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Tax Prep Companies’ Business Model Exploits Low-Income Payers
The average parent in low-income communities is being bombarded with advertising designed to trick them into wasting their hard-earned money that could otherwise be going to groceries, gas, and other necessities.
How far could an extra nine hours and $150 go for you and your family? That’s how much Intuit’s TurboTax and H&R Block are taking from their average customer in low-income neighborhoods. Many of these customers don’t know that they can access these services for free—and that’s intentional. The average parent in low-income communities is being bombarded with advertising designed to trick them into wasting their hard-earned money that could otherwise be going to groceries, gas, and other necessities.
With Tax Day just passed, corporate tax prep giants are trying to extract every last dollar they can from Black communities and working-class taxpayers. A new report in partnership with Better IRS, titled Preying Preparers: How Storefront Tax Preparation Companies Target Low-Income Black and Brown Communities sounds the alarm on how exploiting low-income taxpayers is core to the business model of tax prep companies.
As it stands, 70% of taxpayers are eligible to file their taxes for free, but less than 3% have actually used the failed, corporate-backed free file service. The overwhelming majority of qualifying taxpayers are being coerced by unscrupulous corporate practices like deceptive advertising, overcharging, or hiding the free options.
Now that the IRS has made Direct File a free option, we call on the agency to expand the program.
Tax prep companies rely on and take advantage of economically disadvantaged communities. In fact, areas with the most people claiming the Earned Income Tax Credit have 75% more tax preparers for each person filing taxes compared to areas with fewer people claiming the credit. Furthermore, these major companies primarily hire what are called “unenrolled” tax preparers who lack expertise, certification, or credentials in tax rules and policy. Tax prep companies bank on their proximity, non-stop advertisement, celebrity endorsements, sweepstakes, and giveaways to legitimize their illegitimacy.
Unsurprisingly, companies like H&R Block have dismissed our report by noting the prolific number of locations, the years of experience of their preparers, and their 100% accuracy guarantee. They believe that because there are 9,000 locations across 50 states and most Americans live within five miles of one of their stores, then surely they must be helping hardworking families.
What this actually confirms is that H&R Block preys on low-income communities and communities of color by saturating the neighborhoods of targeted EITC-eligible taxpayers. Additionally, admitting unqualified preparers have been filing taxes for an average of 10 years or more is cause for concern. The predatory locations and disproportionate filing of EITC-eligible tax returns can both explain why Black taxpayers are audited at higher rates than their counterparts and why many people fail to take the deduction even though they are eligible. In this instance, correlation is causation.
These companies claim they are operating within the rules of the game—of which there are none. In 2010, the IRS tried to regulate the practice citing “an abysmal failure rate among unenrolled preparers” and pointing out that 1 in 4 of the 84,000 unenrolled preparers who took the competency exam failed, and more than 320,000 others never took it. That’s why we’re asking for accountability and for regulation of these tax preparers.
The introduction of the IRS Direct File pilot program represents a significant opportunity to dismantle economic inequality in our tax system. Direct File provides a much-needed alternative to costly tax preparation services in 12 states. This service is simple, free, readily available online, and a step in the right direction that empowers working-class people with an option to keep money in their pockets.
In the fight against corporate greed, we stand firm in our resolve. It’s time to hold these giants accountable, to empower the working class, and to build a fairer, more just system for all. Recent enforcement actions by the Federal Trade Commission are an important step; the public should know if they were overcharged and by how much.
With overwhelming public support for IRS modernization, including competency exams to ensure accountability and professionalism, the time for change is now. Now that the IRS has made Direct File a free option, we call on the agency to expand the program. The pursuit of an economy that works for everyone is ongoing. It starts with holding corporations accountable for their exploitative practices, advocating for policy solutions that prioritize the needs of working-class individuals, and ensuring equal access to resources and opportunities for all tax-payers.
In Latest Crackdown on Rich Tax Cheats, IRS Pursues 125,000 Non-Filing Cases
"At this time of year when millions of hard-working people are doing the right thing paying their taxes, we cannot tolerate those with higher incomes failing to do a basic civic duty of filing a tax return," the IRS chief said.
The Internal Revenue Service announced on Thursday that it was going after high-income earners who had dodged taxes by failing to file tax returns since 2017.
The agency said it would begin mailing compliance letters this week in more than 125,000 cases in which people making over $400,000 a year had refused to file. The enforcement action was made possible by increased IRS funding in the Inflation Reduction Act (IRA).
"At this time of year when millions of hard-working people are doing the right thing paying their taxes, we cannot tolerate those with higher incomes failing to do a basic civic duty of filing a tax return," IRS Commissioner Danny Werfel said in the announcement. "The IRS is taking this step to address this most basic form of non-compliance, which includes many who are engaged in tax evasion."
"Funding the IRS to track down wealthy tax cheats pays off big time."
Non-filing by the wealthiest Americans has cost the federal government a significant amount of money in recent years. In 2023, a report found that more than 1.4 million high-earning U.S. taxpayers had not filed at all from 2017 to 2020, depriving the government of $65.7 billion.
The IRS does not know exactly how much it might recuperate through this current round of compliance letters. While the cases deal with financial activity of more than $100 billion, taxpayers may be able to claim credits or deductions. However, the agency said that "even with a conservative estimate, the IRS believes hundreds of millions of dollars of unpaid taxes are involved in these cases."
The IRS will send out between 20,000 and 40,000 compliance letters, or CP59 notices, each week, starting with the highest earners. That includes more than 25,000 who made more than $1 million between tax years 2017 and 2021 and more than 100,000 who made between $400,000 and $1 million. Individuals may be included in the total case count more than once if they refused to file on more than one year during the target period.
Those who fail to respond to the letters will face additional notices and enforcement actions, including audits, collections, and "potential criminal prosecution."
The IRS is making this effort now because it finally has the resources to do so, the agency explained.
"Without adequate resources, the IRS non-filer program has only run sporadically since 2016 due to severe budget and staff limitations that didn't allow these cases to be worked," the agency said.
However, the IRA earmarked $80 billion for the agency following years of chronic underfunding from Republican lawmakers and administrations, which has already allowed it to claim more than $500 million from wealthy tax evaders since 2022.
"With the Inflation Reduction Act resources, the agency finally has the funding to identify non-filers, ensure they meet this core civic responsibility, and ultimately help ensure fairness for everyone who plays by the rules," Werfel said on Thursday.
Thursday's announcement is only the latest in the IRS' renewed efforts to crack down on wealthy corporations or individuals who cheat on taxes. Last week, it announced plans to audit the use of private jets for non-business travel. The agency has also collected more than $480 million so far from a group of 1,600 millionaires who each owed at least $250,000, CNBC reported last week.
Overall, Werfel told CNBC there was a "tax gap" of over $150 billion each year that the wealthy owe but do not pay. However, spending on enforcement works: The IRS calculates that it earns back around $6 for every $1 spent.
"$13,011 per hour—that's the amount of unpaid taxes that the IRS has found by auditing the ultra-rich who made over $10 million in 2022," Sen. Elizabeth Warren (D-Mass.) posted on social media Thursday. "Funding the IRS to track down wealthy tax cheats pays off big time."
However, the IRS' new funding is already threatened by congressional Republicans. As part of the debt-ceiling deal, they successfully persuaded the Biden administration to slash $20 billion of the new IRA funding, and House Speaker Mike Johnson (R-La.) is pushing for more cuts. If the funding remains in place, the Treasury Department and IRS have calculated that the agency could boost government revenue by up to $561 billion over the next decade. The revenue would be around $100 billion less if the $20 billion in cuts go through.
"If millionaires and billionaires actually paid all the taxes they already owe, we'd have enough money to fund universal child care and STILL have more left over," Warren said further. "The IRS' crackdown on wealthy tax cheats is paying off—but Republicans are trying to stop it."
Childcare Crisis Grips US as IRS Chief Says Wealthy Tax Dodgers Cost $150 Billion a Year
"If we can afford to spend over $1 trillion on tax breaks for the top 1% and large corporations making record-breaking profits, we can afford to provide working class families with the childcare they desperately need."
A survey of early childhood educators and caregivers released Sunday shows the post-pandemic collapse of federal funding is fueling a national crisis for young children and their families as centers suffer and out-of-pocket costs soar.
The findings of the survey—titled "We Are NOT OK" and put out by the National Association for the Education of Young Children (NAEYC)—resulted from questions posed to over 10,000 professionals in the early childhood education sector.
Of those polled, more than 50% reported staffing shortages in the various kinds of centers they own or operate, including faith-based programs, family child care homes, Head Start facilities, and childcare centers. Those shortages, according to respondents, stem in part from low wages and burnout from staff who are overloaded but underpaid since federal support dried up.
"Significant public investment in child care is needed urgently to ensure programs can retain qualified educators and remain open to serve children and families."
Rising costs but diminishing support from public subsidies have forced operators to increase tuition which in turn has put pressure on families to withdraw—creating a vicious loop.
"The loss of federal funds that helped the early childhood sector weather the pandemic has exacerbated long-standing challenges like low wages and high operating costs, leading to staff shortages, program closures, and rising family tuition rates," said Michelle Kang, the CEO of NAEYC.
Among other key findings of the 50-state survey:
- 56% of center directors and family childcare owner/operators said they were under-enrolled relative to their current capacity, with the reasons varying from staffing shortages (89%), low pay (77%), and lack of affordability for families (66%).
- 55% of all respondents were aware of at least one childcare program closing in their community in the past six months, while only 30% were aware of a new program opening. 11% said four or more programs had closed in their community in that time.
- 36% of center directors and family childcare owner/operators reported increased rent costs and half reported increased insurance costs over the past 6 months. To cover costs, 48% increased tuition rates for families.
- 46% of all respondents reported increased burnout since January 2023. 32% said their economic situation has worsened, compared to only 16% who said it has improved.
Last fall, Sens. Patty Murray and Bernie Sanders put forward a bill to provide $16 billion in annual childcare funding over five years to prevent what experts predicted would be a childcare disaster.
"We are here today to sound the alarm and put forward a commonsense solution, before childcare providers might have to close their doors, before kids lose their childcare slots, and before parents could face higher costs—or simply be forced to leave their jobs to take care of their kids," warned Murray at a September press conference introducing the legislation.
No Republican in the Senate backed the measure and the bill still languishes in Congress thanks to GOP control of the U.S. House of Representatives.
On Thursday, Commissioner of the Internal Revenue Service Danny Werfel toldCNBC in an interview that the U.S. government loses approximately $150 billion annually from tax evasion by the nation's wealthiest individuals.
"When I look at what we call our tax gap, which is the amount of money owed versus what is paid for," said Werfel, "millionaires and billionaires that either don't file or [are] underreporting their income, that's $150 billion of our tax gap."
Earlier this month, the IRS announced that it could collect approximately $560 billion in additional tax revenue over the next decade so long as Republican lawmakers were thwarted in their efforts to claw back large portions of $80 billion in funding the agency was provided as part of the 2022 Inflation Reduction Act.
As the advocacy group Americans for Tax Fairness (ATF) said in response to Werfel's comments on Thursday, a $150 billion annually would amount to $1.5 trillion over the coming decade.
That's enough, ATF added, "to expand the Child Tax Credit for 10 years, lifting millions of kids permanently out of poverty. We can do great things when we crack down on wealthy tax cheats."
That $150 billion figure is also nearly ten times what it would cost to fund the Murray-Sanders childcare bill for one year.
As Sanders said in September, "If we can afford to spend over $1 trillion on tax breaks for the top 1% and large corporations making record-breaking profits, we can afford to provide working class families with the childcare they desperately need."