The neighborhood where I grew up has changed a lot in the past two decades. Most visitors to the area would now call it “the ghetto” or “the slums”.
Going down the main business street of the neighborhood, I noticed that there was an income tax office on every other block. Just like wealthy neighborhoods might have two Starbucks stores located across the street from each other, this area had multiple Jackson Hewitt offices within eyeshot of each other.
So, why are income tax offices so prevalent in the 'hood? The only reasons that come to mind are very low rent, and what could be the popularity of tax refund loans among a certain demographic. True?
While the refund loans are a draw, it is also true that many people in those neighborhoods qualify for an income tax credit which can be more complicated to apply for.
This is pure WAG from me, but maybe someone has more information … it seems to me as though its a good way to earn money: the shop owner has to be only slightly knowledgeable, know the tax code, not be computer phobic, not be math phobic. Yet, many people do have those problems, but regardless, must get their taxes done. You rent out a forgotten store, some cheap computers, a coffee pot, rent the internet connection from the cable company for a few months … and then when you’re done, it can return to being empty store front/political HQ.
Some people believe that the actual tax-prep guy will get you more money back than the e-file software, and are willing to pay the hundred bucks for it. None of them need to do it; they don’t itemize or have investment income, and e-filing is free. But the commercials make it look like there are all these hidden nuggets of money you’re missing out on that only H&R Block can find.
I used to work with a guy who had a side hustle (it was his wife’s full time gig) doing tax preparation. Jackson-Hewitt if it matters. He had purchased all the franchises in town EXCEPT for the wealthy areas: “Those people have accountants, or can at least follow turbo-tax instructions”. Most of his money was made off the in-store counters at Walmarts.
Literacy and numeracy aside, tax rules can confuse even very educated folks. Very few people who have accountants do their taxes are dumb, after all. If you struggle to read, or with basic arithmetic, then doing your own taxes is out. If you struggle to read, or do basic arithmetic, then you probably don’t own a computer, so turbo-tax is out. And has been mentioned, many of the tax credits deductions, etc. available to poor people are even more complicated than what the middle class deal with, and these are the people who have the most trouble understanding the rules…so they really do need help, and come out ahead even if the help they get is rather mercenary.
Aside: That guy I worked with was pretty good at stretching a penny 'till Lincoln screamed. At the end of the year, he would sign up for zero-interest credit card promotional offers. These he would use to buy a bunch of cheap used computers off ebay. These would be used for the tax offices, with minimum payments made on the credit card accounts. At the end of tax season, he would put all those computers back on ebay, and often make a profit there, and thus pay off the zero-interest credit cards, which accounts he would then close. If for some reason he lost money on the computers, that was a business expense to be written off.
This left rent and his franchise fees as the big expenses. The franchise fee got him advertising and software that allowed cheap fairly unskilled workers (data entry, basically) to do the preparation. It was a pretty sweet deal, and he was only keeping the day job for the health insurance.
A lot of folks in the “slums” don’t have computers and internet access. They don’t know about recent changes to the tax code or that they can do their taxes online for free and they also might not know about things like the earned income credit. Heck, some of them might be poor because of their poor reading, math or decision making skills. So there’s a service that helps them with that. Plus a lot of these places do kind of promise a quick refund.
We could all save a buck if we did everything for ourselves. I think anyone could do their own plumbing but I see plumbers advertised everywhere. Doesn’t make it scam.
I worked for one of the big tax chains briefly. In selecting a location, they preferred a spot within view of 1) another tax chain 2) a check-cashing/pay-day loan place and 3) a bail bond agent.
For the chains, these are the most profitable clients. You can give a preparer minimal training in a few key areas, then sell expensive rapid refund loans to people who expect multi-thousand-dollar refunds every year from credits like EIC and ACTC.
I have mixed feelings about the practice. On the one hand, they are offering a valuable service - you would not believe the degree to which people can screw up their own returns, even when they are simple. And free VITA preparation has a high error rate (in 2011, the good news is that only 30% of returns were done wrong, instead of 40%). On the other hand, I think the fees charged by the tax chains (especially in regards to loan products) are usury and their practices border on the predatory.
I worked at one. I often tried to dissuade them from getting the loan because the other options are just slightly longer. But many may not have checking accounts to DD it into, and aren’t willing to wait for the paper check. So while the government is going after the tax businesses for predatory lending, a significant portion of the customer base would be unhappy if they were gone completely.
With low income people, the big credit is the EITC. It can be a couple thousand dollars, and many are willing to pay the fees. Filing for EITC often needs more knowledge than some people have.
Illegal aliens feel safer having their taxes done for them by somebody else who they think know the ins and outs rather than risk doing it themselves and tipping off INS, according to the owner of the Liberty Tax franchise down the street from me.
I have a relative who worked (posibly still works, in tax season) at a tax-preparation business that specialized in low-income clientele. (I’m not sure if it was actually located in a low-income neighborhood - it was either in or close to one.)
My understanding from what he told me is consistent with the posters who point to the EITC, but also to the $1K per child tax credit. According to my relative, these are routinely “bought” and “sold”, in that people pay each other for the right to use the SSNs of each other’s kids.
On the basis of his experience, he estimated that 75% (or perhaps it was 67%) of these tax credits are fraudulent. His experience was with lower-income people, but these credits tend to phase out at higher incomes, and in addition, the birth rates are higher for lower income people.
Bottom line is that while many people associate taxes with higher income people, a non-tax paying low income person can make thousands of dollars from what are termed “tax refunds” in the form of various credits, and this can represent a very big chunk of change for people with not much other income. Considering the fairly low cost of tax preparation for these straightforward incomes, it’s not a bad idea to have a professional do the work and get it right, even absent any loans.
Slight digression: I’m not saying you’re wrong, but this concept is blowing my mind. Why would an illegal alien file income taxes? In what way can they fill out the forms without tipping off INS yet still receive a refund? Why would they give their address and (presumably false) SSN to the IRS when this information helps prove that they’re illegal?
My guess is they would file in order to receive EITC refunds, using purloined SSNs. I’m skeptical that this is an especially widespread practice, though.
This thread reminded me that I have to do my taxes! I am definitely a low-income tax filer and live in a ghetto neighborhood. IIRC, I don’t qualify for the EITC because I’m too young and don’t have children, but I can get something similar called the “Making Work Pay Credit”. Based on what I’ve got back in the past, I’m looking at about a $700 refund, which is more than half of my monthly income right now.
Anyway, I just looked at the IRS website. Free-file doesn’t open until January 30th. I have a bank account now, so if I file myself, I can get that money a couple weeks after that. If I had to wait for a paper check, it would be about 7 weeks from now. Also, the check-cashing place near me takes out a higher percentage from government checks than from paychecks, so if I didn’t have that bank account, I would be losing 9% of the money anyway. That Jackson Hewitt looks a little more tempting. There’s also a car a friend wants to sell me, but I won’t have enough until I get that refund.
I realize that refund anticipation loans are a horrible deal and I’m not THAT desperate for money, so I will be filing myself as soon as I can. However, if I was in a situation where I had large, pressing expenses, I might be taking a second look at getting money NOW
Regarding the illegal alien issue: many people believe that if there is ever an amnesty program to help them become citizens legally, it will favor those people who have consistently filed their taxes. Only time will tell if this is correct or not.
As DrDeth points out, the IRS cannot share information with INS without some kind of subpoena and the INS isn’t pursuing that. The IRS believes that sharing this information would be counter-productive to their function, which is to administer the tax code.
That could be correct for a particular person’s practice. The overall statistic is something more like 15-20% according to the IRS. That’s still a LOT of money (about $15 billion).
The “Making Work Pay Tax Credit” was around for 2009 and 2010. It’s gone now. (And if you haven’t filed your 2009 tax return yet, hurry – your time runs out April 15, 2013.) The MWPTC was replaced by a 2 percentage point reduction in the Social Security withholding tax.
The reloadable debit card market has suddenly become more competitive in the last year. You can have direct deposits such as paychecks and tax refunds sent directly to the cards. For example, look at the Bluebird Card from Walmart. No maintenance fees, free billpay service, free cash withdrawals at Walmart, free cash withdrawals at other ATMs if you have direct deposit. It’s actually quite a reasonable alternative for the unbanked. There are others, I’m just using this as an example.
It used to be that the prepaid cards were quite a ripoff with huge fees. Most still are. But someone out there has realized there is a market to be exploited and several vendors have started issuing reasonably-priced cards.
