Expanding the VITA Scope Tax Year 2010 Schedule C VITA Pilot

Transcription

1 SETI Expanding the VITA Scope Tax Year 2010 Schedule C VITA Pilot In 2010, CFED s Self-Employment Tax Initiative (SETI), the National Community Tax Coalition (NCTC) and the IRS Stakeholder Partnerships, Education and Communication (IRS- SPEC) teams partnered to develop a pilot initiative testing the efficacy of expanding the parameters of Volunteer Income Tax Assistance (VITA) programs to include broader Schedule C preparation. SETI, NCTC and IRS-SPEC determined a set of expanded Schedule C parameters for implementation of the pilot, selected 12 VITA programs with experience preparing Schedule C returns and worked with those sites to develop training materials, certification tests and other tools for the pilot s implementation. During the 2011 tax season, the Schedule C Pilot local partners a group of 12 community-based tax assistance providers delivered free tax assistance to low-income selfemployed filers, in addition to their wage-earning clients. They collected data throughout the process in order to demonstrate the feasibility of bringing robust Schedule C parameters into scope for all VITA programs. This report documents the results of this Tax Year 2010 Schedule C VITA Pilot. The Schedule C pilot has allowed us (tax assistance practitioners) to reach a wider pool of potential VITA clients. Not only can we assist small business owners who need to file taxes in order to grow their businesses, we can also reach many people who otherwise would not be able to file taxes at all. Leonardo Covis, EBALDC Background VITA is an IRS-sponsored, community-based program designed to help low- and moderate-income taxpayers complete their annual tax returns at no cost. Each year, thousands of volunteers are trained and certified to prepare income tax returns, and in 2011, VITA volunteers prepared over three million income tax returns at more than 12,000 VITA sites across the country. The VITA program features a defined scope of services for which volunteers can become certified in order to guarantee the quality of returns filed and to ensure that volunteers, time and resources are maximized to help low-income families comply with their tax liabilities and access the tax credits for which they are eligible. Complex tax issues, many of which arise with Schedule C filing, are typically disallowed from VITA scope to ensure that quality tax assistance can be delivered in the greatest volume possible. Filers that earn selfemployment income, under certain very limited parameters, can receive tax assistance at VITA sites with qualified volunteers. Still, VITA scope prevents many more Schedule C filers those who earned self-employment income by operating a small business from receiving assistance at VITA sites. Prior to 2011, IRS-SPEC deemed Schedule C preparation out of scope for all VITA programs. The pilot gave the 12 VITA programs that participated license to expand their services to handle Schedule C preparation during the 2011 tax season. Prior to this year, however, some VITA programs with the capacity to provide additional resources and more thoroughly trained volunteers have offered tax assistance to self-employed filers with more complex returns 1200 G Street Suite 400 Washington, DC

2 that may fall outside the typical VITA scope. For many former SETI grantees, this has been the case for years; they recognized a need in their communities, acquired qualified volunteers and developed the resources necessary to serve small business owners in spite of VITA scope restrictions. For years, these programs have been operating in stealth to serve a clientele in need of assistance. This year, the Schedule C VITA Pilot allowed a group of 12 VITA programs to operate under an expanded set of parameters to serve more self-employed filers with IRS approval. The Partners In 2010, SETI, NCTC and IRS-SPEC partnered to develop the framework and parameters for this pilot. In late 2010, CFED and NCTC identified a group of community-based VITA programs with deep experience in serving self-employed filers. From that group of local partners, NCTC convened a small group to work with the IRS to develop a Schedule C certification test and retest. At the same time, SETI adapted its existing data collection tool a final reporting survey used for SETI grantees in the past for use with the local partners participating in this pilot. SETI, NCTC and the local partners participated in monthly conference calls to discuss planning, pilot parameters, data collection, testing requirements, training techniques and a range of other topics. The local partners also shared Schedule C training materials, intake tools, assessment and quality review forms, tax filer organizers and other materials throughout the planning period. Those materials were collected and will be catalogued on the SETI Resource Bank website, an online compendium of strategies and tools for leveraging tax time to empower entrepreneurs. SETI works to ease the tax challenges faced by low- and moderate-income business owners who are pursuing economic success through entrepreneurship. For five years, SETI has partnered with local nonprofit tax preparation services that have prepared business tax returns for over 30,000 low-income business startups. SETI focuses on the annual tax preparation process as the primary outreach mechanism for educating self-employed business owners and connecting them to other products and services that will help them grow their businesses, incomes and wealth. Nearly all small businesses must pay business taxes in the very first year of operation. This encounter with tax preparation can be both intimidating and, consequently, a powerful teachable moment for business startups. While calculating business taxes is a critical learning experience for every business owner, the SETI strategy goes beyond this exercise alone. Sometimes called tax prep plus or wrap-around products and services, SETI local partners offer services that address the tax prep process directly, but that also indirectly offer a lasting benefit to the business. These services vary from partner to partner but often include basic business record-keeping, pre- and post-tax season trainings, budget estimation and preparing estimated taxes for the upcoming year, business credit planning and more. NCTC is the nation s largest, most comprehensive membership coalition for community-based organizations offering free tax and financial services to low-income working families. A division of the Chicago-based Center for Economic Progress, NCTC is dedicated to strengthening economies, building communities and improving lives through tax assistance and asset-building activities that produce financial security, protect families and promote economic justice. NCTC serves as the go-to place for training and program resources, networking opportunities and advocacy tools for our members. Everything NCTC does is focused on one goal: to secure greater financial stability and economic opportunity for hardworking, low-income families. IRS-SPEC is the outreach and education function of Internal Revenue Service s Wage and Investment Division. SPEC s mission is to assist taxpayers in satisfying their tax responsibilities by building and maintaining partnerships with key stakeholders who also seek to create and share value by informing, educating and communicating with their shared customers. SPEC achieves its mission by combining resources and goals with other organizations for better access to lower-income populations in local communities. It places an emphasis on partner involvement and introduces relationship management as a key element in its operations. Page 2 Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot

3 SPEC uses a three-pronged approach to serving the wage and investment taxpayer: tax awareness and education, tax preparation, and financial Education and Asset Building. In conjunction with partnering organizations, SPEC sponsors several programs designed to reach taxpayers, including VITA; promotes tax education efforts; and encourages financial responsibility and asset building. The Schedule C VITA Pilot Local Partners are 12 organizations operating VITA sites with deep experience in serving self-employed filers. In late 2010, NCTC and CFED convened a taskforce featuring representatives from each of the 12 pilot sites that worked together to design the pilot parameters and volunteer certification test. Each of the programs participating demonstrated a commitment to low-income self-employed clients, asset building and quality tax assistance. All of the local partners either participated in the SETI Demonstration between the 2005 and 2009 tax years or were NCTC affiliates. Table 1: Schedule C VITA Pilot Local Partners & Number of Sites Reporting Data Schedule C VITA Pilot Local Partners Location Number of Sites Reporting Real $ense Prosperity Campaign Jacksonville, FL 4 El Paso Affordable Housing* El Paso, TX 1 East Bay Asian Local Development Corporation* Oakland, CA 2 Rural Dynamics, Inc. Great Falls, MT 12 Just Harvest Education Fund* Pittsburgh, PA 1 Foundation Communities Austin, TX 7 KC CASH Coalition, Inc.* Kansas City, MO 3 Accounting Aid Society Detroit, MI 5 Center for Economic Progress* Chicago, IL 2 AccountAbility Minnesota St. Paul, MN 12 St. Mary's University* San Antonio, TX 1 Campaign for Working Families* Philadelphia, PA 3 *Those organizations marked with an asterisk above reported data for the 1-3 VITA sites preparing Schedule Cs that were approved and received oversight by the IRS. Those not marked by an asterisk provided data for all the VITA sites they operated where Schedule Cs were prepared. Pilot Design The 12 local partners delivered Schedule C tax assistance to income-eligible taxpayers with self-employment income during the 2011 tax season. Only self-employed filers that fell within the guidelines below were eligible to receive assistance at Schedule C VITA Pilot sites: Business expenses up to $25,000 Business losses confined to a single tax year and with no carry back or carry forward Business use of the home was limited to childcare providers that either rent or own their homes Section 179 depreciation only so long as total business expenses did not exceed $25,000 No businesses with inventory No Net Operating Losses (NOLs) Only cash basis taxpayers No businesses with employees Each local partner agreed to secure experienced paid staff or volunteers to prepare Schedule C returns and all preparers were required to participate in Schedule C Training, pass the VITA Certification Test at the Intermediate Level and pass the Schedule C certification test designed by the team of local partners and approved by the IRS. Three of the local partners utilized all volunteer preparers, while the rest split the workload between volunteers Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot Page 3

4 and paid staff (See Table 5 in the Appendix). On average, 65% of the tax preparers providing self-employed tax assistance for the Schedule C VITA pilot were volunteers and 35% were paid staff. Tax Preparers: Percentage Volunteers & Paid Staff 100% 80% 60% 40% 20% 0 AAM Volunteers AAS CEP Paid Staff EBALDC El Paso FC Just Harvest KC CASH RDI St. Mary s Real$ense CWF In addition to providing tax assistance to self-employed filers, the pilot sites agreed to participate in IRS research, through visits where their trainings and tax preparation services would be observed. They also collected tax-related, demographic and organizational data as well as anecdotal accounts of taxpayers experiences. Many of these programs operate numerous VITA sites, but only up to three sites per organization a total of 24 sites were subject to IRS oversight through visits to observe Schedule C volunteer trainings and to review Schedule C tax preparation during the season. 1 Members of the IRS-SPEC team, comprised of SPEC headquarters and field employees, observed nine training classes, including one web-based curriculum. They visited at least one VITA site per organization, for a total of 15 visits, and conducted 19 Schedule C Return reviews. Only one of the nineteen returns was inaccurate, and the sites received a 94.7% accuracy rate overall. Compared to a Form 1040, preparers required an additional 15 minutes on average to complete a Form 1040 with Schedule C-EZ or an additional 30 minutes to prepare one with a full Schedule C. Time Required to Complete Tax Returns /C-EZ 1040/C Minutes AAM AAS CEP EBALDC El Paso FC Just Harvest KC CASH RDI St. Mary s Real$ense CWF 1 For this reason, some programs reported data for only the two to three sites that were supervised by the IRS, while others provided data for all the VITA sites they operated at which Schedule Cs or C-EZs were prepared. Those marked with an asterisk in Table 1 above provided data only for the two to three sites designated for IRS oversight. Page 4 Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot

5 Table 2. Schedule C Preparation Process Sites with Separate Intake Sheet for Schedule C Filers, Additional Time Required to Complete Intake Sheet and Time Required to Complete Form 1040, Form 1040 with Schedule C-EZ and Form 1040 with Schedule C Time Required to Complete Return Organization Separate Intake Sheet Add'l Time for Intake /C-EZ 1040/C AccountAbility Minnesota Yes Accounting Aid Society No N/A Center for Economic Progress No N/A East Bay Asian Local Development Corp. Yes El Paso Affordable Housing Yes Foundation Communities No N/A Just Harvest Education Fund Yes N/A KC CASH Coalition Yes Rural Dynamics Inc. Yes St. Mary's University Yes Real $ense Prosperity Campaign No N/A Campaign for Working Families No N/A Average To compensate for the fact that more time and attention are required to complete a return for a self-employed taxpayer than for a wage-earning filer, many sites have designed additional tools and procedures to help gather as much information as possible before tax preparation begins. Half of the participating sites developed additional intake procedures to gather more detailed information about their Schedule C filers to guarantee that their filing needs fit the pilot parameters. On average, that intake process added about 17 minutes to the overall tax preparation process. Some sites used phone interviews to determine clients needs and to make sure clients had sufficient documentation prior to arriving at the VITA site. Other programs developed a more detailed intake sheet to be completed on site; some provided clients with tax organizers to categorize their expenses and earnings and some instituted an appointment system to make sure that clients could be screened before arriving for tax preparation and that ample time was allotted to prepare the return. All programs take time after preparing taxes to educate their Schedule C clients about the importance of detailed recordkeeping throughout the year, and many offer additional tools organizers, expense trackers, additional classes and IRS publications and advise filers to use them to prepare for the upcoming year. Those programs that used an appointment system to provide self-employment tax assistance, shown in Table 3 on the following page, often conducted separate screenings to take place prior to scheduling the appointment. At some sites, self-employed tax assistance was made available at any time on a walk-in basis, similar to other VITA services. Some programs accommodated clients differently at different sites, depending on capacity and availability of preparers. Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot Page 5

6 Table 3. How Did VITA Sites Accommodate Self-Employed Filers During Tax Season? How do you accommodate self-employed filers during tax season? Organization Appointment Walk-In Designated Day AccountAbility Minnesota X Accounting Aid Society X Center for Economic Progress X East Bay Asian Local Development Corp. X El Paso Affordable Housing X Foundation Communities X Just Harvest Education Fund X KC CASH Coalition X X Rural Dynamics Inc. X X St. Mary's University X Real$ense Prosperity Campaign X X Campaign for Working Families X Pilot Scale and Impact The Schedule C VITA Pilot sites prepared a total of 5,741 Schedule C or C-EZ tax returns during the 2011 tax season. Of those self-employed filers, more than 60% filed a full Schedule C form rather than a C-EZ (see Table 6 in the Appendix). Number of Schedule C and Schedule C-EZs Prepared CWF Real$ense St. Mary s RDI KC CASH Just Harvest FC El Paso EBALDC CEP AAS AAM Schedule C Schedule C-EZ Number of Returns Page 6 Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot

7 Who Did We Serve? More than 85% of the self-employed tax filers served at pilot sites earned less than $30,000 in Adjusted Gross Income (AGI) in 2010 (see Table 7 in the Appendix). Taxpayers AGI includes all income earned, including wages reported on a Form 1040 (see Table 8 in the Appendix). Of the taxpayers reporting earnings from self-employment at the participating VITA sites, nearly two-thirds also earned wage income during This suggests, as we have learned from many other tax assistance providers, that low- to moderate-income entrepreneurs are often operating businesses to help fill household income gaps. On average, 42% of the self-employed filers served at these VITA sites received tax assistance at the same sites the year before (see Table 9 in the Appendix). Of those return filers, half increased their adjusted gross incomes from the year before, which suggests the capacity for business income to serve as a critical gap filler and financial security enhancer for low-income households. Overall, the most common business types to receive assistance at the local partners VITA sites included those shown in Table 11 (on the following page). Of the 14 most common businesses listed, childcare providers emerged as a most common business type for eight of the 12 local partners; on average, for those organizations, childcare providers accounted for 19% of their self-employed clientele. It is important to note that in many states where local partners are located including Michigan, Illinois and Pennsylvania state agencies operate programs that pay family members to provide childcare for state employees or students and treat those childcare providers as self-employed sole proprietors, rather than employees. In many cases, these childcare providers are, in fact, operating intentional small childcare businesses. Five Most Common Business Types (as a percentage of Schedule C taxpayers) Arts/Entertainment Retail/Sales Janitorial Services Home Care/Health Care Construction/Laborers Child Care 0 5% 10% 15% 20% The second most common business type was construction work and other labor, which appeared as a most common business type at seven organizations. On average, construction workers made up about 15% of all Schedule C filers at those organizations that listed them as a common business type. These top two business categories are followed by home care and health care services, which appeared on the top five most common business lists of four local organizations and accounted for an average of 11% of all self-employed filers at those sites. Next was janitorial services, which made up an average of 10% of the business activity at the six sites counting this among the most common types of businesses. The fifth most common business type was a tie between retail and sales which made up an average of 9% of the self-employed individuals served by five organizations that cited it as a common business type and arts and entertainment (including performing artists and writers) which also made up an average of 9% of the self-employed individuals that filed at the three organizations citing this as a common business type. For the remaining common business types, see Table 4 on the next page. Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot Page 7

8 Table 4. Most Common Self-Employed Individual Business Types Reported by Local Partners Common Business Types 2 Arts/Entertainment Childcare Construction/Labor Consulting Delivery/Transportation Educational Services Hairstylists/Barbers Home Care/Healthcare Janitorial Services Landscaping Other Personal Services Repair/Maintenance Retail/Sales Specialty Trades AccountAbility Minnesota 8% 10% 6% 7% 6% Accounting Aid Society 20% 4% 3% 7% 4% CWF 13% 38% 6% 18% 25% Center for Ec. Progress 17% 4% 9% EBALDC 11% 8% 3% 11% 6% El Paso Affordable Housing 15% 25% 6% Foundation Communities 7% 21% 7% 11% 8% Just Harvest 34% 3% 8% 2% 2% KC CASH Coalition 7% 14% 14% 9% 14% Rural Dynamics, Inc. 19% 8% 9% 8% St. Mary's University 6% 6% 5% 14% 5% Real$ense n/a Average % of All SE Filers 3 9% 19% 15% 8% 5% 7% 8% 11% 10% 2% 3% 6% 9% 6% Frequency Most of the self-employed taxpayers served were Single filers (45%), followed by Married filing jointly (32%), Head of household (21%), Married filing seperately (2%) and less than one percent filing as Qualifying widow(er). It is important to note the high rate of single filers because by and large, single filers are not eligible for the EITC because they do not have dependents, though they may be low-income (see Table 10 in the Appendix). This is one reason why EITC claim rates are not higher. The primary age group served by the Schedule C VITA Pilot sites was the years (43%) cohort followed by the years (39%), 25 years and under (11%) and 65 years and over (7%) groups (see Table 11 in the Appendix). This age breakdown is consistent with the filers served by SETI grantees during the demonstration from 2006 to The final reporting form for local partners asked them to list the five most common business types owned for their self-employed filers and the percentage of all self-employed filers for which each business category accounted. 3 This is only an average across the organizations that sited a certain type of business. 4 Number of organizations for which a certain business type was listed as one of the five most common. 5 Between the 2005 to 2009 tax years. Page 8 Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot

9 Schedule C Taxpayer Gender 100% 80% 60% 40% 20% 0 AAM AAS CWF CEP EBALDC El Paso FC Just Harvest KC CASH RDI St. Mary s Real$ense Male Female On average, 46% of the self-employed taxpayers that Ethnic Breakdown of Self-Employed Taxpayers filed at Schedule C VITA Pilot sites were male, while 54% were female (see Table 12 in the Appendix). Other 1% 5% demographic characteristics of filers served at these sites White varied by organization and mirrored certain regional 29% Black or local demographics. For instance, in San Antonio, 27% Austin and El Paso, Texas, local partners served large Asian/Pacific Islander populations of Latino/Hispanic taxpayers and catered to many Spanish-speaking clients by translating Latino/Hispanic their tools and materials and providing bilingual tax preparation volunteers (see Table 13 in the Appendix). 7% At East Bay Asian Local Development Corporation, half of the self-employed filers served were Asian or Pacific Islander and half of all self-employed filers also spoke a language at home other than English. On average, 30% Native American Other across all the local partner organizations, nearly one third of all self-employed filers live in a household where a language besides English is spoken. This prevalence of self-employed filers for whom English is likely a second language demonstrates the value and impact of the services offered at these VITA sites and emphasizes the need for enhanced IRS educational outreach in immigrant communities. What Challenges Did Self-Employed Filers Face? The self-employed filers receiving assistance at these sites are, by definition, sole proprietors, operating passthrough businesses where revenues are passed directly through the business to the individual as income. Sole proprietorships are businesses owned and run by one individual, in which there is no legal distinction between the owner and the business. This individual unincorporated entrepreneur, small business owner, self-employed person, sole proprietor receives all profits and has unlimited responsibility for all losses, debts and assets. Essentially, a person can start a business and have no legal paperwork confirming its establishment until he or she files an income tax return and reports self-employment earnings. Many new entrepreneurs do not even realize when they cross a business-defining legal threshold. This is especially true of necessity entrepreneurs who are motivated by lost jobs or other distressed circumstances. Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot Page 9

10 The most consequential federal threshold is reached when a sole proprietor earns a net profit of $400 or more in a calendar year; this triggers their Social Security and payroll tax liability, which is owed even when the business owner has no income tax liability. Many self-employed filers learn for the first time that they must pay payroll taxes as both an employee and employer when they first file an annual tax return documenting their business income. Because these taxes are due over the course of the year in which they are incurred, these filers often owe a penalty in addition to the taxes due for the previous year. On average, at the Schedule C VITA Pilot sites, 12% of the self-employed filers owed some kind of tax penalty for the 2010 tax year (see Table 14 in the Appendix). In addition, our local partners encounter many taxpayers reporting self-employment income who are actually misclassified employees and are unprepared for their tax liability when they discover they owe both the employer and employee portion of FICA taxes. In these situations, local pilot sites educated the taxpayers about the implications of filing as self-employed and their opportunities for rectifying their misclassification. Though these filers are not intentional entrepreneurs, they may benefit from the same suite of services offered to self-employed filers at the sites participating in the pilot. What Opportunities Did Schedule C VITA Pilot Sites Offer Taxpayers? First and foremost, the Schedule C VITA Pilot enabled low- and moderate-income self-employed taxpayers to comply with their tax liabilities without having to pay exorbitant fees to a commercial tax preparer. Oftentimes, self-employed clients visit VITA programs after having been to paid preparers in the past; they find improved quality assistance and additional opportunities to learn about how to improve their businesses in the future. The assisted tax preparation process at VITA sites helps self-employed filers better understand their business finances and learn about their compliance responsibilities. In addition, a complex, intimidating small business tax code becomes somewhat less so when filers are guided by a qualified preparer. In addition to helping filers prepare their 2010 taxes, the pilot partners were committed to helping first-time Schedule C filers calculate and submit their estimated taxes for the upcoming tax year. Most of the local partner organizations offer additional financial education or asset-building services to their clients at tax time. These services vary from partner to partner but include basic business record-keeping, pre- and post-tax season trainings, meetings with pro-bono financial planners, credit reporting, referrals to assistance with debt Being self-employed, I get scared with taxes because I don t know if I m doing and tracking things right. Coming to AccountAbility Minnesota each year, I ve gotten smarter. They educate me in a way a paid tax professional never did before. Mary, AccountAbility Minnesota self-employed taxpayer Mary has been coming to AccountAbility Minnesota (AAM) to have her taxes prepared for the past four years. She s self-employed, working as a graphic designer and a personal assistant. Having worked with paid tax preparers before finding AAM s services, Mary appreciates not only the hundreds of dollars she saves on preparation but the guidance and tools that the staff and volunteers provide her at tax time and beyond that enable her to run her business in a smarter and more efficient way. When Mary first began coming to AAM for tax preparation, she sat down with Tom Larson, AAM s self-employment program coordinator, to talk about her business. Together, they walked through reporting requirements, discussed the importance of record keeping year-round, outlined Mary s business expenses, and most importantly, identified an easy and efficient way for Mary to track her expenses. With the help of AAM s self-employment tax organizer a tool to help self-employed taxpayers track their business expenses Mary can maximize the value of the tax credits she has earned when she files her taxes. These tax credits are now a valuable source of income for Mary that she reinvests in her business to keep it growing to meet her basic needs. Mary is a small business owner and also a person with a disability. Because of this disability, it takes Mary longer than most to accomplish tasks and she often needs to ask many questions to understand. She appreciates the one-on-one, professional service and attention that she receives at AAM and can t afford to hire someone to give her this much attention and information. Having quickly exhausted her savings and retirement just over 10 years ago when her disability began to limit her ability to work, Mary has come to trust AAM as a source for high-quality free tax preparation and also for the free tools and training materials that most self-employed business owners pay for as an added business expense. Page 10 Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot

11 management and financial counseling, budget estimation and preparing estimated taxes for the upcoming year, business credit planning and more (for more details, see Tables 15 and 16 in the Appendix). Some sites also make asset-building financial products available, including basic checking and savings accounts, Individual Development Accounts, savings bonds and prepaid debit cards loaded with a deposit from filers tax refund. As it turns out, the largest direct federal support for microbusinesses comes not through federal credit programs, like SBA or the CDFI Fund, but through the tax code. Each year, low-income self-employed tax filers claim over $6 billion in Earned Income Tax Credit (EITC) refunds while in 2010, the SBA made just $3.6 million in grants for the Program for Investment in Microentrepreneurs (PRIME), which provides grant support to organizations that help microentrepreneurs. Filers at Schedule C VITA Pilot sites not only saved hundreds of dollars in commercial tax preparation fees, but those who qualified were guaranteed access to federal tax credits like the EITC, Child Tax Credit (CTC) and Making Work Pay (MWP) tax credit, offering injections of income that may be used to reinvest in their microbusinesses or support their households. This tax season, more than half (56%) of all the filers served at Schedule C VITA Pilot sites received the EITC, 31% received the CTC and 88% received the MWP credit. On average, those EITC recipients collected a $1, refund and the CTC recipients collected a $1, refund (see Table 17 in the Appendix). The Making Work Pay credit, a provision of the American Recovery and Reinvestment Act of 2009 for the 2009 and 2010 tax years, provided working individuals with up to $400 and married taxpayers filing joint returns with up to $800. Conclusion Each year, over 20 million taxpayers file a Schedule C. Of those, over half (60%) have adjusted gross incomes under $50,000 and for nearly one-quarter (23%), that self-employment net profit enhances their Earned Income Tax Credit. Even though a significant share of Schedule C filers report incomes that fall within VITA program scope, most are not eligible to access this important service because the Schedule C form is out of scope for VITA. The Self-Employment Tax Initiative, NCTC and IRS-SPEC have demonstrated that there is significant demand for this service from low-income self-employed businesses and community-based free tax assistance providers are capable of providing this service in a high-quality manner. The 12 participating organizations delivered high-quality Schedule C assistance, tracked and reported lessons, designed tools used for training and certification and informed the future direction of a more expansive rollout of Schedule C services through the community tax preparation field. This pilot not only tested the viability of expanding Schedule C VITA scope, it was also instrumental in legitimizing the Schedule C tax assistance that so many VITA programs have been offering for years. CFED recognizes the commitment of our funders to small and growing businesses and is grateful for their support of SETI. CFED gratefully acknowledges the support of our funders, including Capital One, the Citi Foundation, Bank of America, Sam s Club, the Annie E. Casey Foundation, the Wal-Mart Foundation and the Northwest Area Foundation. About CFED CFED expands economic opportunity by helping Americans start and grow businesses, go to college, own a home and save for their children s and own economic futures. We identify promising ideas, test and refine them in communities to find out what works, craft policies and products to help good ideas reach scale, and develop partnerships to promote lasting change. We bring together community practice, public policy and private markets in new and effective ways to achieve greater economic impact. For more information about SETI, our partners and our programs during the 2010 tax year, contact us at seti@cfed.org. Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot Page 11

12 Appendix Table 5. Percentage of Volunteer and Paid Staff Schedule C Tax Preparers Volunteers Paid Staff AccountAbility Minnesota 98% 2% Accounting Aid Society 5% 95% Campaign for Working Families 58% 42% Center for Economic Progress 100% 0% East Bay Asian Local Development Corp. 50% 50% El Paso Affordable Housing 100% 0% Foundation Communities 100% 0% Just Harvest Education Fund 20% 80% KC CASH Coalition 99% 1% Rural Dynamics Inc. 86% 14% St. Mary's University 33% 67% Real$ense Prosperity Campaign 25% 75% Average 65% 35% Table 6. Tax Year 2010 Self-Employed (Schedule C and C-EZ) Returns Filed Tax Year 2010 Self-Employed Returns Filed Schedule C Schedule C-EZ Total AccountAbility Minnesota Accounting Aid Society 910 1, Campaign for Working Families Center for Economic Progress East Bay Asian Local Development Corp El Paso Affordable Housing Foundation Communities 1, Just Harvest Education Fund KC CASH Coalition Rural Dynamics Inc St. Mary's University Real$ense Prosperity Campaign Total 3,437 2,304 5,741 Page 12 Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot

13 Table 7. Schedule C Taxpayer Adjusted Gross Incomes < $5,000 Schedule C Taxpayer Adjusted Gross Income $5,000- $15,000 $15,001- $30,000 $30,001- $40,000 $40,001- $50,000 AccountAbility Minnesota 29% 31% 28% 7% 3% 2% Accounting Aid Society 28% 37% 25% 5% 2% 2% Campaign for Working Families 21% 41% 24% 7% 4% 3% Center for Economic Progress 22% 35% 25% 6% 7% 6% East Bay Asian Local Development Corp. 23% 50% 17% 5% 3% 3% El Paso Affordable Housing 18% 59% 23% 0% 0% 0% Foundation Communities 18% 35% 33% 8% 4% 3% Just Harvest Education Fund 33% 34% 25% 6% 2% 1% KC CASH Coalition 19% 19% 36% 14% 9% 4% Rural Dynamics Inc. 15% 31% 30% 8% 9% 7% St. Mary's University 21% 37% 24% 12% 5% 1% > $50,001 Real$ense Prosperity Campaign 17% 25% 21% 11% 6% 20% Average 22% 36% 26% 7% 5% 4% Table 8. Percentage of Self-Employed Filers that Also Earned W-2 (wage) Income Organization What percentage of self-employed filers also earned W-2 (wage) income? AccountAbility Minnesota 62% Accounting Aid Society 47% Campaign for Working Families 63% Center for Economic Progress 66% East Bay Asian Local Development Corp. 52% El Paso Affordable Housing 75% Foundation Communities 55% Just Harvest Education Fund 61% KC CASH Coalition 75% Rural Dynamics Inc. 60% St. Mary's University 36% Real $ense Prosperity Campaign 63% Average 60% Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot Page 13

14 Table 9. Percentage of Self-Employed Filers Returning from Tax Year 2009 and Percentage of Return Filers with Increased AGI Return Clients Increased AGI AccountAbility Minnesota 35% 57% Accounting Aid Society 48% 55% Campaign for Working Families 33% N/A Center for Economic Progress 50% 52% East Bay Asian Local Development Corp. 40% 43% El Paso Affordable Housing N/A N/A Foundation Communities 59% 23% Just Harvest Education Fund 64% 57% KC CASH Coalition 18% 47% Rural Dynamics Inc. N/A N/A St. Mary's University 35% 67% Real $ense Prosperity Campaign N/A N/A Average 42% 50% Table 10. Schedule C Taxpayer Filing Status Single Schedule C Taxpayer Filing Status Married Married Filing Separately Head of Household Qualifying Widower AccountAbility Minnesota 55% 18% 2% 25% 0% Accounting Aid Society 58% 13% 8% 21% 0% Campaign for Working Families 52% 13% 3% 31% 1% Center for Economic Progress 48% 24% 3% 25% 0% East Bay Asian Local Development Corp. 54% 35% 0% 10% 0% El Paso Affordable Housing 15% 78% 0% 7% 0% Foundation Communities 37% 39% 2% 22% 0% Just Harvest Education Fund 46% 17% 0% 37% 0% KC CASH Coalition 48% 29% 1% 22% 0% Rural Dynamics Inc. 40% 35% 3% 21% 1% St. Mary's University 53% 43% 0% 4% 0% Real$ense Prosperity Campaign 30% 43% 0% 28% 0% Average 45% 32% 2% 21% 0% Page 14 Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot

15 Table 11. Schedule C Taxpayer Ages Schedule C Taxpayer Age Under 25 Years Years Years Over 65 Years AccountAbility Minnesota 13% 47% 37% 3% Accounting Aid Society 4% 33% 52% 11% Campaign for Working Families 12% 41% 40% 7% Center for Economic Progress 14% 39% 41% 7% East Bay Asian Local Development Corp. 14% 43% 39% 4% El Paso Affordable Housing 8% 74% 15% 3% Foundation Communities 9% 61% 28% 3% Just Harvest Education Fund 41% 18% 30% 11% KC CASH Coalition 7% 45% 40% 9% Rural Dynamics Inc. 4% 28% 54% 15% St. Mary's University 1% 41% 51% 7% Real$ense Prosperity Campaign 0% 52% 42% 6% Average 11% 43% 39% 7% Table 12. Percentage of Schedule C Taxpayers by Gender Male Female AccountAbility Minnesota 37% 63% Accounting Aid Society 43% 57% Campaign for Working Families 47% 53% Center for Economic Progress 33% 67% East Bay Asian Local Development Corp. 39% 61% El Paso Affordable Housing 62% 38% Foundation Communities 55% 45% Just Harvest Education Fund 32% 68% KC CASH Coalition 41% 59% Rural Dynamics Inc. 55% 45% St. Mary's University 58% 42% Real $ense Prosperity Campaign 48% 52% Average 46% 54% Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot Page 15

16 Table 13. Schedule C Taxpayer Ethnicity & Language Ethnicity White Black Asian or Pacific Islander Latino or Hispanic Native American Other Language Besides English Spoken at Home AccountAbility Minnesota 45% 25% 7% 11% 2% 10% 23% Accounting Aid Society 22% 72% 0% 4% 0% 1% 5% Campaign for Working Families 17% 55% 5% 15% 1% 7% 9% Center for Economic Progress 47% 34% 0% 14% 1% 3% 18% East Bay Asian Local Development Corp. 14% 5% 52% 10% 0% 19% 51% El Paso Affordable Housing 6% 4% 0% 90% 0% 13% 96% Foundation Communities 24% 10% 3% 60% 0% 4% 60% Just Harvest Education Fund 34% 57% 2% 4% 1% 2% 7% KC CASH Coalition 43% 29% 6% 19% 2% 1% 17% Rural Dynamics Inc. N/A N/A N/A N/A N/A N/A 13% St. Mary's University 21% 5% 1% 72% 0% 0% 30% Real$ense Prosperity Campaign 52% 42% 3% 3% 0% 0% 14% Average 27% 28% 7% 25% 1% 10% 29% Table 14. Percentage of Self-Employed Filers that Owed a Tax Penalty for Tax Year 2010 Organization How many self-employed filers owed a tax penalty? AccountAbility Minnesota 8% Accounting Aid Society 21% Campaign for Working Families 17% Center for Economic Progress 6% East Bay Asian Local Development Corp. 48% El Paso Affordable Housing 1% Foundation Communities 10% Just Harvest Education Fund 1% KC CASH Coalition 5% Rural Dynamics Inc. 5% St. Mary's University 11% Real$ense Prosperity Campaign 11% Average 12% Page 16 Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot

17 Table 15. Types of Asset Building Services and Products Offered Asset Building Services and Products Organization 6 Type of Service & Product Offered % Take-up by SE Taxpayers 7 Pro Bono Financial Planners N/A Savings Accounts at Credit Unions or Banks N/A AccountAbility Minnesota Saver s Credit Research & Survey N/A Credit Reports N/A Referral for Debt Management & Financial Counseling N/A Center for Economic Progress Savings Accounts 4% Savings and Checking Accounts 1% IDAs 0% Foundation Communities Savings Bonds 2% Financial Coaching 0% Cash for College 7% Just Harvest Education Fund Debit Card with Deposit of Full Refund N/A KC CASH Coalition Passive Financial Education 50% Rural Dynamics Inc. Prepaid Debit Cards N/A No-cost Savings Accounts N/A Real$ense IDAs 20% Table 16. Take Up of Trainings for Self-Employed Filers Offered and Attended Before, During and After Tax Preparation Pre-Tax Training Business Trainings Offered & Attended Before, During and After Tax Preparation Is Training Mandatory to Receive Assistance? % Attended Offer During Tax Season Training % Attended Offer Post- Tax Season Training % Expected to Attend AccountAbility Minnesota Yes No 15% Yes 15% Yes 10% Accounting Aid Society No No N/A No N/A No N/A Campaign for Working Families No No N/A No N/A No N/A Center for Economic Progress No No N/A No N/A No N/A EBALDC No No N/A No N/A No N/A El Paso Affordable Housing Yes No 2% No N/A No N/A Foundation Communities Yes No 4% Yes 3% Yes 2% Just Harvest Education Fund No No N/A No N/A No N/A KC CASH Coalition No No N/A No N/A No N/A Rural Dynamics Inc. No No N/A No N/A No N/A St. Mary's University No No N/A No N/A No N/A Real$ense Prosperity Campaign No No N/A No N/A No N/A 6 Only those organizations that reported asset building services and products are listed here. 7 If N/A, data was not collected. Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot Page 17

18 Table 17. Percentage of Self-Employed Filers that Received Refundable Tax Credits and Average Amount of Earned Income Tax Credit and Child Tax Credit Refundable Tax Credits % EITC Average EITC % CTC Average CTC % MWP 8 AccountAbility Minnesota 53% $1, % $1, % Accounting Aid Society 53% $1, % $1, % Campaign for Working Families 58% $1, % $ % Center for Economic Progress 52% $1, % $1, % East Bay Asian Local Development Corp. 57% $ % $ % El Paso Affordable Housing 95% $2, % $1, % Foundation Communities 45% $1, % $1, % Just Harvest Education Fund 59% $1, % $1, % KC CASH Coalition 50% $ % $1, % Rural Dynamics Inc. 50% $1, % $1, % St. Mary's University 60% $1, % $1, % Real $ense Prosperity Campaign 36% $1, % $1, % Average 56% $1, % $1, % 8 In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act of 2009 provided a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns. Most wage earners benefited from larger paychecks in 2009 and 2010 as a result of the changes made to the federal income tax withholding tables to implement the Making Work Pay tax credit. Page 18 Expanding the VITA Scope: Tax Year 2010 Schedule C VITA Pilot