A new report by two non-profits accuses for-profit tax preparation companies of disproportionately targeting black and brown communities in their predatory marketing. While all low-income people have been targeted, they say, black and brown communities feel the brunt of these tactics.
New Report
For-profit tax preparation companies disproportionately cluster in Black and Brown communities and deploy predatory marketing tactics that take advantage of low-income filers of color, according to a new report out today from Color of Change and the Better IRS campaign.
More than half of the nearly 150 million tax returns filed with the Internal Revenue Service (IRS) each year are completed by the $10 billion tax preparation industry. Lacking federal oversight, many of the more than 700,000 tax preparers in the United States are, at best, unqualified and, at worst, purposely taking advantage of taxpayers, committing fraud and engaging in misconduct.
Disproportionately Targeted
Building on previous research, the report introduces new data demonstrating that unregulated preparers are most prevalent in low-income, Black, and Brown communities. Counties with more Black taxpayers and Earned Income Tax Credit (EITC) claimants have 14 percent more Jackson Hewitt and 7 percent more Liberty Tax locations. Counties with more Hispanic taxpayers and EITC claimants have 11 percent more Liberty Tax locations, 8 percent more Jackson Hewitt locations, and 5 percent more H&R Block locations.
Need Change
The authors go on to argue that policymakers should protect taxpayers by:
- Regulating the tax preparation industry
- Defending and expanding the IRS’ Direct File tool
- Implementing policies that ensure our tax system works for everyone, including investing in the Volunteer Income Tax Assistance for (VITA) program
“Tax preparation companies have been siphoning resources from Black families through the provision of second-rate services at a premium – and, in most cases – unnecessary cost. Policymakers must hold these corporations accountable and protect consumers by raising the standards of this industry, which has made billions off of exploitative business practices for decades,” said Portia Allen-Kyle, chief of staff at Color Of Change. “Our report exposes the alarming reality: predatory tax prep companies disproportionately target Black and Brown communities, exploiting financial vulnerability. It’s time to protect taxpayers.”
In addition to new research, the report highlights real stories from former customers and preparers who have experienced firsthand how these companies take advantage of vulnerable taxpayers.
“It is beyond time that policymakers stand with consumers and hold these unscrupulous, shady tax preps accountable for taking advantage of low-income filers of color,” said Igor Volsky, executive director of Groundwork Action and a leader in the Better IRS campaign. “Americans almost unanimously agree that taxpayers should have the option to file their taxes for free without relying on private companies that try to nickel and dime them. The only way we can grow our economy is if we have a tax system that works for all of us.”
Slow Change
In an ambitious move to transform the tax filing landscape, the Internal Revenue Service (IRS) is set to launch Direct File, a groundbreaking project designed to provide free, accessible, and straightforward public tax filing. However, the program is extremely limited and slow in coming.
The eagerly anticipated pilot will kick off during the 2024 tax filing season, offering phased availability to an estimated 20 million taxpayers across select states, including Arizona, California, Massachusetts, and New York, as well as states without a state income tax filing requirement such as Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington, and Wyoming.
Direct File is positioned not as a replacement but as a complement to existing tax filing options. Taxpayers who prefer the services of private companies or personal accountants will still have the freedom to choose those avenues. This announcement comes at a crucial time, as TurboTax faces scrutiny for its deceptive advertising practices, underscoring the urgent need for diversified tax filing alternatives.
The Significance of Direct File for Taxpayers
Americans collectively expend a staggering 1.7 billion hours or $31 billion annually on filing their taxes. Despite the majority having relatively simple tax cases that should take minutes and be free to file, many find themselves spending unnecessary time and money. A free tax filing option, such as Direct File, could potentially save Americans an average of 13 hours and $250 per tax season.
Moreover, millions of individuals find filing taxes too challenging or expensive, leading them to miss out on valuable credits. This includes up to 1 in 5 families eligible for the Earned Income Tax Credit and approximately 4 million Child Tax Credit families in 2021—disproportionately impacting people of color.
Providing 20 million Americans with the option to file taxes without relying on for-profit tax preparers is expected to save families both time and money. This is particularly advantageous for immigrants and communities of color, who are often disproportionately affected by the complexities of the current tax system.
Eligibility Criteria for 2024
Direct File is set to launch as a limited-scope pilot, covering specific types of income, credits, and deductions. These include W-2 income, unemployment benefits, interest up to $1,500 (no Schedule B), Social Security (and Railroad Retirement) benefits, and credits like the Earned Income Tax Credit, Child Tax Credit, and Credit for Other Dependents. Some deductions, such as the standard deduction, student loan interest deduction, and educator expenses subtraction, will be included.
The pilot aims to prioritize low and moderate-income families and enhance accessibility by offering the tool in both English and Spanish. Individual Taxpayer Identification Number (ITIN) holders, as opposed to Social Security Number (SSN) holders, will also be able to utilize the tool.
What Happens Next?
The inaugural year of Direct File serves as a pilot with limited functionality. If successful, subsequent phases are expected to expand its reach and capabilities, aligning with the overwhelming desire of Americans. Recent polls by Hart Research reveal that 88% of Americans support the Direct File pilot program, with over 75% expressing a willingness to try the free file tool.
Paying taxes is an integral part of civic duty, ensuring the government can continue to provide critical, lifesaving services. Direct File aims to simplify this process, making it easier for all citizens to fulfill their legal responsibilities.
In the words of Igor Volsky, Executive Director of Groundwork Action: “America’s current tax filing system is time-consuming, expensive, and complicated. Direct File offers a much-needed alternative for the millions of Americans seeking a free, simplified way to file taxes. This is especially important for low-income taxpayers, many of whom miss out on certain tax credits simply because it’s either too difficult or too expensive to file. Paying taxes is our civic duty and legal responsibility—the least the government can do is make it easier.”