Rogelio V. Solis/AP Photo
Estimates suggest the tax preparation service industry collected $14.3 billion in revenue last year.
On July 11, Sens. Elizabeth Warren (D-MA), Ron Wyden (D-OR), Richard Blumenthal (D-CT), Tammy Duckworth (D-IL), Bernie Sanders (I-VT), Sheldon Whitehouse (D-RI), and Rep. Katie Porter (D-CA) co-authored a letter to the Internal Revenue Service (IRS), the Federal Trade Commission (FTC), the Department of Justice (DOJ), and the Treasury Department’s Treasury Inspector General for Tax Administration (TIGTA). The purpose of the letter, the lawmakers wrote, was to inform those agencies about a congressional report “revealing an outrageous and potentially illegal sharing of taxpayers’ sensitive personal and financial information with Meta by online tax preparation companies.”
Last November, The Markup, a nonprofit tech-focused publication, first reported about the sensitive financial data sharing between tax preparer companies like TaxAct, TaxSlayer, and H&R Block and tech giants like Meta and Google. Aside from the sensitive personal and financial information of taxpayers, the lawmakers noted, the investigation found that the data collected was then used for targeted advertising purposes. This means that Meta and Google could create advertising profiles based upon millions of taxpayers’ data on their location, income, tax returns, dependents, how much they received from government aid such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), and so forth.
It was probably illegal, the report states, but taxpayers have no recourse through the courts. Of course, the tax prep company services included forced arbitration clauses that are essentially a “get-out-of-jail card that takes away consumers’ day in court,” as the National Consumer Law Center states.
In response to the congressional inquiry, both Google and Meta and the tax prep companies blame the other. Tech says the tax prep companies should have shared only lawful data. The tax prep companies generally say they were unaware of the extent of taxpayer data shared. It’s a classic case of deflection, because neither party had intentions of stopping the practice until journalists investigated the issue and lawmakers demanded answers.
But it gets worse. Tax preparation companies are just one node of a larger, more rapacious—yet legal—enterprise to trick poor people out of both big chunks of their tax refund and their personal data to boot.
That’s what the Center for Taxpayer Rights (CTR) is trying to explain to the Consumer Financial Protection Bureau (CFPB) through a comment published on the consumer agency’s request for information on data brokers. The Center for Taxpayer Rights is a nonpartisan organization that advocates for all taxpayers, founded by the first person to serve as the national taxpayer advocate before Congress and the IRS, Nina Olson. One of CTR’s particular focuses is providing assistance to low-income taxpayer clinics, which are abysmally underused in favor of private tax prep storefronts scattered across low-income communities.
In return for the tax preparers’ service, taxpayers are allowing the upstream bank to reclassify their personal and tax return data into bank customer data.
Although CTR’s comment focuses on taxpayers who do not pay fees to servicers up front, this segment of the population’s experience with tax season sheds light on the people most reliant on receiving their tax refunds. For a taxpayer on the edge financially, immediately receiving a tax refund can be the difference between paying living expenses or not. Tax prep companies take full advantage of this fact.
That’s why “the enticement of a quick, large refund,” CTR notes, incentivizes taxpayers to use “paid tax return preparers who promise expedited refunds,” generally known as refund anticipation checks (RACs). In return for the tax preparers’ service, taxpayers are allowing the upstream bank the prep companies work with to reclassify their personal and tax return data into bank customer data. As CTR says, “the data is no longer tax return information protected by the Internal Revenue Code.” Effectively, for low-income taxpayers to allegedly receive their return faster, they forfeit federal protections over their data, and pay hundreds of dollars in the process.
In reality, there is no such expedited return, which explains the involvement of a bank. As I’ve previously reported for the Prospect, virtually every financial product requires a charter from an FDIC-insured depository institution, which means a bank of sorts. These expedited tax refunds are actually high-interest loans that are deposited into a bank account from the upstream financial institution the preparer is partnered with. Often, CTR notes, taxpayers don’t even realize they’re opening a new bank account or that they applied for a loan through the preparer.
With that data in the parent bank’s control, theoretically, that bank can share the data with its other financial partners that are in similar arrangements as the tax preparer. It’s the equivalent of giving your email or phone number to a politician’s campaign—and then despite opting out of texts after campaign season, your information gets kicked up to the Democratic or Republican Party’s master list for use in perpetuity.
In the immediate term, this information is lucrative because everybody involved in preparing a low-income taxpayer’s return gets a cut. Banks give software companies a cut per customer for processing the return, plus a bonus per tax return for enrolling a customer in a prepaid debit card offered by the bank. The software company employs a similar strategy with preparers. Once preparers reach a certain number of returns filed, the software company waives filing costs for the tax preparer.
“In pushing the taxpayer to these products,” CTR wrote, “the preparer may fail to disclose or downplay the real cost of the product. They may also avoid explanation of the third-party involvement by the banks and [Tax Refund Bank Products] Provider FinTechs so that the taxpayer has no knowledge of how their money and tax information is being moved and shared.”
For a sense of the popularity of these financial products, 22 million tax return filers received a RAC, and 8.5 million of those also received the Earned Income Tax Credit, according to the Center for Taxpayer Rights. Estimates suggest that the tax preparation service industry collected $14.3 billion in revenue last year, according to IBISWorld. That’s troubling and potentially translates to EITC-qualified taxpayers paying “over $2 billion to apply for poverty relief credits, and [sharing] their tax return data in the process.”
The costs for individuals are enormous. Toward the end of CTR’s comment, they offer a case study of anonymous taxpayers, itemizing the fees skimmed for tax preparation services plus other electronic and processing fees. In total, one taxpayer was expected to receive $9,697. But the cost of fees totaled $970—a tenth of the entire refund—leaving the taxpayer with about $8,700. It’s simply a racket skimming off the federal government’s anti-poverty programs.
The incentives imposed by banks from the top make it so the public-facing component of this scheme—that is, the tax preparers—are the only visible parts of this. Effectively, the tax prep companies are compromised from the start. Their business relies on upselling financial products for upstream partners even as their customers could have qualified for cheaper private services—or better yet, free filing services from low-income tax clinics the Center for Taxpayer Rights supports.
The rest of the Center for Taxpayer Rights’ comment goes into granular detail over structure of the loans tax preparation companies offer. They each come with different consequences for taxpayers and different rewards for the upstream parties. But at the core of the tax filing business is the RAC, better identified as the initial loan. CTR says the RAC might as well be the “gateway product” because it gives the bank the critical data that can be used for future financial products such as audit protections, earned wage access products, and other alternative lines of credit.
It’s a terrible business from top to bottom. But it’s also unnecessary—as I’ve reported at the Prospect, the IRS could automatically deliver refunds to nearly everyone, including EITC recipients, without that much work. There’s no reason to loop in predatory financial companies at any point.
