Association for Public Policy Analysis & Management

In this work, I examine whether the availability of tax refund anticipation products (either in the form of a loan or a temporary bank account) is associated with higher noncompliance rates for the Earned Income Tax Credit (EITC). Refund anticipation products are offered by tax preparers as a way for taxpayers to receive a refund faster or to have the tax preparation fee paid from the refund (or both). These products are, on average, costly for taxpayers compared with the average value of a refund, and they are often marketed to low-income taxpayers who may be liquidity constrained or unbanked. Both tax preparers and taxpayers have perverse incentives to use these products, and the temptation of a large refund (for the taxpayer) and added fees and interest (for the tax preparer) may induce erroneous claiming of credits. I examine the association between refund anticipation product use and the overpayment of EITC using tax records and survey data linked at the individual level. For taxpayers in the Current Population Survey Annual and Social Economic Supplement, I estimate EITC eligibility based on household characteristics and combined survey and administrative income information; I can observe EITC credit receipt, the use of paid tax preparation or online filing, and the receipt of a refund anticipation product. I find that both the incorrect payment of EITC and the value of EITC overpayment are associated with preparer use, and to a lesser extent with the use of online filing, when compared with paper filing. Incorrect payment is exacerbated for preparer and online filing when a refund anticipation product is purchased. I also exploit an exogenous price shock to the tax preparation industry that occurred in 2010. This allows me to separately identify a “preparer effect” on EITC noncompliance. I find that the rate of incorrect payment and the dollar value of overpayment increased in the tax year of the shock for those using a preparer and buying a product.