Claim tax break with paychecks, employees urged

Many wait, pay dearly to get a short-term loan

Earned income tax credit

December 25, 2003|By BLOOMBERG NEWS

NEW YORK -- Marriott International Inc., CVS Corp. and 40 other companies that hire low-wage workers are urging their employees to collect a tax break in their paychecks rather than paying fees for tax-preparation services and loans to get it as a lump sum once a year.

The group, representing businesses employing 4 million people, is distributing flyers, stickers, posters and other educational tools to company managers to encourage employees to sign up for the little-used version of the earned income tax credit.

The credit is a tax subsidy worth as much as $4,000 per worker that is administered by the Internal Revenue Service.

It marks the first time the private sector has pushed the program, which the tax agency promoted without success in the 1990s. It may end up hurting companies such as H&R Block Inc., Cendant Corp.'s Jackson Hewitt Inc., Bank One Corp. and HSBC Holdings PLC's Household Bank that collect billions in fees preparing tax returns and making short-term loans to people who want refunds faster than the IRS can process them.

The advance earned income tax credit program "offers more support for the family on an ongoing basis rather than a lump sum at the end of the year," said Marriott Vice President Donna Klein, president of Corporate Voices for Working Families.

About 19 million people qualify for the earned income tax credit, which is available to working families with two children that have annual wages of $34,692 or less, and less than $2,600 in investment income. The average recipient gets a lump sum of about $2,000 when filing a tax return.

Some workers don't even realize they're eligible for the credit, Klein said. Her group, which also includes discount retailer TJX Cos. Inc., International Business Machines and Abbott Laboratories, estimates about $5 billion went uncollected. "It's very much a hand-holding process," Klein said. "It almost needs to be explained to employees on a one-to-one basis."

Of the 100 million U.S. residents who will file a tax return next year, more than half will use tax preparation services such as H&R Block, where they pay an average of $267 to have someone fill out tax forms and file them electronically, according to the Consumer Federation of America.

Eleven million people will spend a collective $800 million to get loans against their tax refunds from banks such as Household Bank and Bank One, which will deliver the lump sums in as little as 24 hours, the consumers group said.

The Consumer Federation says the banks charge annual percentage rates of from 67 percent to 774 percent on so-called refund-anticipation loans. The loans are essentially risk-free to the bank because the IRS guarantees that the refunds will be paid.

Bank One spokeswoman Calmetta Coleman declined to comment, saying the bank's profit from such loans is proprietary information.

An IRS effort to encourage eligible workers to claim the tax credit through paychecks in the 1990s largely failed. Of the 19 million eligible recipients, only 150,000 claim the credit over the course of a year.

Klein said her group will succeed where the IRS failed because companies can do a better job explaining the program to workers, who often speak a multitude of languages.

The companies have designed flyers, posters, stickers and paycheck inserts to encourage workers to register with the IRS to receive the tax credit payments over the course of the year. They're also instructing workers on how to gain access to free tax preparation at volunteer sites coordinated by the IRS.

TJX, for example, posted the locations of free tax preparation services within 10 miles of its 1,300 stores and included tax forms necessary to receive the credit in new employee hiring packages. Marriott established a toll-free line and used the company intranet and newsletters to tout the credit. It also offers free tax advice in its hotels for employees.

The tax credit is considered a "high risk" because up to $9.9 billion in fraudulent and erroneous payments were distributed in 1999 out of total credits of about $30 billion, according to the General Accounting Office, the official government auditor.

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