Employee Tax Education: Are Prep Fees Too Taxing on Your Lower Income Workforce?

January 31, 2012

For many lower income employees, their yearly tax return provides more than just a refund of their tax withholding – it can include refundable tax credits that can add thousands of additional dollars to their bank account.  The Earned Income Credit http://www.irs.gov/individuals/article/0,,id=150513,00.html (EIC) can add up to $5,751 for a working parent with 3 or more children making a yearly income of less than $43,998 and if the kids are under age 17 there could be up to an additional $1,000 child tax credit for each.  Because of these large refunds, many tax preparation services aggressively go after these taxpayers with the temptation of getting their refund immediately, instead of waiting the average 2 weeks it takes to get their tax refund directly deposited by the IRS.

However, there is a big price to pay for these immediate refunds, called “refund anticipation loans”, commonly nicknamed RALs.  The cost for these RALs can add up to be hundreds of dollars of fees and interest .  I’ve seen disclosure forms from a few of these RALs that had an annual finance charge expressed as over 400%, which is so high because the banks backing these RALs are essentially loaning the amount of the refund upfront for just the several days it takes for the IRS to send out the refund.  Wouldn’t it be much better if your employees could keep all of the refund in their own pocket instead of having to share a portion with the tax preparation service?

Workers that earned less than $57,000 of adjusted gross income in 2011 are eligible for the IRS FreeFile program this tax season, which allows them to access free online software for their federal tax filing.  After completing the FreeFile program online, they can get their federal refund in as quickly as ten days.  Employers can help by spreading the word – the IRS offers a FreeFile widget http://www.widgetbox.com/widget/irs-free-file-tax-countdown that can be embedded on your company intranet, and it’s even available in a Spanish version!

Another way to help your workforce become more comfortable with taking on the task of doing their own tax return is by offering tax basics as part of an ongoing workplace financial education program.  This makes lots of sense since many of the most common tax reduction strategies are through payroll deduction, including 401k deferral, FSA and HSA contributions, and un-reimbursed employee expenses.  Just be cautious of who you invite into your worksite to offer this education.  A local CPA or tax preparer may say they are only there to educate, but could actually be looking for potential clients so try to avoid this type of conflict of interest.

As an added bonus for all the taxpayers out there that wait until the tax filing deadline, we get an extra 2 days this year to procrastinate:  April 17th is the filing deadline in 2012.