Turn Tax Refunds into Savings through Free or Inexpensive Tax Preparation for the Working Poor

The Opportunity

The federal Earned Income Tax Credit (EITC) was created in 1975 to offset payroll taxes paid by the working poor,[1] and it is now considered a key pillar of efforts to raise low-income workers out of poverty.  North Carolina offers its own state EITC modeled after the federal tax credit. Workers eligible for the EITC typically receive a tax refund, because the EITC is designed to offset income tax liability and to reimburse workers for a portion of payroll taxes already paid by them during the year. Local communities benefit in immediate and measurable ways, as most EITC recipients spend their refunds in the local area shortly after receiving them.[2]  In North Carolina during tax year 2008 alone, the EITC brought $1.8 billion into the state’s economy through 835,000 wage earners.[3] Rural areas may see a proportionally greater benefit, because a higher percentage of rural tax filers receive the EITC as compared to urban filers, and rural EITC recipients receive a higher refund on average.[4]

However, not all eligible workers file their personal income tax forms and claim the credit. One study estimated that between $100 million and $200 million of the credit goes unclaimed each year in North Carolina.[5]

Even when the credit is claimed, many workers lose a portion of it to high-fee refund anticipation loans (RALs), which are essentially immediate cash advances in the amount of the federal refund, minus a fee that can in some cases be equivalent to triple-digit interest rates over the brief loan period.[6]  In North Carolina, it has been estimated that 66% of all RALs went to EITC recipients for tax year 2006.[7] RAL usage was particularly heavy in rural counties with high poverty rates and high minority populations.[8]

The asset-building opportunity—both for individuals and communities—comes from ensuring that EITC-eligible working poor individuals file their tax returns and then retain their entire tax refund by avoiding high-fee RALs. Various means of offering free tax preparation are employed to this end.

How the Tactic Is Applied

  • Reach more individuals on the economic margin with tax preparation assistance
  • Combine free tax preparation with other asset-building services
  • Evolving practice: improve access to work support funding

Reach More Individuals on the Economic Margin with Tax Preparation Assistance   

Northeastern Community Development Corporation (North Carolina)

Wilson County Department of Social Services (North Carolina)

In order to help low-income workers claim their EITC and avoid paying high fees for refund anticipation loans, programs must first find a way to reach that population. In vast rural areas with low population density, this necessarily involves creative program design. In northeastern North Carolina, Northeastern Community Development Corporation (NCDC) improved awareness and access for low-income workers in the local Hispanic community. Tax preparation services were marketed through NCDC’s existing child care, housing, and Hispanic services programs; through area church networks; by advertising on a local AM radio station; and by word-of-mouth. NCDC staff believe the organization has been successful reaching more Hispanics with its tax preparation program because it serves both EITC-eligible workers as well as those who file using Individual Taxpayer Identification Numbers (though the latter are not eligible for and do not receive EITC).[9] As a result of these efforts, NCDC has managed each year to increase the number of low-income Hispanic tax filers using its tax preparation services.

Wilson County Department of Social Services in North Carolina takes advantage of its connections as a local government agency, employing multiple forms of outreach in order to target different audiences.  In addition to placing announcements in the agency’s newsletter, staff members make presentations at community meetings, area businesses, the Chamber of Commerce, and human resource agencies.[10]  Additionally, information about the EITC and tax preparation services are placed in all school newsletters.[11]  Brochures about the tax preparation services are included in the pay stubs for all area temporary employment agency staff and the W-2 forms for all county employees.[12]  Since 2003, the number of tax returns filed through the agency’s program has consistently increased, with 110 returns filed in 2003 and more than 600 returns filed in 2010.[13]


Combine Free Tax Preparation with Other Asset-Building Services

Center for Economic Progress (Illinois)

Northeastern Community Development Corporation (North Carolina)

Northeast Oklahoma Community Action Agency (Oklahoma)

In Illinois, the Center for Economic Progress offers a variety of asset building services at most of its award-winning tax preparation clinics.  In one of its most successful tax-related programs—its financial partnerships program—the Center forms partnerships with various banks and credit unions throughout the state to offer financial products geared specifically towards the needs of working families.  The products offered alongside tax preparation include free and low-cost checking or savings accounts,[14] individual development accounts,[15] and a “split refund” whereby recipients can split their refund between a savings and a checking account.  From 2000 to 2007, the Center assisted more than 4,000 low-income taxpayers open bank accounts through the partnership program.

Some organizations couple tax preparation with financial education or counseling. Clients of the tax preparation clinic operated by Northeastern Community Development Corporation have an opportunity to attend workshops and educational sessions on topics such as banking and using bank accounts, general financial education, how to fill out federal and state employment tax forms, what it means to be an employee versus a contractor for tax purposes, and other topics. Northeast Oklahoma Community Action Agency offers financial education[16] classes at tax clinic sites to increase awareness about the EITC and to encourage low-income individuals and families to consider using their EITC refund as a means for building financial assets.


Evolving Practice: Improve Access to Work Support Funding

More than $700 million in funding designed to assist the working poor—to include EITC—goes unclaimed in North Carolina every year.[17]  According to practitioners assisting low-income workers with obtaining work support benefits, efforts to connect low- and moderate-income North Carolinians with the work supports for which they are eligible can raise families out of poverty and inject millions of dollars into the state and local economies.[18] In Ohio, the first Benefit Bank was established to improve worker access to benefits. Ohio’s Benefit Bank is a statewide service offered through an Internet-based software program and a network of volunteer counselors at more than 850 community organizations.[19]  The software enables volunteer counselors to determine a household’s eligibility for state and federal benefits and automatically fills out the necessary application forms.[20]  According to a study of The Ohio Benefit Bank during the period of 2006 to 2008, more than 2,600 households were served, bringing an estimated $38.4 million in benefits to them. The multiplier effects derived from these benefits were estimated to generate $25.2 million in revenue to private businesses and individuals, as well as more than $2.5 million in state and local tax revenues.[21]

The Benefit Bank of North Carolina was launched in 2010 as the result of a partnership between MDC, Inc., Solutions for Progress, Inc., Connectinc., and the state. The North Carolina program offers assistance with the following work support programs: food and nutrition assistance, federal and state income taxes, state property tax relief, federal financial aid, and voter registration.[22] The program relies on a network of volunteers, so the level of penetration into rural areas remains to be seen.

Learn More

Amber Denning
Human Services Coordinator
Wilson County Department of Social Services
Wilson, NC

On the Internet


EITC Carolinas

The Benefit Bank of North Carolina



[1] While this entire section refers only to the EITC, the tactic does not apply only to EITC eligibility but also applies to other tax credits, such as the Child Tax Credit, the Child and Dependent Care Tax Credit, the Credit for the Elderly or Disabled, and any temporary tax credits.

[2] Meg Gray, Making Work Pay for North Carolina’s Low- and Moderate-Income Working Families, 5-6 (2007), available at http://www.ncjustice.org/sites/default/files/873_makingworkpay.pdf; Alan Berube, Using the Earned Income Tax Credit to Stimulate Local Economies (2006), available at http://www.brookings.edu/~/media/Files/rc/reports/2006/11childrenfamilies_berube/Berube20061101eitc.pdf; Steve Holt, The Earned Income Tax Credit at Age 30: What we Know 13-14 (), available at http://www.brookings.edu/~/media/Files/rc/reports/2006/11childrenfamilies_berube/Berube20061101eitc.pdf; Robert Greenstein, The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor 1-4 (2005), available at http://www.cbpp.org/archiveSite/7-19-05eic.pdf.

[3] Internal Revenue Service, EITC Statistics: EITC State Statistics at-a-Glance for Tax Year 2008, http://www.eitc.irs.gov/central/eitcstats/ (accessed Feb. 27, 2010).

[4] William O’Hare & Elizabeth Kneebone, Carsey Institute, EITC is Vital for Working-Poor Families in Rural America 1-2 (2007) (“Nationwide a higher percentage of rural tax filers (20 percent) receives the EITC than urban filers (16 percent). And the same is true in almost every state.”).

[5] Ralph Gildehaus, Feasibility Analysis for Utilizing The Benefit Bank in North Carolina 10 (2009), available at http://gitterman.web.unc.edu/files/2014/03/MDC_Feasibility_Study_NC.pdf; Jon Spader, Janneke Ratcliffe & Michael A. Stegman, Transforming Tax Refunds into Assets: A Panel Survey of VITA Clients in Greenville, Henderson, and Raleigh, North Carolina 3 (2005).

[6] Chi Chi Wu & Jean Ann Fox, Major Changes in the Quick Tax Loan Industry: The NCLC/CFA 2010 Refund Anticipation Loan Report 3, 6-10 (2010), 

[7] Adam Rust & Peter Skillern, Fast Cash, Less Refund: Refund Anticipation Loans in North Carolina 9-10 (2010).  Nationwide, in 2008, 63% of RAL users received the EITC, even though EITC recipients only made up 16% of taxpayers that year.  See Wu & Fox, above note 6, at 12.

[8] Adam Rust & Peter Skillern, above note 7, at 10-11  (reporting that nine of the top ten North Carolina counties in terms of RAL usage for tax year 2006 were rural and had poverty rates above 20% and non-white populations above 74%).

[9] Internal Revenue Service, Understanding Your Individual Taxpayer Identification Number ITIN,  Publication 1915 (Rev. 4-2010) (“To claim the EITC the claimant must file a return as a citizen or legal resident of the United States on Form 1040. In addition, the claimant, spouse and qualifying child(ren) listed on the return must have valid “work related” Social Security Numbers.”), available at http://www.irs.gov/pub/irs-pdf/p1915.pdf.

[10] Interview with Amber Denning, Human Services Coordinator, Wilson County Department of Social Services (Mar. 3, 2010).

[11] Ibid.

[12] Ibid.

[13] Ibid.

[17] Jeff Diebold, Jessica Dorrance, & Daniel Gitterman, Struggling North Carolinians Miss Out on Much-Needed Federal Assistance, 8 Carolina Context 2, 6 (2009) (describing role of work supports such as Medicaid, SCHIP, energy assistance, EITC, TANF, and SNAP/Food Stamps.).  See also Gildehaus, above note 5, at 10.

[18] Ohio Association of Second Harvest Foodbanks, The Ohio Benefit Bank 1-2 (2008).

[19] Ohio Association of Second Harvest Foodbanks, above note 18 at 9; Gildehaus, above note 5, at 31.

[20] See The Benefit Bank, About the Benefit Bank, available at http://www.thebenefitbank.com/About.

[21] Ohio University Voinovich School of Leadership and Public Affairs, Economic Impact of Ohio’s Benefit Bank on the State Economy: Technical Report 4 (2009), available at http://www.oashf.org/obb/OBBEconomicImpact2009.pdfSee also Ohio Association of Second Harvest Foodbanks, above note 18, at 3-6.

[22] The Benefit Bank of North Carolina, available at http://www.thebenefitbank.com/NorthCarolina.