Hurah! I am excited that the AL Senate has passed this act (unanimously!) and have high hopes that the House will do the same. This Act seeks to ensure that 1) if you are paying someone to do your taxes for you, they are qualified and licensed to do your taxes... so hopefully they will do your taxes correctly, and 2) tax preparers making refund anticipation loans make written disclosures to their clients.
I've been doing taxes for SaveFirst, along with Craig and several hundred other students, for two years now. Last year, I was a volunteer and certified by the IRS at the basic level, this year Craig and I (along with many others) are certified at the intermediate level and supervise tax sites. We each spend about 12 hours a week doing taxes for low-income Alabamians. It's actually pretty fun and one of my favorite things going on this semester. The goal of SaveFirst is to provide free tax preparation to low income Alabamians.
Currently, anyone can charge a fee for doing taxes in Alabama. Some businesses capitalize on the likelihood of lower income people to get a large tax rebate check, and go into the tax preparation business with the hopes of charging people exhorbitant interest rates for a "refund anticipation loan (RAL)". You get your taxes done, the preparer tells you that you are set to get back 3k from the government, and it might take the IRS awhile to mail them the check, but they can get it to you immediately. This refund anticipation loan generally has very high fees and interest rates. Also, it is a loan -- there is no guarantee that the unlicensed person doing your taxes is correct in the amount you are supposed to get back.
Refund anticipation loans capitalize on the federal government's earned income credit. The Earned Income Credit (EIC) is the federal government's largest welfare program. But most people don't see it as a welfare program because it ties in the money received with income earned. It would make sense that our society, with its value on work and personal responsibility ties in welfare payments with a tax credit. Basically, as an individual or family's income rises, the amount of EIC they get back also rises until they earn the income "cap". This year, for a family of four (two children), the income cap is 42k. On average, families get back between 2 and 3k from the federal government a year. This isn't refunded taxes, it is, essentially, a large portion of the refund is a welfare program.
Of course, I see nothing wrong with the EIC, I think it is a good system that the government has come up with -- it provides financial assistance but doesn't have a stigma associated with it like other welfare programs have. Because I'm now 25 and as a student making under the single person limit (12k), I will receive an EIC this year (though as a single person without children my EIC will be much much lower than the 2k average).
Many "entrepreneurs" target these large EIC payments with their tax preparation services. Basically, these companies or entrepreneurs are capitalizing on the federal government's welfare program at the expense of the people who are actually entitled to it.
Hopefully, this legislation will make this practice more difficult. Although it doesn't prohibit refund anticipation loans, it requires more disclosure. (However, my cynicism wonders how many people actually read the fine print in the first place?). It also requires tax preparers to be licensed.
We'll see.
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