Chicago Ordinance Would Protect Against Predatory Tax Preparers

A Chicago ordinance that targets predatory tax preparers will help low-income workers keep more of their income — hopefully before this tax season ends.

The regulations zero in on businesses that include hidden fees, have unfair payment rules and steer Chicagoans unfamiliar with the tax filing process to more expensive products. The ordinance is being introduced to the City Council today, a day after Mayor Rahm Emanuel announced it.

Targeted businesses are primarily those that prey on low-income workers eligible for the Earned Income Tax Credit (EITC), a critical income support for individuals and families struggling to make ends meet. Almost 70% of those who claim the EITC use a paid preparer for their tax return.

Tax prepares charge low-income filers an average $189 on their return. But more than half of low-income families are sold refund settlement products with hidden fees, which increase the cost of tax preparation by $100. Refund anticipation loans (RALs)  and Refund Anticipation Checks (RACs) are particularly costly. However, a recent report from the Consumer Federation of America and the National Consumer Law Center found that 2012 is the final year for the RAL industry.

According the NCLC & CFA  “Even after the end of RALs, tax preparers and banks will continue to offer RACs, for which the banks generally charge about $30 – $32. Tax preparers may also charge their own “add-on” fees, which can range from $25 to several hundred dollars. Since one of their main purposes is to defer payment of the tax preparation until the refund arrives, RACs may represent a high-cost loan of that fee”

This ordinance will “ensure that Chicagoans are made aware of their consumer rights before they sign away their tax refunds and hard-earned income to cover exorbitant fees and high cost loans by commercial tax preparers,” David Marzhal, President of Center for Economic Progress and IABG Steering Committee Member, said in a press release from Mayor Emanuel’s Office.

The Chicago ordinance would do the following:

• Mandate that tax preparers inform customers of their rights and disclose any hidden fees, eliminate surprise costs and hard to find fine print during tax preparation.
• Mandate that tax preparers provide costumers with a bill of rights, so customers know exactly what to expect and how to seek help if they believe they are victims of unscrupulous tax services.
• Ban tax preparers from steering customers towards high-cost refund products.
• Ban tax preparers from forcing customers to use a Refund Anticipation Loan or a Refund Anticipation Check if they seek general tax returns services.
• Require tax preparers to disclose all costs and fees in the customer’s native language.

The city’s Department of Business Affairs and Consumer Protection will implement the new requirements if the City Council approves the ordinance, which we hope it will.

The Center for Economic Progress  and Ladder Up both provide Volunteer Income Tax Assistance (VITA) – free tax preparation services to low-income families in Illinois. For households with incomes below $50,000 and individuals with incomes below $25,000 CEP and Ladder Up offer free tax preparation at sites across the state.

Residents across the state can also locate a VITA site by contacting the IRS at 1-800-906-9887 or www.irs.gov or they can access an AARP Tax-Aide site. Choosing a VITA or AARP Tax-Aide site saves taxpayers the cost of a tax preparation fee.

Patty Pensa is a Policy Aide with IABG & Heartland Alliance.