Pro-bono tax assistance - CPAs wanted all year long.

There are some little-known facts about the earned income credit (EIC):

1. For 2004, over 21 million workers received EIC benefits, for a total credit of $37 billion; see www.cbpp.org/ eic2005/eic-welcome.pdf. Of that amount, most was refunded, finding its way back into low-income communities.

2. Of the returns filed in 2002, approximately 75% of the benefits went to families with adjusted gross incomes between $5,000 and $20,000; see Greenstein, "The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor," Center on Budget and Policy Priorities (rev. 8/17/05), available at www.cbpp.org/7-19-05 eic.htm (Greenstein).

3. According to the Census Bureau, in 2003 the EIC lifted 4.4 million people out of poverty, including 2.4 million children; see id. Without the credit, the poverty rate among children would have been nearly 25% higher. The EIC is responsible for lifting more children out of poverty than any other single program or category of programs. In 2003, it reduced the number of children in families with below-poverty disposable income from 12.6 million to 10.2 million, and the number of Americans (all ages) in families with below-poverty disposable income from 35.3 million to 30.9 million, a decline of 4.4 million. This analysis uses a measure of poverty that counts food, housing and energy assistance benefits as income, and subtracts income and payroll taxes.

4. Eighteen states have enacted their own version of the EIC that supplements the Federal credit; see id. These states have various eligibility and filing requirements.

Despite the large number of taxpayers claiming the EIC, the complexities associated with eligibility and the additional difficulties of state compliance, only a fraction of the taxpayers who claim the EIC and its state equivalent obtain free assistance in filing their returns. For example, in the Washington, DC area, less than 10% of returns filed in 2004 were prepared by third-party preparers for free, despite an active, organized outreach program to educate taxpayers about the EIC. In locations without such resources, the percentage of EIC taxpayers who obtain free assistance is even lower. Accord-ing to IP, S statistics, of the over 22 million EIC claims filed for tax year 2003, approximately 500,000 (roughly 2%) were prepared in Volunteer Income Tax Assistance (VITA) clinics sponsored by the Service.

Taxpayers either prepare their own returns or obtain the services of paid preparers, who often charge between $50 and $250 for return preparation or persuade the taxpayers to take a refund anticipation loan, which can cost them even more than the return preparation fee. According to a paper published by the Center on Budget and Policy Priorities, approximately 70% of filers claiming the EIC use paid preparers, which is higher than tax fliers in general; see Greenstein.

Thus, the taxpayers who are least able to afford tax preparation assistance nevertheless seek it at a higher rate than other taxpayers, due primarily, if not exclusively, to the complexities of the EIC and its state counterparts.

Volunteering Tax Services

Clearly, there is a significant unmet need for free income tax assistance to low-income taxpayers, for whom claiming the EIC can be the first step toward moving above the poverty line. Research shows that many families who receive the EIC use it to pay for vital necessities, such as housing, utilities, food and basic household appliances. Some use the credit to make purchases or investments that help them maintain their jobs and homes or improve their chances of gaining employment, which would give them a better chance of moving into the middle class. For example, a significant share of families use part of their EIC to (1) repair or replace a car needed for work, (2) make essential but costly repairs to a home (e.g., fixing a leaking roof) or (3) pay for additional education or job training; see Smeeding, Phillips and O'Connor, "The EITC: Expectation, Knowledge, Use, and Economic and Social Mobility," 53 National Tax Journal 1187 (December 2000), and available at www.cpr.maxwell.syr.edu/cprwps/ pdf/wp13.pdf.

Who would be better in providing assistance to low-income taxpayers than a CPA, especially one with tax expertise? Although increasing the availability of free tax assistance to low-income workers is a laudable goal, what can actually be done? Many tax advisers already spend almost all their waking moments during tax season handling their own clients, and simply cannot divert even a couple of hours a week to volunteer activities. Plus, many tax advisers do not handle individual returns and often lack specific knowledge about the EIC. Further, CPAs do not have an obligation to provide pro-bono services as part of their professional commitments.

Although much of the work associated with providing free tax assistance is accomplished between February 1 and April 15, tax season for EIC taxpayers often extends past the April 15 deadline. For example, taxpayers who arrive at overflowing free clinics during the last weeks of the filing season are often told they cannot obtain help to file their returns, but assistance is available for filing extensions. As their returns will still need to be filed, who then helps them in May or June, when the VITA clinics are closed? What happens to taxpayers who (1) miss the April 15 deadline altogether, (2) have not filed returns for several years or (3) receive a notice about a previously filed return from the IRS or the state? Many low-income taxpayers are not native English speakers, and have difficulty understanding notices that often include tax jargon not within their limited English vocabulary.

Besides tax preparation, low-income tax clinics are also in need of other assistance in which tax advisers can help. For example, tax advisers can be "on call" at specific times during tax season to answer tax questions that are beyond the expertise of the volunteers preparing returns. Firms can "adopt" a clinic, for instance, and members can donate several hours each week to provide expertise and support. They can also assist in pre-season training of volunteers and donate used computer equipment to clinics.

As for learning the vagaries of the EIC, there are ample materials available. Many are posted on the IRS's website, including a toolkit for tax professionals; see www.irs.gov/pub/ irs-pdf/p3107e.pdf. Further, virtually all of the organizations offering free tax assistance also conduct training sessions before tax season, which focus on the EIC and other issues affecting low-income taxpayers, such as the child tax credit, the saver's credit, and the child and dependent care credit.

The Rewards

Providing pro-bono tax services offers significant rewards. In addition to personal satisfaction, pro-bono services can help tax advisers develop their practices. Such services result in positive community relations; opportunities to recruit new employees, especially when the firm is involved with a university's tax assistance clinic; and occasions for young firm members to develop their interviewing and interpersonal skills.

Finally, as to pro-bono obligations, the Enron scandal and other well-publicized accounting misfeasance or malfeasance have damaged the accounting profession's reputation in the public's eyes, which behooves CPAs to do what they can to restore the public's trust and admiration for the profession.

Tax advisers interested in serving their communities can contact a local, low-income-taxpayer or VITA clinic, and volunteer this tax season. The rewards for volunteers and their firms will be immeasurable. (For more information on the VITA program, see Bauman, et al., Campus to Clients, "Pro-Bono Tax Services: The Role of Tax Academics and Students," TTA, August 2005, p. 500.)

Editor's note: Mr. Holub is the former chair of the AICPA Tax Division's Tax Practice Management Committee. Mr. Porter is the Chair of the AICPA Tax Division's Tax Practice Improvement Committee and Chair of that Committee's Pro Bono Issues Task Force. Ms. Mantegani is a member of that Task Force. For more information about this column, contact Mr. Holub at [phone] or [e-mail], or Mr. Porter at [phone] or [e-mail].

Circular 230 Webcast!

On Dec. 7, 2005, the AICPA will host a live, interactive webcast, "Circular 230: What Tax Professionals Must Know." Coverage will include:

* Best practices;

* Covered opinions (including principal purpose and significant purpose transactions; reliance opinions; marketed opinions; opinions subject to conditions of confidentiality; and opinions subject to contractual protection);

* Use of "no reliance" prominent disclosures;

* Requirements for covered opinions;

* Written tax advice that is not a covered opinion;

* Procedures to ensure compliance; and

* Penalties for noncompliance.

The price is $79 for an individual registration; $249 for a five-pack; see www.cpa2biz.com/webcasts for details.

Co-Editor:

Steven F. Holub, CPA

Aidman, Piser & Co.

Tampa, FL

Co-Editor and Co-Author:

Jeffrey A. Porter, CPA

Porter & Associates, CPAs

Huntington, WV

Co-Author:

Barbara J. Mantegani, Esq.

Senior Manager

Economic and Valuation Services

KPMG LLP 

Washington, DC