Alabama Taxpayer Protection and Assistance Act announced - Montgomery Alabama news.

Alabama Taxpayer Protection and Assistance Act announced

BIRMINGHAM, AL., -- Senator Quinton Ross (D -Montgomery), Senator Jabo Waggoner (R-Jefferson), Representative Tammy Irons (D-Lauderdale), Rep Cam Ward (R-Shelby) and a bipartisan coalition of Alabama legislators announced the introduction of the Alabama Taxpayer Protection and Assistance Act, which will provide for testing and licensing of commercial tax preparers in the state to help ensure they are competent and ethical. The announcement of the legislation comes one week after Impact Alabama released the findings of a statewide investigation which uncovered widespread fraud and negligence in the industry.

"More than a million lower and middle income Alabamians put their trust, their legal liability for taxes, and their financial health in the hands of unregulated paid preparers," stated Representative Tammy Irons. "The people of Alabama deserve to know that they will be receiving a basic level of competence and honesty."

"Many commercial tax preparation companies exploit low-income taxpayers with poor disclosures, exorbitant fees and fraudulent miscalculations," stated Senator Ross. "To be a hairdresser in Alabama, an individual must have certain training and obtain a license to do business. Shouldn't we expect Alabama's tax preparers to have a basic level of competency and be accountable for their work?"

"Although there are many well-trained and ethical tax preparers, there are others whose incompetence hurts the entire tax preparation industry by confusing customers with misleading refund estimates and costly mistakes -- leaving no recourse for taxpayers," stated Senator Jabo Waggoner (R-Jefferson), a co-sponsor of the Bill.

The Alabama Taxpayer Protection and Assistance Act:

  • Provides for the oversight of the commercial tax preparation industry through a state board (excluding Certified Public Accountants, Enrolled Agents, and lawyers already required to obtain licenses);
  • Requires individual tax preparers to apply for an annually renewable license, fulfill a continuing education requirement, and pass a proficiency exam;
  • Expands informational outreach efforts to individuals eligible for the Earned Income Tax Credit;
  • Utilizes portion of licensing fees to provide grant support to IRS-certified free Volunteer Income Tax Assistance (VITA) nonprofit sites throughout state;

The coalition of legislators are joined in this effort by college and university students from across the state who have been an integral part of raising awareness of the current problems in this industry, creating the legislation and building support for its passage.

Over the last six months, University of Alabama students working with the University of Alabama's Center for Ethics & Social Responsibility conducted research and helped draft the needed reforms. In addition, college students from more than ten campuses statewide have worked tirelessly to raise awareness and gain support from the Legislature and Governor. This group of students is responsible for over 5,000 student letters supporting this legislation which have been sent to legislators across the state.

"This type of grassroots mobilization of students to achieve such a significant improvement in the lives of working Alabamians not only brings more attention to this important effort, it also inspires the students themselves to believe in the efficacy of collective action and to continue to work for structural changes to solve societal problems," said Stephen Black, who heads the University of Alabama Center for Ethics & Social Responsibility and is the founder and president of Impact Alabama.

The legislation will be filed in both chambers of the Alabama State Legislature next week.


Need For Legislative Reform:

Since its inception in 1975, the Earned Income Tax Credit (EITC) has been championed by both Republicans and Democrats, becoming the single most important federal anti-poverty program in the nation. A refundable tax credit for workers with low to moderate incomes, the EITC represents a $1 billion annual investment in 492,000 Alabama families and the communities in which they live and work. 

In 2004, the average total refund for Alabama taxpayers claiming the EITC was $3,200. Often the largest check a lower-income, working family will see all year, this money helps families cover expenses like housing, utilities, food and child care - making it easier for working Alabamians to keep working.

Unfortunately, despite the obvious benefit of the EITC, an estimated 20-25% of eligible families and individuals do not claim the credit, and an estimated $133 million in EITC dollars are "left on the table" by households who are eligible for the credit but do not claim it. 

The impact of the EITC is also dramatically undermined because money that was intended for working families is diverted to commercial tax preparers and refund lenders. More than 75% of EITC recipients in Alabama pay a commercial preparer to complete their tax returns, losing more than $77 million annually to tax preparation and refund anticipation loan costs - a figure which places us 49th in the nation. That extra $77 million could have gone a long way in helping lower-income families secure health insurance, pay down debts or put food on the table.

Legislation Provides Needed Reforms:

Alabama's Tax Preparers Should Have a Basic Level of Competency and be Accountable for Their Work:

Although certified public accountants, enrolled agents and tax attorneys must receive substantive training and meet stringent standards of certification, there are currently no educational qualifications, no training standards, and no licensing requirements that must be met to become a paid tax preparer in Alabama. Anyone who can rent a storefront or pass out flyers from their home can set up shop as a tax preparer. Although there are many competent and knowledgeable paid preparers who operate with integrity, there are others who are inadequately trained and more interested in pushing products that inflate their profits (e.g., refund anticipation loans, investment schemes) than in serving the best interests of their clients. More than one million working families put their trust, their legal liability for taxes, and their financial health in the hands of unregulated paid preparers.

Education and Testing Requirements Result in More Accurate Returns and More Revenue for Alabama's Schools:

The benefits of establishing registration, education, and testing requirements for all paid preparers before they can prepare tax returns is confirmed by the results demonstrated in Oregon - a state with requirements similar to those in the Alabama Taxpayer Protection and Assistance Act.  According to a 2008 GAO analysis, Oregon returns were more likely to be accurate compared to the rest of the country.  In dollar terms, the average Oregon return required approximately $250 less of a change in tax liability than the average return in the rest of the country.  This equates to over $390 million more in federal income taxes paid in Oregon than would have been paid if the returns were as accurate as similar returns in the rest of the country.[1][1]

In a recent undercover operation conducted by Impact Alabama staff, evidence of significant fraud and negligence among professional tax-return preparers was uncovered.  All thirteen returns that were prepared contained negligent mistakes, and eleven (85%) of the thirteen contained misstatements and omissions considered to have been willful or fraudulent.

Education and testing requirements for Alabama tax preparers will result in less fraud and tax cheating and more revenue for our schools. 

Increasing EITC Participation Will Provide a Tremendous Economic Benefit to Working Families and to the State of Alabama:

More than 492,000 working families in Alabama annually claim the EITC - representing a $1 billion investment for our state.  However, an estimated $134 million in EITC dollars are "left on the table" by households who are eligible for the credit but do not claim it. 

Many low-income households are eligible for the EITC and other tax credits, but are unaware of their existence and thus do not apply for the annual refunds. 

If a greater number of eligible families claims the EITC in Alabama, the potential economic benefit to Alabama could reach $189 million due to increased spending and output in the retail, services, utilities and other economic sectors. An additional $6.6 million in tax revenues could also be collected.

Providing Greater Access to Free Tax Preparation Services Will Put More Money in the Pockets of Alabama's Working Families:

Many families who do not have the resources or knowledge to file their own taxes instead rely on costly commercial tax preparers.  Additionally, many consumers are convinced to take out a Refund Anticipation Loan (RAL)-a predatory one-to-two week loan secured by and repaid directly from the proceeds of a consumer's tax refund, offered at exorbitantly high interest rates, ranging from about 50% to over 800% APR.

75% of Alabama's EITC recipients pay commercial tax preparers just to access this benefit - a figure that places us 49th in the nation.

Approximately $77 million is diverted from the EITC to the commercial tax preparation industry annually through tax preparation fees and refund anticipation loan costs.

Nonprofit efforts, certified by the IRS, provide free tax preparation assistance to working families statewide.  In 2008, these Volunteer Income Tax Assistance and Tax Counseling for the Elderly sites prepared returns for more than 5,000 EITC-eligible families in Alabama.  However, many areas still have no free tax preparation alternatives and most EITC-eligible families are unaware of the existence of free tax preparation sites.

[1][1] U.S. GAO. "Oregon's Regulatory Regime May Lead to Improved Federal Tax Return Accuracy and Provides a Possible Model for National Regulation." August 2008. Report to the U.S. Senate Committee on Finance. GAO-08-781

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