Tuesday, April 03, 2007

Jackson Hewitt and the Earned Income Tax Credit

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a rather unique element of the tax code. The EITC was brought into being by Ronald Reagan in order to reward people who were working, as an alternative to welfare (paying people for NOT working). Under the EITC, depending on how much you earn, you may be eligible to receive money BACK from the government. This money back might be more than was actually withheld from the taxpayer in the first place.

The potential credit is largest for "taxpayers" (in this case, they aren't paying) with two or more children. For the 2006 tax year, filers with 2 or more children can receive up to $4,536, filers with 1 child can receive up to $2747, and filers with no children can receive up to $412. Wikipedia has a good description of the EITC here.

In prior years I used to assist low income taxpayers at the "Tax Counseling Project" here in Illinois. The tax counseling project filled out tax forms for free for poor individuals and assisted them in resolving tax conflicts with the IRS. I need to get back into this program; it was very satisfying and let me utilize one of my (few) skills useful to the public at large.

Refund Anticipation Loans

The EITC is a Federal program that is taking money from taxpayers and giving it to the poor. As noted above, this program rewards people for working even if it isn't enough to live on rather than having them do nothing except collect a check from the government.

Since many of the people who are eligible for the EITC are not sophisticated financial individuals (this is a generalization but was borne out by my first-hand experience) they are subject to come-ons that more savvy consumers might reject. Tax preparation firms like Jackson Hewitt (pictured above) offer those eligible for the EITC an instant cash refund on the spot at the time they complete their tax returns. Since the EITC (if properly filed) is pretty straightforward, the tax firm SHOULDN'T have much liability and they basically earn a prodigious return by forwarding money to taxpayers that they know the government will pay out.

Thus in a perverse way the Federal government designs a system to help the poor, but a significant portion of the benefits go to these types of firms who take a big cut when they forward the money on to taxpayer in the form of a refund anticipation loan. I realize that they are a business and need to be paid for their time (the time it takes to prepare the tax form), but offering these types of products to financially inept customers is semi-despicable.

Tax Fraud

I took the picture of Jackson-Hewitt above because I was going to write about how I hate refund anticipation loans and those that push these financially nasty products. However, Jackson Hewitt "beat me to the punch" by stepping even lower; they are being accused of tax fraud in the EITC program by pushing through obviously bogus and illegal information to the Federal government in their filings.

Jackson-Hewitt's stock price plummeted by 18% today on this news. In a way this is sweet justice...

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