When Filing Taxes, The Poor And Minorities Pay More

Refund anticipation checks (RACs) are temporary bank accounts set up by commercial tax preparers into which taxpayers’ refunds are deposited and out of which the tax preparers’ fees are paid. RACs allow a taxpayer to delay paying the tax preparer’s fee for a few weeks.

Typically, tax preparers charge between $25 to $40 for this service. While this might seem to be a modest amount to pay, the National Consumer Law Center (NCLC) points outthat a $40 fee to delay payment of a $300 preparer fee represents an annual interest rate of 232%.

In tax year 2018, the Internal Revenue Service (IRS) reports 20.7 million taxpayers used a RAC with nearly three-fourths, or 73.9%, of all RACs created for taxpayers with less than $50,000 of adjusted gross income (AGI). The geographic prevalence of RACs varies considerably depending on which part of the country you live in. The map below shows the highest concentration of RACs among U.S. counties in the South and in scattered locations throughout the Southwest and West.

Given that most RACs are created for low and middle-income taxpayers, it is not surprising that RACs tend to be concentrated in counties with higher levels of poverty as shown in the table below. In addition, however, the table also shows that counties with a higher percentage of RACs also have higher concentrations of non-white and Hispanic populations. (The U.S. Census Bureau’s category of “White alone” excludes individuals who identify as White Hispanic.) This finding is further evidence that the tax code as currently administered works to the disadvantage of poor and minority taxpayers. This also shows that if the IRS wants to ensure that the tax code is administered fairly for all taxpayers it should strongly consider collecting data on the racial and ethnic backgrounds of taxpayers. These data could be collected in a variety of ways without adding a question about race to tax forms.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Kim Bloomquist, currently retired, previously worked as a senior economist in the IRS Office of Research from 1999 to 2015 and as an operations research analyst in the Taxpayer Advocate Service from 2015 to 2018.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.