June 27, 2013
June 27, 2013
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Tax preparation by commercial paid preparers, despite being important to households, suffers from a lack of transparency about fees charged.
Tax time is often referred to as the “golden moment” for asset building and financial check-ups due to the availability of lump sum funds through tax refunds. Tax preparation also has economic and legal ramifications for everything from employment to homeownership. Some 75 percent of households receive a tax refund, and social policy is now routed through the tax code with housing, education, and work credits. Yet, there is very little regulation and standardization in the tax preparation industry. Only a handful of states provide oversight for storefront paid tax preparers. The federal government recently issued regulations requiring testing, registration, and continuing education, only to find them entrenched in a court battle.
This brief finds that tax preparation by commercial paid preparers, despite being important to households, suffers from a lack of transparency and disclosure in the fees charged. As tax refunds have increased, clients have become less sensitive to price, since costs are deducted from the refund rather than paid outright. Clients also struggle to compare and contrast prices and services. It is difficult to get information about credentials, history, and rates of paid tax preparers. While there are other concerns in the tax preparation process, this brief focuses on the need for price disclosure and transparency. In the sections below, we make recommendations to improve the tax preparation process for clients.
There has been increased discussion and guidance around the regulation of paid tax preparers. The Internal Revenue Service (IRS) recently announced a program for registering and testing the estimated one million paid tax preparers operating nationwide. A recent lawsuit put this regulatory structure on hold while the case is being heard in district court. Even if reinstated, there is no fee disclosure box included in this structure. Maryland, California, and Oregon regulate paid tax preparers but do not require a fee disclosure box. At the city level, Chicago recently passed an ordinance regulating paid tax preparers and requiring price disclosure, warnings about refund settlement products, and estimates of the total cost of preparation.
In conducting this research project, we reviewed dozens of paid tax preparer documents across companies. Lack of requirements or standards to post or provide fee structures before or after tax preparation made analysis difficult. Phone calls and store visits yielded little data since prices were disclosed at the end of the transaction. Some stores provided general pricing or average costs for a typical 1040 form and Schedule EITC of $200 to $300. We also used information from former tax preparation clients, free tax sites, attorneys representing tax clients, and visits to paid tax preparers.
Other studies provide an indication of the high price of tax preparation, the drive to sell tax loans, and a lack of transparency. Mystery shopper testing from consumer groups, advocacy groups, and others have found tax preparation fees as high as $400 or $500, as well as numerous examples of preparers giving low-ball estimates on preparation fees or even refusing to provide testers with a quote. The U.S. Department of Justice’s lawsuit against Instant Tax Service is the latest example of these types of abuses. The USDOJ alleged that “Instant Tax Service’s tax preparation and junk fees typically average more than $400-$500, and sometimes run as high as $1,000 for as little as 15 minutes of tax return preparation.”
It is clear that a disclosure box is needed, with the following features:
Standardization. Tax forms and preparation can be complicated for a consumer. In our analysis of typical terms and pricing used, we found a lack of consistency in how tax forms, processes, and refunds are described. For instance, it was unclear whether “document processing” fees were the same as “administrative” fees when comparing across storefronts. There was also no consistency around how tax-related financial products were described. Some stores used the term “refund anticipation loan” while others used terms like “money now” or clauses that did not mention that the money offered was a loan.
Three policy solutions would help the disclosure and transparency aspects of the tax preparation process.
First, requiring a paid tax preparation disclosure box, similar to what the nonprofit financial services group Center for Financial Services Innovation recommends for prepaid debit cards, would go a long way toward ensuring transparency in pricing. Requiring paid preparers to use the disclosure box before tax preparation would allow customers to compare and contrast services with other preparers and online software. (See Figure 2.) It is important that the box serve as a guide, be concise and easy to read. The box should predict expected costs and help consumers how their returns and refunds are structured.
If the preparer uses an hourly fee instead of charging by schedule, the preparer should disclose “hourly” in the fee column and a row disclosing the hourly fee. This table should be in a prominent location in the preparer’s waiting area and on their website, and should be provided automatically for telephone customers. Currently, it is nearly impossible to request price estimates over the phone. The table could also include a minimum of two sample tax scenarios showing the cost for the average Earned Income Credit tax return as well as another common return (Schedule A and C return).
The table should also show different refund options and the costs associated with them. This will help clients avoid refund settlement options that are unnecessary for their tax situation. In the Appendix, we provide a sample fee box scenario.
Second, allowing the IRS to regulate paid tax preparers with licensing and education components will ensure a floor for quality of tax preparation. If the IRS is deemed to lack the authority to institute paid preparer regulations, Congress should pass legislation granting that authority. The role of the Consumer Financial Protection Bureau, while undefined, is an important part of this disclosure movement. As an agency, it has not been given guidance to regulate paid tax preparers. However, the CFPB is given authority through the Dodd-Frank Wall Street Reform Act to promote the EITC and asset building at tax time. Combined with their authority to regulate financial transactions, it is clear that the CFPB has a role to play in paid tax preparer disclosures – specifically around the refund settlement options.
Third, states can play an important role in paid tax preparer disclosure. The three leading states (California, Maryland, and Oregon) could add this element to their existing regulation of paid preparers. Other states are considering legislation. Finally, localities may have more success in passing ordinances and regulation for paid preparers that include a disclosure box. Cities and counties have consumer affairs divisions that could regulate the industry, as Chicago has done.
The policy steps outlined above are critical to ensure that customers receive quality tax preparation. Disclosure establishes a strong floor for paid tax preparation. But disclosure is not enough – the overall process would benefit from registration of paid tax preparers, continued education for preparers, and better refund options. Engaging the CFPB and U.S. Department of the Treasury would provide not only more oversight but also more options for tax preparation, EITC awareness, and opportunities to encourage consumers to open bank accounts at tax time.
Policy Matters Ohio thanks the Annie E. Casey Foundation for its generous support of this project; program officer Patrick Hain, in particular, made numerous connections and suggestions. Leaders in the field of tax preparation offered comments and critiques, including Robin McKinney of the Maryland CASH Coalition, Chi Chi Wu of the National Consumer Law Center, Jackie Lynn Coleman and Sean Noble of the National Community Tax Coalition, and Tom Feltner of the Consumer Federation of America. Free tax program coordinators, volunteers, and clients helped shape the need and concepts for this report and we are grateful for their work on the front lines. Amy Hanauer and Piet van Lier of Policy Matters provided helpful edits to this report. Any errors and opinions expressed in this issue brief are the sole responsibility of the author.
 For the purposes of this issue brief, paid tax preparers refer to storefront and online software that are not Enrolled Agents (EAs) or Certified Public Accounts (CPAs). The latter have existing guidance and registration with the IRS.
 Benjamin Marks, et al., First Nations Development Institute, More Tax Time Troubles: Mystery Shopper Testing Exposes Refund Anticipation Loans in Reservation Border Towns, 2012: http://1.usa.gov/17Cwd7b. Sara Dewees, First Nations Development Institute, Tax Time Troubles: Mystery Shopper Testing Exposes Poor Quality Tax Preparation and Refund Anticipation Check Abuses, Apr. 15, 2011, available at http://1.usa.gov/19tTUz8. Chi Chi Wu, et al., NCLC, NEDAP, Community Reinvestment Association of NC, Tax Time 2011: Mystery Shopper Testing In New York And North Carolina Finds Continuing Problems With Tax Preparers (Apr. 2011), available at http://bit.ly/mfCJpv. Chi Chi Wu, et al., National Consumer Law Center, Arkansans Against Abusive Payday Lending, NEDAP, Community Reinvestment Association of NC, Tax Preparers Out of Compliance: Mystery Shopper Testing Exposes Violations of Refund Anticipation Loan Laws in Arkansas, New York and North Carolina (Apr. 2010), available at http://bit.ly/12pOuvc. Chi Chi Wu, et al., NCLC, Community Reinvestment Association of NC, Community Legal Services of Philadelphia, Tax Preparers Take a Bite Out of Refunds: Mystery Shopper Test Exposes Refund Anticipation Loan Abuses in Durham and Philadelphia (Apr. 2008), available at http://bit.ly/10lfVtV.
 Complaint, United States v. Fesum Ogbazion, Civil No. 3:12-cv-95 (S.D. Ohio. Mar. 28, 2012).
 Jeanne M. Hogarth and Ellen A. Merry. (August 2011). “Designing Disclosures to Inform Consumer Financial Decisionmaking: Lessons Learned from Consumer Testing,” Federal Reserve Bulletin 97.
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