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Money and Its Opposite
You know, Mom, being poor is very expensive. —Sandy Brash, at age twelve
Tax time in poor neighborhoods is not April. It is January. And “income tax” isn’t what you pay; it’s what you receive. As soon as the W-2s arrive, working folks eager for their checks from the Internal Revenue Service hurry to the tax preparers, who have flourished and gouged impoverished laborers since the welfare time limits enacted by Congress in 1996. The checks that come from Washington include not only a refund of taxes withheld, but an additional payment known as the Earned Income Tax Credit, which is designed to subsidize low-wage working families. The refunds and subsidies are sometimes banked for savings toward a car, a house, an education; but they are often needed immediately for overdue bills and large purchases that can’t be funded from the trickle of wages throughout the year.
Christie, a child-care worker in Akron, earned too little to owe taxes but got $1,700 as an Earned Income Credit one year, which enabled her to avoid the Salvation Army’s used-furniture store and instead buy a new matching set of comfortable black couches and loveseats for her living room in public housing.
Caroline Payne’s check went for a down payment on her house in New Hampshire. “I used my income tax and paid a thousand down,” she said proudly. When she sold it five and a half years later and her daughter lent her money to rent a truck for her move, she planned to pay her back “when I get my taxes.”
“I’m waitin’ for my income tax to come in so I can pay my real estate taxes,” said Tom King, a single father and lumberjack who lived in a trailer on his own land.
Debra Hall, who had started at a Cleveland bakery, was keen with anticipation after filing her first tax return. “I’ll get $3,079 back! What am I gonna do with it? Pay all my bills off,” she declared, “and I haven’t had anything new in the house. Do some good with it, that’s for sure. Minor repairs on my car. The bills are first, for my credit [rating], to get all my back debts paid. It will be well spent.”
The Earned Income Tax Credit is one of those rare anti-poverty programs that appeal both to liberals and conservatives, invoking the virtue of both government help and self-help. You don’t get it unless you have some earned income, and since its payments are linked to your tax return, you don’t get it unless you file one. That leaves out low-wage workers—especially undocumented immigrants—who get paid under the table in cash and think they’re better off avoiding the IRS. By filing, however, they would end up ahead, because they’d get to keep everything they earned and would receive a payment on top of that. The benefits kick in at fairly high levels—at earnings of less than $33,692, for example, for a worker who supported more than one child in 2003. At the lower income levels, the Earned Income Tax Credit can add the equivalent of a dollar or two an hour to a worker’s wage.
Enacted in 1975, the program was expanded under Presidents Reagan, Bush, and Clinton, and in 2003 paid more than $32 billion to 18 million households. Treasury officials worry about erroneous claims, honest or fraudulent, which may rise to 27 to 32 percent of the total.1 On the other hand, an estimated 10 to 15 percent of those eligible don’t file for it,2 partly because employers and unions often don’t tell workers that it exists. The presidents of two local unions in Washington, D.C., for example, one representing janitors and the other parking garage attendants, had never heard of the Earned Income Tax Credit until I mentioned it to them. And I have not yet come across a single worker or boss who knew that with a simple form called a W-5, filed with the employer, a low-wage employee could get some of the payments in advance during the year. When I mentioned the W-5 to Debra Hall and she then asked at her bakery, the woman who handled the payroll waved her away impatiently and said she knew nothing about it. Later, the tax preparer told Debra it was better just to wait and get the payment in one lump sum after she filed her return.
It sure is better—if you’re the preparer. With cunning creativity, the preparers have devised schemes to separate low-wage workers from as much of their refunds and Earned Income Credits as feasible. The marvel of electronic filing, the speedy direct deposit into a bank account, the high-interest loan masquerading as a “rapid refund” all promise a sudden flush of dollars to cash-starved families. The trouble is, getting money costs money.
The preparers operate from sleazy check-cashing joints and from street-level outposts of respectable corporations. They do for a hefty fee what their clients could do for themselves for free with the math skills and the courage to tackle a 1040, or with a computer and a bank account to speed filing and receipt. But most low-wage workers don’t have the math, the courage, or the computer, and many don’t even have the bank account. They are so desperate for the check that they give up a precious $100 or so to get everything done quickly and correctly. “You get so scared,” said Debra Hall, who paid $95 to have her simple return done after ending twenty-one years of welfare. “I don’t know why it’s so scary, but I’d rather have it done right the first time.”
She was probably wise, because another disadvantage of being poor is that you’ve been more likely since 1999 to face an audit by the IRS. In that year, 1.36 percent of the returns filed by taxpayers making under $25,000 were audited, compared with 1.15 percent of those making $100,000 or more. The scrutiny was instigated by Republican congressional leaders who feared abuses of the Earned Income Tax Credit. In the face of bad publicity, the IRS shifted the balance in 2000 by auditing 0.6 percent of those under $25,000 versus 1.0 percent of those over $100,000. Thereafter, the audit rate tilted back and forth, to .86 and .69 percent, respectively, in 2001, then to .64 and .75 in 2002.3 In other words, as the IRS lost enforcement personnel, it dramatically reduced its scrutiny of well-to-do taxpayers, whose returns were once audited at the rate of 10 percent. This despite the fact that audits at the upper levels of income naturally tend to recover more dollars in lost revenue.
Evon Johnson never dared do another return herself after the IRS charged her $2,072 in taxes, penalties, and interest. Newly arrived from Honduras, she was working from 5 a.m. for a cleaning service in Boston that never withheld taxes and never sent her a W-2. She didn’t know they were supposed to do either. “I did my taxes, I fill it out, fine,” she said. But not so fine, evidently. “Three years after or four years after, IRS contact me saying that I owe them . . . like, $2,072. ‘Why do I owe you?’ And they say: because I didn’t declare my taxes. I say I did. . . . They say no. . . . I sent them a letter saying I was sending them $1,072 I think it was, ’cause I didn’t have no money at the time, and I was going to make small installments for the rest of the money. . . . You know what they did? I had a bank account, and they took the money from my bank account—every penny I had.” Ever since, she has happily paid $100 a year to a tax preparer, $100 a year for peace of mind. “I don’t want the IRS back on me,” she explained. “He do it and he sign it and put everything, so if any mistake, he gonna be the one who will have to deal with them.”
By the end of February, H&R Block’s storefront office on a dismal stretch of Washington’s 14th Street looked like a well-used campaign headquarters a week after Election Day. Most computer screens were dark, and the place was quiet and cavernous. All the desks were empty but one, occupied by Claudia Rivera, who used to prepare returns without charge at a library in Virginia. She and the manager, Carl Caton, didn’t have much to do now that the rush had passed, so they were happy to sit at a keyboard and explain.
Each form the taxpayer needed carried a fee: $41 for a 1040, $10 for an EIC (the Earned Income Credit), $1 for each W-2, and so on. Electronic filing cost another $25. So a simple return with two W-2s filed electronically would run $78. But it didn’t stop there. Block had a smorgasbord of services for people who lived on the edge. If you had no bank account, your refund could be loaded onto an ATM card that charged $2 per withdrawal. Or a temporary account could be opened into which the IRS payment could be deposited for a fee of $24.95. If you were enticed by Block’s offer of a “rapid refund” and wanted a check in a day or two, you paid H&R Block an additional $50 to $90, depending on the amount you were getting. The fee on 14th Street could be as much as $50 on a $200 refund, up to $90 for $2,000 or more.4
This was actually a loan, and for a very short time. Filing electronically usually gets you a check in two and a half weeks, according to the IRS, and five days sooner if it’s deposited directly into a bank account. At the most, then, the “rapid refund” loan, issued a day or two after filing, would run about fifteen days, which made the $90 fee on a $2,000 payment equivalent to an annual interest rate of 108 percent. At the least, the loan could run as little as four days, propelling the annualized rate to 410 percent on $2,000, and 2,281 percent on $200. (The highest percentage is incurred if the timing occurs perfectly: the return is filed by the IRS’s weekly deadline of noon Thursday, the loan check is not issued until after banks close Friday, the taxpayer can’t put it into his account until Monday, and the IRS is fast enough to deposit the refund directly with the lending bank the following Friday.)5
After a spate of lawsuits, a federal judge in Norfolk ordered Block to stop using the misleading term “rapid refund” in advertising loans, but Block continued with the ads by redefining “rapid refund” as a reference to electronic filing only. The company called its loan program a “refund anticipation loan,” a distinction lost on many of the low-wage workers who ventured into Block offices in search of a rapid refund. In 2000 such loans went to 4.8 million taxpayers.
Among all the working people I interviewed who used the loan service, not one understood the terms or the options. Hector and Maribel Delgado, who earned about $28,000 a year picking and packing vegetables in North Carolina, were stunned when I sat with them in their trailer, looked over their tax return, and explained how it all worked. They had paid Block $109 to prepare their return, file it electronically, and give them an advance on their payment from the IRS of $1,307.05. The form they had signed disclosed a finance charge of 69.888 percent annually, but they had not understood it. Even as Block employees presented a contract in fine print, they were trained to avoid the word “loan,” and say “two-day refunds” instead, a Maryland judge found in hearing a lawsuit on the lending practices. And the refund loans were lucrative enough to provide 8 percent of Block’s entire profits in 1999, mainly because a Block subsidiary owned a 49.99 percent interest in the loans, made by Household Bank.
Something else illicit happened to the Delgados in the Block offices. Although they filed electronically in January, a time when the IRS promises checks within a couple of weeks, “We were told we’d have to wait six to eight weeks,” Maribel said. This was patently false. “We needed the money to pay bills,” she explained. “We send one part to Mexico, another part to here. We usually send $100 every two weeks to Mexico. We have a big family.”
In 2000, after facing a decade of class-action lawsuits alleging misleading lending practices, H&R Block agreed to a $25 million settlement without admitting any wrongdoing. The only practice the company changed was to present the federally required truth-in-lending disclosures earlier in the process, according to a spokeswoman. Do employees at least explain the terms verbally? “A lot of it depends on questions customers ask,” she said. “If they ask questions, preparers are supposed to answer.” Many customers simply do not know what questions to ask.
Poverty is like a bleeding wound. It weakens the defenses. It lowers resis- tance. It attracts predators. The loan sharks operate not only from bars and street corners, but also legally from behind bulletproof glass. Their beckoning signs are posted at some 10,000 locations across the country: “Payday Loans,” “Quick Cash,” “Easy Money.” You see them in check-cashing joints and storefront offices in poor and working-class neighborhoods. They have organized themselves into at least a dozen national chains, and they charge fees equivalent to more than 500 percent annualized interest.
They also provide a much needed service. Say you’re short of cash, and the bills are piling up, along with some disconnection notices. Payday is two weeks away, and your phone and electricity will be shut off before then. The guy at the local convenience store, who has a booth for cashing checks, throws you a lifeline. If you need $100 now, you write him a check for $120, postdated by two weeks. He’ll give you the $100 in cash today, hold your check until your wages are in your bank account, and then put the check through. Or you can give him the $120 in cash when you get it, and he’ll return your check. Either way, 20 percent interest for two weeks equals 1.428 percent a day, or 521 percent annually.
If you’re still stuck after payday, if your paycheck doesn’t quite cover your needs, or if your check for $120 bounces, no problem. The guy behind the bulletproof glass will gladly roll over your loan—for another $20. This pattern prevails in Illinois, for example, where state examiners found that rollovers made up 77 percent of all payday loan transactions. The average customer had ten such renewals, which meant paying fees totaling up to twice the amount borrowed.6 Eventually, you may have to borrow from another payday loan merchant to pay the fees at the first. And so on and on and on.