millions of low-income Americans, tax season means the biggest one-time influx of money all year. It also means the annual sprouting of commercial tax preparers: some of them big-name franchises, some mom-and-pops and some, as 20-year-old Brittany Dixon discovered this year, shockingly expensive.

Dixon, a supermarket cashier and college student, took her tax documents — a W-2 form and some education expenses — to the first place she saw, in a storefront near the interstate. The preparation took about a half-hour, and Dixon was told the amount of her refund — and that she would be charged nearly $400, about a quarter of the total, in fees.

She told the preparer not to file, she said, and found a service willing to do her taxes at no cost. But by then, the first preparer had already filed and taken its cut. "That was my whole car note," Dixon said.

There are as many as 1.2 million tax preparers nationwide, and reports have shown that a large majority of customers felt they were well served by their tax preparers. But with almost no regulation in the tax preparation industry and a tax code that is forbiddingly complex, the billions flowing into low-income households this time of year, primarily in the form of the earned-income tax credit, present a ripe target for the unscrupulous.

Stephen Black, director of Impact Alabama, a nonprofit based at the University of Alabama that trains college students to provide free tax help, said his volunteers routinely saw low-income taxpayers who had paid hundreds of dollars to commercial preparers, often for inaccurate returns, and were often unaware that the prices are excessive.

"Exorbitant pricing is rampant," he said.

Black and many consumer advocates have been pushing for years for more oversight of tax preparation, describing a range of problems from excessive fees to incompetence to outright fraud.

On Tuesday, the Senate Finance Committee will hold a hearing on the issue, which Sen. Ron Wyden, D-Ore., described as a priority for him as committee chairman.

"I’m open to a variety of different approaches for how to do this," said Wyden, whose home state of Oregon is one of four that have regulatory requirements for preparers. "But there should be a floor of basic consumer protection and fairness."

The tax preparation business has been bumping up against the government frequently in recent years.

After prolonged efforts by federal regulators, the once-prolific refund anticipation loan, a kind of cash advance that often came with staggeringly high interest rates, has become all but extinct. And last fall, the owners of two national chains aimed at low-income customers — Mo’ Money Taxes, of Memphis, Tenn., and Instant Tax Service, of Dayton, Ohio — were permanently barred from the business after being charged with a litany of abuses, including encouraging fraudulent tax returns and charging "deceptive and unconscionable" fees.

But one of the federal government’s most aggressive efforts did not fare so well. In 2009, the Internal Revenue Service introduced a plan to require tests, continuing education and registration for tax preparers. Some professional groups and tax preparation businesses, like H&R Block, supported the rules, but many small tax preparers denounced them as unfair and protectionist.

"How can you tell me who can fill out my income tax?" asked Albert Turner Jr., a tax preparer in rural Perry County, Ala., which once had one of the country’s highest rates of refund loan use. He said concerns about fraud were overblown given ever-stricter documentation requirements.

"Each year it’s getting tighter and tighter," Turner said. "It’s hard to defraud the government now."

Last year, a federal court ruled that the IRS had overstepped its authority in mandating the new regulatory regime, a decision affirmed by an appeals court this February.

Supporters of the rulings said the rules would have done little to stop unscrupulous tax preparers anyway.

"The solution to the predatory pricing issue is more competition, not less competition," said Dan Alban, a lawyer at the Institute for Justice who represented tax preparers who sued over the regulations. "We shouldn’t be forcing hundreds of thousands of people out of business with these burdensome regulations that aren’t being imposed on them because of anything they’ve done that’s wrong, but because there are a few bad apples we’re trying to catch."

The challenge for many customers is telling the bad apples from the good.

A majority of earned-income tax credit filers use preparers, according to a report by the IRS’ taxpayer advocate, but only about a quarter of those preparers are certified public accountants, lawyers or federally licensed tax specialists. Prices are often not disclosed up front, and many places do not mention the option of paying fees separately, rather than having them automatically, and more discreetly, deducted from the refund.

"It’s one of these areas where normal market forces just don’t work," said Brett Theodos, a senior research associate at the Urban Institute. "You don’t have competition to modulate prices because of the lack of transparency."

The federal focus has been on fraud and incompetence rather than prices, and while Wyden said "the lines blur," opponents of new regulations question how much overlap there is between the two issues. Some consumer advocates have proposed fee disclosure requirements, while others have suggested caps on how much money can be deducted directly from a refund.

There are plenty of stories here in Alabama of tax fraud in which the taxpayer is complicit. There are also many in which taxpayers find out only after being audited that their refunds had been fraudulently inflated by preparers, who have since disappeared.

"A lot of times they don’t even sign it," Black said.

Cedrick R., 57, who did not want to give his full name because he was embarrassed about his predicament, learned from a volunteer in Black’s organization this year that his preparer, who worked out of a strip mall near Tuscaloosa, Ala., had been claiming a full-time college credit on his returns, inflating his refund and taking half for herself.

"I didn’t get any paperwork," he said, adding that the preparer had stopped returning calls after he asked about the discrepancy.

Nicole Todd, 40, a mother of three who works at the YWCA in Birmingham, said her brother had a similar experience involving falsely claimed school credits.

Todd considered herself a savvy consumer, at least until a couple of years ago. On the recommendation of a friend, she went to an office set up in a building between an oil-change place and a pawnshop.

"They said they’d give you the hookup," she said. "That’s what they called it."

After a half-hour of work, the preparer told Todd that she would be receiving a refund of just more than $6,000.

Happy with the payout, Todd looked through the sheaf of papers only later to find the fees that had been discreetly subtracted: $550 for tax preparation, an "electronic filing fee" of $99, a "service bureau fee" of $25, a "transmitter fee" of $99 and an "electronic refund product processing fee" of $32.95.

Todd, who now does her own taxes, went by the building not that long ago, she said. There is nothing there.

Campbell Robertson, New York Times

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