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Child Watch® Column: "Important Free Help at Tax Time"

Release Date: March 30, 2009
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Marian Wright Edelman

Mabel Pichardo is a self-employed mother of two young children from New York City.  She earned approximately $31,000 last year making ends meet through three different freelance jobs. In 2008, she had her tax returns prepared for free at the nonprofit Northern Manhattan Improvement Corporation. She found the workers courteous and helpful and often referred friends and co-workers to their site. But this year, a personal financial emergency caused Mabel to go to a commercial tax preparer and purchase a loan that would allow her to use some of her refund money right away.

Rapid Center, a tax preparation business in the Bronx, charged Mabel $160 for tax preparation plus $150 for a Refund Anticipation Loan (RAL). It would have taken Mabel about two weeks to receive her refund through direct deposit into her bank account if she had filed it online with free assistance from the nonprofit organization. But because she was facing eviction, she didn't think she could wait and felt she had no choice but to purchase the loan. Mabel used most of her $4,480 refund to pay past due rent and the rest to catch up on bills and purchase food for her family.  She certainly also could have used the extra $310 she was forced to spend at the commercial tax preparer.

Mabel is not alone. Some commercial tax preparers take advantage of workers by targeting them for "rapid refunds" through RALs, short-term, high-interest loans that tax filers take out against their expected tax return. Tax preparers aggressively market these loans as a way to get cash fast instead of waiting for a tax refund. Most of their customers are low-income taxpayers who need their refunds quickly to pay for basic needs. These loans are disproportionately marketed in Black and Latino communities and offered in locations not typically used for financial services, including auto dealerships, pawn shops, and rent-to-own stores. Tax preparers advertise to filers that they can use their loan for a down payment on a car or to purchase items in the store. These loans often undermine important benefits that should be available for hard-working families playing by the rules but still struggling to stay ahead.

As the 2008 tax filing deadline approaches and millions of families struggle in the economic recession, the Children's Defense Fund has released a report highlighting the importance of tax credits for working families and how low-income families lose billions of dollars each year to predatory commercial tax preparers. The Earned Income Tax Credit (EITC), a refundable federal tax credit for low- and modest-income workers, is one of the most effective tools for lifting families out of poverty. The Center on Budget and Policy Priorities estimates that in 2005, the EITC lifted 5 million low-income Americans out of poverty—including 2.6 million children.  EITC's benefits are far-reaching. EITC and the Child Tax Credit help families make ends meet during tough economic times, improve children's well-being, and benefit our economy and communities. But it's the same workers who most need their hard-earned income who are often sold these expensive loans. In tax year 2006, our report found low-income families lost $3.1 billion of their EITC benefits to high-interest, short-term loans, tax preparation fees and other financial products pushed by commercial tax preparers. Community leaders need to be aware and warn against their use.

Filing alone can be confusing, so CDF and other organizations have encouraged the growth of free tax preparation sites that offer electronic filing and direct refund deposit, allowing taxpayers to get their money in two weeks or less without unnecessary fees. The money saved helps families pay bills, purchase needed household items, and even save a bit.
Are you eligible for the EITC or the Child Tax Credit? Visit the Children's Defense Fund's website, download our report, find out if you are eligible, and locate a free tax preparer site near you. Whether or not you are eligible, you can learn how to help children escape poverty by helping working families keep more of their benefits. You also can see how much your city, county or state has lost to predatory commercial tax preparers and how individuals, communities and policy makers can take action.

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