As April 15 crept nearer in 1996, Angela Taylor did like tens of millions of low-income working parents: She dragged herself to a local tax preparer's office.

In prior years, Taylor had let her mother fill out her tax forms. But then Taylor, a single mother in Tulsa, Oklahoma, began to worry. "My mom wasn't a certified preparer," she explains, "and I just felt better" having the returns done professionally.

She made an appointment with Mr. Tax, Inc., and then sat by as the firm filled out her tax forms, filed them electronically, and completed the paperwork for a rapid refund loan. Taylor also signed a form granting Mr. Tax a thick slice off the top of her refund.

Today, Taylor cannot recall precisely how much she paid the tax preparer—at least $100, she says—but she does remember what she got for her money. "[The refund] was supposed to take 48 hours," she says, "but they gave us just a little bit after two days, and we waited at least two weeks for the rest. I was very frustrated. I said I wouldn't go back, and I never did go back."

Had she lived anywhere except Tulsa, Taylor would have been hard-pressed to keep that pledge. Increasingly, the federal tax code for low-income families— while offering a wealth of possible benefits—requires filers to navigate a swamp of complicated forms, instructions and worksheets. Free tax assistance for low-income filers is scarce throughout most of the nation.

But not in Tulsa. There, a local nonprofit agency has developed an ambitious program providing free tax help to low-income workers. Operated by the Community Action Project of Tulsa County (CAP), the program has prepared returns for more than 12,000 wage earners in each of the last two years, helping Tulsa taxpayers avoid roughly $2 million in preparer fees over the two years and reap $27 million in federal and state tax refunds.

Angela Taylor got wind of the program early in 1997 and made an appointment. She's been a loyal customer ever since.

The Hidden Tax
Think of it as a hidden tax on the working poor—$75, $100, sometimes even $200 per year plucked from the pockets of America's most vulnerable families as they struggle to earn their way out of poverty.

As welfare reform pushed millions of formerly dependent parents into the workforce in the 1990s, the federal government significantly expanded the Earned Income Tax Credit (EITC) for low-income working families. For 2001, the credit was worth up to $4,008 for families with two or more children.

These benefits come with a hitch, however. The Internal Revenue Service publication explaining the EITC is 54 pages long, including six separate worksheets.

As a result, a large and growing share of the credit is being paid to tax preparers. Although the finances of low- and moderate-income families tend to be far simpler than those of more affluent families, 60 percent of families filing for earned-income credits in 1997 used paid tax preparers, an IRS study found, compared with 51.8 percent of all filers nationwide.

Many preparers aggressively market refund anticipation loans (RALs) that allow cash-strapped families to collect refunds within 48 hours, typically charging $75 to $100 in fees and interest. Given that the IRS provides refunds within two to three weeks for taxpayers who file returns electronically, that can translate into an effective annual interest rate of more than 100 percent.

John Wancheck of the Center on Budget and Policy Priorities, a Washington, D.C., think tank, estimates that taxpayers filing for the earned-income credit paid at least $633 million in 2001 for tax preparation charges alone. When electronic filing fees and rapid refund costs are included, EITC filers almost certainly spent more than $1 billion last year for tax services.

"Paying for tax preparation takes money away from [EITC] benefits," the center declared in its 2001 Earned Income Credit Outreach Kit. "It means that workers have less money to help pay bills and care for themselves and their children."

Help—But Not Enough—From the IRS
The IRS has long recognized that its complex rules are beyond the comprehension of many taxpayers. Since 1977, the agency has been sponsoring the Volunteer Income Tax Assistance (VITA) program, which operates in more than 8,500 sites nationwide.

Unfortunately, VITA programs do not serve the vast majority of low-income working families. The IRS does not fund local VITA projects to hire supervisors or coordinators, and many VITA sites are located in suburban areas far from the homes of potential earned-income credit recipients. The IRS training curriculum for VITA volunteers lumps the EITC with six other credits into a single two-hour session.

In June 2000, an internal IRS study found that VITA sites completed returns for nearly 500,000 taxpayers in 1997, of whom 101,000 were low-income workers claiming the EITC. Ron Smith, chief of community partnerships for the IRS, insists that these figures under-count VITA's production. But even if VITA sites completed twice that number of EITC returns—200,000—it would still represent only 1 percent of the 19.5 million families nationwide who claim the EITC.

Taking a Chip Off the H&R Block
While most low-income taxpayers nationwide must choose between paying for tax preparation, navigating EITC forms on their own, or forsaking valuable credits, those in Tulsa can walk into free, full-service tax preparation clinics.

The program is the brainchild of Steven Dow, a Yale-trained lawyer and former investment banker who followed his wife to Tulsa in 1990. Two years later Dow took the reins of a local nonprofit agency called Project Get Together.

The agency—which changed its name to Community Action Project of Tulsa County in 1998—has been growing ever since, becoming the recipient of Tulsa County's $650,000 per year Community Service Block Grant and taking over the county's Head Start program.

In 1994, Dow initiated a campaign to inform Tulsa's low-income residents about the federal Earned Income Tax Credit, which was enacted in 1975 but remained unknown to many eligible families in the early 1990s.

The outreach campaign made thousands of Tulsans aware of the EITC. But when residents asked where they should get their taxes done, Dow's agency could only refer them to local VITA sites. "When people tried to look around, they found that the VITA program wasn't operating in the neighborhoods where they lived, or in the hours they weren't working," Dow recalls. "It begged the question of are we going to step up to the plate and do something about the problem."

Setting Up Shop
During the second half of 1994, Dow raised funding from the city's Community Development Block Grant and deputized Dick Jackson, an energetic volunteer, to take charge of program development. "There was not a whole lot of what I would call careful planning that first year," Jackson says. "It was kind of sink or swim."

Jackson determined that computers would offer the most efficient and reliable method for completing tax returns, and they would enable CAP to file returns electronically, so clients could receive their refunds within two or three weeks. Jackson also pulled together a training curriculum for volunteers.

In February 1995, the fledgling tax project commandeered a classroom and opened for business. "We had no idea what to expect," Dow recalls. The response was overwhelming. "The first couple of days were just pandemonium," says Jackson. "We just couldn't keep up with the demand."

The program served 1,201 taxpayers in that first year, and generated more than $1.3 million in tax credits and refunds. The following year CAP served more than 3,000 clients. Apart from a slight downturn in 2001, the program has continued to grow ever since—climbing above 12,000 clients and $12 million per year in credits and refunds the past two years.

"Each year," Dow says, "we've looked at what kinds of refinements we need to make to make the program better and more responsive." In 1997, CAP forged a partnership with KTUL-TV, the local ABC television affiliate, which has produced advertisements about the program each year since 1997 and airs more than 300 every tax season.

CAP's marketing campaign also includes more than 12,000 post-cards to former customers, plus billboards; posters; flyers; paid advertisements on commercial radio; placards on public buses; and newsletter features.

Also in 1996, Dow persuaded the Bank of Oklahoma to host the program. Each year from February to April, the bank's branch at Lewis Avenue and Pine Street turns into a bustling tax preparation office. In 2001, almost 6,000 taxpayers completed their returns at this site.

Last year, the Bank of Oklahoma offered coupons allowing CAP tax clients who do not have bank accounts to cash tax refund checks for just $2 each—helping families avoid the $45 to $75 (3 to 5 percent) fee charged by commercial check-cashing companies to cash a $1,500 tax refund check.

In 1999, Dow convinced the Corporation for National Service to send a team of 14 AmeriCorps volunteers. The following year, AmeriCorps sent two teams, and it sent one team again in 2001. "Without them," Dow says, "we wouldn't have been able to serve nearly as many folks as we have."

In 1997, CAP began offering Individual Development Accounts (or IDAs) to help tax clinic clients turn their tax refunds into nest eggs for the future. CAP enrolls interested low-income parents in personal finance seminars, and asks them to contribute at least $10 per month to their IDAs—up to a maximum of $750 per year. CAP contributes a dollar to each account for every dollar participants save for education, retirement, or investment in a small business, and $2 for every dollar saved to buy or repair a first home.

As of 2001, CAP had recruited 617 families into its IDA programs, most of them tax clinic participants, and these families had saved $450,000 and received $590,000 in matching contributions.

Looking Forward
Recently, Steven Dow has been stepping back and considering the future. In the short run, he must replace the AmeriCorps volunteers who have been a crucial part of his team to date. After sending volunteer teams three years in a row, the Corporation for National Service—which oversees AmeriCorps—has informed Dow that it will be sending no more.

For the long term, Dow is thinking less about how to expand the tax program than about how he might one day dismantle it. "The mission of this agency is to build genuine self-sufficiency for our clientele," he says. "In an ideal world there wouldn't be a role [in tax preparation] for an agency like ours. There are plenty of other issues that we can be worrying about."

Unfortunately, Dow concedes, the day when he'll be able to close down the program has not arrived. "As long as there's a commercial preparer out there that's going to gouge our clients and charge predatory pricing and entice them to do rapid loans . . . we're going to provide a much cheaper and better alternative."

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This is a condensed version of a more detailed story that appeared in Advocasey, a magazine published by the Annie E. Casey Foundation. Read the full text of Repealing the Hidden Tax online.