The number of taxpayers taking advantage of the Earned Income Tax Credit (EITC) hit a new record in 2013, the latest year for which data is available. That's good news, since the powerful credit is aimed to make life a little easier for low-income workers, offering an average benefit of $3,074 in 2013 for qualifying families with children. It has lifted millions of working Americans out of poverty. The number of people being helped by the credit may fall soon, though, as companies specializing in tax preparation are lobbying Congress to make the EITC rules even more complicated.
The EITC is a rare tax program that has support from many conservatives and progressives alike. Progressives like that it helps the poor, while conservatives like that it promotes participation in the labor force, focused as it is on earned income. The EITC, though, is notorious for being difficult to apply for. One problem that EITC critics frequently cite is that billions of EITC dollars are paid out annually improperly -- but that's in large part because the paperwork is difficult to understand and fill out correctly. This complexity also leaves many eligible taxpayers not claiming the credit at all -- about one in five don't. The EITC program is clearly riddled with problems and ripe for reform.
Making the EITC better -- or worse
One useful reform would be to make the EITC much easier to understand and apply for by simplifying the rules and paperwork. Unfortunately, tax-preparation companies such as H&R Block (NYSE:HRB) and Intuit (NASDAQ:INTU) (which produces the popular tax-prep software TurboTax) have long been arguing against making the tax-prep and tax-filing process easier. Indeed, they have lobbied Congress to do the opposite, and seem to want to make it even harder for low-income people to access the available help that the EITC provides.
Several years ago, the IRS made applying for the EITC more complicated -- but only for those who used a paid preparer. Those preparers now have to use a new multipage checklist. What's happening now is that tax-prep companies are lobbying to make individual taxpayers preparing their own returns have to fill out a similar checklist, essentially lengthening the EITC application from one page to four or five pages, per a Vox report.
H&R Block argues that mistakes and fraud will be greatly reduced by making the process more complicated. That may not be the case, though, as a 2014 government report suggests that tax preparers are more likely to make EITC errors on returns than are taxpayers preparing their own returns.
Meanwhile, Robert Greenstein, president of the Center on Budget and Policy Priorities, has suggested that should the EITC application process get more complicated, "No one should be surprised to see large numbers of individuals who now file their own returns either giving up and not claiming the EITC due to the added complexity or turning to paid preparers, who could charge hundreds of dollars for their services."
Conflicts of interest
It seems clear that tax-prep companies have a lot to gain if tax preparation is made even more complex, as more taxpayers coming to them for help means more revenue. (The tax code was recently close to 4 million words long – that's like 16,000 books, each 250 pages long!) In a November, 2014, letter to lawmakers, H&R Block CEO William Cobb noted a decline in the number of EITC taxpayers using paid tax-preparers while urging the lawmakers to "...require all EITC taxpayers, including the more than 40% of taxpayers who self-prepare their returns, to submit additional eligibility information to the IRS." Meanwhile, Intuit's TurboTax website offers helpful information on the EITC, including this highlighted tip: "Tax software can help."
This isn't the only time that tax-prep companies have made their wishes known to Congress. The Center for Responsive Politics notes that H&R Block has spent more than $14 million on lobbying since 1998. Intuit has spent more than $11 million since 2008. One promising reform that has been proposed is the permitting of automatic, return-less tax filing for those with simple returns -- but the tax-prep industry has lobbied against that, too.
Capitalism isn't always pretty. Tobacco companies would like us to smoke more, hurting our health. Tax-prep companies, too, are eager to have more people paying for their services -- whether they need them or not -- and they're pushing hard to keep our tax system from improving on several fronts. Life is tough enough for low-income Americans. It's rather shameful to make it unnecessarily harder. If you don't like what these companies are doing (or, hey – even if you do), contact your congressional representatives and let them know.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool owns and recommends Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.