Predatory loan practices for tax refunds & preparation

[the fixer]

This is on Morning Edition this morning.

http://www.npr.org/2013/03/25/175057303/free-tax-help-protects-low-income-filers-from-pricey-loans

The worst part:

"They don't have the money to pay tax-preparation fees," Hinze says.

But, she says, some people who should, don't come here for help. They're either unaware it's available or need some quick cash. They turn instead to private preparers or other programs that offer short-term loans in advance of getting their money back from the government. Hinze says it can be a risky move.

"The average fee in this area is around $170 to $200. And we had a woman a couple of years ago who paid $900," she says.

But she didn't realize it because the fee was deducted from her refund.

[Paul der Krake]

I was listening to this on the way to work as well. It sure put a damper on an already gloomy and rainy Monday morning.

[Jamesqf]

Worse, I think, is what's left unstated: that all these people are so effing poorly educated that they can't even fill in a Form 1040-EZ, which is what most of them will be using.  I mean, how simple is it for the typical taxpayer who just has income from wages?  You add up the amounts on your W2s, write down the number, figure out how many kids you have, multiply by the exemption amount, subtract, and you're done.

[the fixer]

Yes there are several layers of ignorance here:
- unable to fill out a 1040EZ on your own
- don't know about the FREE! services that will fill it out for you

It seems like we should be striving for a tax system that's simple enough that you don't need to file a return: if the IRS already knows how much you made in a year through W2's and 1099's, all they need is to know how many dependents these people have and they could just get a check mailed to them with no effort on their part.

Another reform that might help is to spit up the EITC into multiple payments over the year instead of one lump sum. That way there'd be less of an incentive for predatory loan practices on the refund check, and it would be harder to hide preparation fees.

[projekt]

Over the years, tax systems have gotten harder for no reason. The IRS used to have TeleFile, a phone-based Q&A system that would file your 1040EZ return in about 10 minutes. At the same time, NY state had the IT-100 form, which you basically wrote in the numbers and the dept. of taxation would calculate the tax for you and either bill you or send you a refund. Around the same time, both options went away.

http://en.wikipedia.org/wiki/TeleFile
2004 IT-100: https://dl.dropbox.com/u/12942232/2004-IT100.pdf
compare to current IT-150: http://www.tax.ny.gov/pdf/2010/fillin/inc/it150_2010_fill_in.pdf

For everyone who gets only W2 and 1099-INT income, there should be no reason to file a tax return anymore, unless you believe that you deserve more money back. The tax and/or EITC should just be figured based on what the IRS already knows about you. Instead we have the parasitic tax prep/loan industry.

[Rangifer]

I saw one recently when doing my taxes online. You could deduct the $10 that the website charges from your tax refund, BUT there is an additional $28.95 fee for doing so.

[chicagomeg]

Worse, I think, is what's left unstated: that all these people are so effing poorly educated that they can't even fill in a Form 1040-EZ, which is what most of them will be using.  I mean, how simple is it for the typical taxpayer who just has income from wages?  You add up the amounts on your W2s, write down the number, figure out how many kids you have, multiply by the exemption amount, subtract, and you're done.

I've been doing VITA taxes every week this year and have yet to see one that qualifies for the EZ. Remember, you can't have dependents. A surprising number are 1099 employees who need to do a C-EZ. And most if not all get the EITC.

[Jamesqf]

Still, it's not exactly rocket science for anyone with just W2 income, which is most people.  It's not all that hard even the 1099 types like me.  I think my record is something like 17 pages (when I was working abroad a lot), but these days it's down to just 8 or 9. 

Sure, the tax system could be simplified considerably, but that would just mean the scammers would have to come up with a different way to fleece the hard-of-thinking.

[gooki]

It seems like we should be striving for a tax system that's simple enough that you don't need to file a return.

This is the system NZ has moved to (self employed, and those with investment income still have to file).

[zhelud]

We had a wonderful, free, online system for filing state tax returns in Virginia until just a few years ago. It took about 15 minutes to file (if you already had your federal form filled out.) And did I mention it was free?

It was eliminated because our oh-so-smart legislators decided that it was wrong for the state to pay for a free tax filing system when "private industry" should be handling it (meaning people should be paying private preparers.) I think the system cost the state something like $50-100k to run per year.

[projekt]

It was eliminated because our oh-so-smart legislators decided that it was wrong for the state to pay for a free tax filing system when "private industry" should be handling it

They say you shouldn't attribute to malice that which can be explained by incompetence but sometimes it is just so hard not to wonder if some of these guys are on the take.

[randymarsh]

Here's an article that goes into some detail about return free filing and why we can't have nice things.
http://www.propublica.org/article/how-the-maker-of-turbotax-fought-free-simple-tax-filing

Hint: Intuit (makers of TurboTax) don't want us to. Grover Norquist also sent a letter to congress warning that this would "socialize all tax preparation in America". ;)

[Jamesqf]

Here's an article that goes into some detail about return free filing and why we can't have nice things.

Still, you can download all the required forms as editable pdf files, or even get paper copies.  Fill them out, do the simple (for most people, which would include almost everyone going to to a tax-prep scam company) math, and mail them in. 

Honestly, it seems the real problem here is that advertising &c has convinced people - falsely! - that tax forms are so complicated that no one can possibly do them without special training.

[Midwest]

Full disclosure, I'm a CPA. 

Most simple forms could be filled out by people, they simply are intimidated and/or lazy.

To those calling for the IRS to do the returns, however, I think you are entirely misinformed as to the competence of the IRS, state and local governments. 

If you would see the errors and notices they make on a consistent basis, you would not want them calculating your refund or the amount you owe.  Uninformed taxpayers are often willing to pay the notices simply because of their fear of the IRS.  If the IRS were in charge, I don't think these people would be well served.

For example, in the last month I've seen a $500.59 1099 turned into a $50,590.00 by the IRS, a widow sent a notice for stock sold where basis was excluded from the calculation, and a state tax return where the state returned the check and then sent a notice for funds due.  These agencies are undermanned/incompetent or both in many cases.

Before you brand me as being self serving, most of my clients are high income/high net worth who wouldn't be impacted by your proposals.  Based on my experience, however, you don't want what you are asking for.

[projekt]

I guess my question is which is worse? The IRS miscalculating returns with decimal errors that may make people upset but are pretty easy to spot, or systematically denying millions of people significant refundable tax credits because they are not filling out forms correctly? Which feels better to you as a CPA?

[DoubleDown]

Consumption Tax = Problem Solved

[the fixer]

Consumption Tax = Problem Solved

+1
(IF it includes a payroll refund of about $10000 worth of the tax, COL-adjusted, per person per year to offset the regressive nature)

I'll vote for the next politician who's seriously going to pursue this, but I'm not holding my breath...

[sherr]

Consumption Tax = Problem Solved

+1
(IF it includes a payroll refund of about $10000 worth of the tax, COL-adjusted, per person per year to offset the regressive nature)

I'll vote for the next politician who's seriously going to pursue this, but I'm not holding my breath...

Consumption Taxes are not inherently regressive. You could, for example, have very low taxes on food and very high taxes on yachts. A flat-rate consumption tax would be regressive, just as a flat-rate income tax would be regressive.

[Midwest]

I guess my question is which is worse? The IRS miscalculating returns with decimal errors that may make people upset but are pretty easy to spot, or systematically denying millions of people significant refundable tax credits because they are not filling out forms correctly? Which feels better to you as a CPA?

I think if the IRS is making $50,000 decimal errors (easy for me to spot but not so much for the taxpayer), the chances of them getting these millions of returns rights is pretty low. 

Given the complexity of the tax system, the IRS simply isn't up to the task.  If the IRS is capable of filling out the forms, why aren't they simply correcting the returns for the people you reference.  I think the answer is they are incapable of doing it.

I'm all for simplifying the tax code, but putting the IRS in charge is a bad idea.

[simonsez]

If it is a voluntary system, I don't see the problem.  If you don't trust the IRS's figures, then do your own, have someone else do your own, or report the error(s) back to the IRS and have them try again.  Or, you could always file before April 15th and not even be prompted by the IRS and the free-filing system.  To write it off completely by assuming it will be too complicated or that the government will be too invasive (or won't work for whatever else) doesn't seem like the most progressive thought process.  I'm also not naive and realize there will be growing pains with any new system implemented.  However, other places have tried this and there seems to be plenty of information on it to ensure that an efficient automatic tax filing system could be in place (eventually) in the near future.  What is there to lose if the IRS is already running the numbers (i.e. staffing costs wouldn't dramatically rise)?

Midwest, I'm glad you admit your perspective and experience with the IRS.  Could it be that you are suffering from severe IRS selection bias as a result of your clientele and the complexity of the situations?  The more complex the situation, the higher the chance for error.  I'm guessing if you had lower income clientele, the success rate would be higher?  I think if such a free-filing system were in place, it would be more utilized by the lower income households with less complex tax situations anyway.  The higher incomes would still seek out professional counsel to handle taxes.