Bob Cohen saw a problem and vowed to correct it. He saw a need and wanted to fill it. Today, thousands of people across the country are getting tax refunds and credits easily and without charge because of his work and the Legal Aid Society of Orange County, which Cohen directs.
The problem Cohen saw was desperate low-income people, often people with little knowledge of the government or tax system, losing much of their refunds to tax preparers who offered them instant money while taking a huge cut of their check. The need he wanted to fill was for an easy, online program that would allow people to skip the commercial tax preparers, file their taxes themselves and get their money almost as quickly.
It turns out that the service is also a form of economic development, generating payments to people who spend most of what they receive because they are poor. That generates business for retailers and others in their community.
Most of the money comes from the Earned Income Tax Credit, which is designed to ease the transition from public assistance to the workforce. Without it, many people would see a decline in their income when they got a job. The credit phases out as incomes grow, so that it still pays to work.
“When we looked at that issue, and at our capabilities, and what we had been learning from technology, we thought the earned income tax credit really lent itself to an area where there was a big need and there would be a big benefit,” Cohen said.
“Until we provided our service, there was no non-profit providing electronic filing services and there was no product really targeting our client community, low-income workers. We’re making a concerted effort to enable them to do it by themselves, to learn from the experience and to be able to do their own taxes, and more importantly, to use the Internet. The digital divide can empower you if you are on the right side of it.”
One of the big problems with the earned income tax credit is that those low-income workers who are entitled to it and go to tax preparers would sign up, often unknowingly, for what are known as “refund anticipation loans. “
“You go to get your taxes done and you are asked this innocent question: would you like your money right away?” Cohen said. “Who says ‘no’ to that question? The clients we represent need their money yesterday. But if they are entitled to a $4,000 refund, and this year we have had a number of folks who are entitled to a refund like that, it becomes a very lucrative target. The tax preparers will set up a fee structure and an interest rate that takes about half the loan before you even get it.”
Sometimes, the people don’t even know they are getting a loan.
“They don’t actually know what their return amount was because they never looked at their return” said Jeanette Valencia, who directs outreach for the program. “They are told if you want your money today, this I what you will get.”
If every thing goes right, the loan is closed out when the IRS sends the refund to the preparer.
“If it doesn’t go right, if you calculated your taxes wrong, or if you owe the IRS money, or you owe money for child support, the IRS could give you less, or even nothing” Cohen said. But the customer is still on the hook for the loan.
Legal Aid, drawing on its experience creating award-winning online court document templates, wrote software to allow people to file their taxes online in 2003.
But the organization has had a long struggle with the IRS. The problems began shortly after they decided to create their program.
“We were bugging the IRS about how we wanted to do this, because it was a great economic development program,” Cohen said. “We wrote them but they didn’t respond. Then we got a letter back from the IRS saying we had been randomly selected to be audited. They sent a guy down to do a very in-depth audit of us. While he was doing it, I said, ‘Is this our reward for coming up with a great idea?’ He said, ‘I don’t know anything about that.’””
Eventually the organization got the go-ahead, but even after creating the program it was still mostly a local service. At first it was used only in Orange County, and often with the help of a volunteer or staff person at a community organization. Soon groups in other cities in California, and other parts of the country, started using the program with their clients.
Then, before the 2009 tax filing season, Cohen applied to the IRS to be placed on the government home page with the other online services that offered free filing for low-income people. At first the IRS refused, Cohen said, because that page was reserved for members of the “Free File Alliance,” a coalition of commercial tax preparers. But after Cohen threatened to sue, the agency backed down.
Now 500 partners nationwide are using the program, and individuals can use it in their own homes or offices. Last year, Cohen says, the program brought $102 million in credits and refunds to taxpayers across the country.
“Not half bad for a local legal aid program,” he says.
The program is offered in English, Spanish and Vietnamese, and users can switch back and forth while keeping their tax data in tact. The project is supported by the United Way, the City of Irvine, grants from financial institutions and the national Legal Services Corporation.
According to Valencia, about 80 percent of the refunds that people get from the earned income tax credit get reinvested back into their community. But an estimated $1 billion in credits are left on the table in California alone because people don’t know they qualify or they don’t know how to fill out the forms.
To use the program, go here.