Alabama needs a law to regulate tax preparers

By STEPHEN FOSTER BLACK

As we move into a new tax filing season, in the midst of the most severe recession in three generations, the Earned Income Tax Credit (EITC) has never been more critical to the working people of our state.

Considered to be the most important federal anti-poverty program in the nation, the EITC is a refundable tax credit for working families with low to moderate incomes, representing a $1 billion annual investment to 491,000 Alabama families and the communities in which they live and work. Advertisement

Lifting nearly five million Americans, including almost three million children, above the poverty line each year, the EITC gives working parents the ability to better support their families. In 2006, the average total refund for Alabama taxpayers claiming the EITC was $3,200.

Unfortunately, despite the obvious benefit of the EITC, an estimated 20 to 25 percent of eligible Alabama families and individuals do not claim the credit, leaving approximately 11 percent of the money ($134 million) "on the table."

The impact of the EITC is also dramatically undermined because money that was intended for working families is diverted to commercial tax preparers and refund lenders.

Encouraged by clever ads, and often unaware that they are simply speeding up the refund process by as little as five days, many consumers are convinced to take out a Refund Anticipation Loan (RAL) - a one-week loan secured by and repaid directly from the proceeds of a consumer's tax refund, offered at exorbitantly high interest rates, ranging from about 50 percent to over 800 percent APR.

Millions of working families pay $200 to $400 each in fees, essentially borrowing their own money for five to seven days at extremely high interest rates. More than 75 percent of EITC recipients in Alabama pay a commercial preparer to complete their taxes, losing more than $78 million annually to tax preparation and refund anticipation loan costs.

Those preparing taxes include many highly trained pros - such as certified public accountants and enrolled agents - who face considerable professional regulation. But it also includes thousands of other commercial preparers across Alabama referred to as unenrolled agents, who target lower income families with their services and products.

There are currently no educational qualifications, no training standards and no licensing requirements that must be met to become a paid tax preparer in Alabama.

A recent undercover review conducted by the nonprofit organization, Impact Alabama, found evidence of significant fraud and negligence. All 13 returns that were prepared across the state contained negligent mistakes, and 11 (85 percent) of the 13 contained misstatements and omissions considered to have been willful or fraudulent.

Over the last six months, University of Alabama students working with the UA Center for Ethics & Social Responsibility conducted research and helped draft needed reforms. College students from more than 10 campuses statewide were organized to raise awareness and gain support from the Legislature and governor to pass these needed reforms.

Under the leadership of Sen. Quinton Ross, D-Montgomery, Rep. Tammy Irons, D-Lauderdale, and a bipartisan coalition of legislators, the Alabama Taxpayer Protection and Assistance Act will be filed in both chambers this week. The act would require individual tax preparers to pass a proficiency exam, obtain a license and fulfill a continuing education requirement (excluding CPAs, Enrolled Agents, and lawyers already required to obtain licenses.)

To be a hairdresser, an individual must have certain training and obtain a license to do business in Alabama. Shouldn't we expect Alabama's tax preparers to have a basic level of competency and be accountable for their work?

Stephen Foster Black is the director of the University of Alabama Center for Ethics & Social Responsibility, and president/founder of Impact Alabama. E-mail: stephen.black@ua.edu

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