Opening Doors (and Accounts) at Tax Time

If you are like most Americans, you cringe at the thought of tax season. You get nervous about doing your taxes, a process that you don’t entirely understand. However, the truth is that you most likely have good reason to look forward to this time of year: very few Americans are audited, and the vast majority of households receive a tax refund.

More meaningfully, many low income households actually use tax time as the time of the year when they can actually get ahead on their bills, pay down debt, and maybe even set some money aside to save up for their kids, a house, or an emergency. Is it possible for tax time to become less cringe-inducing, and more of an opportunity to open doors to greater financial health?

The short answer is that, yes, it is. The longer answer is that some lower-income taxpayers can and do take a step toward stabilizing their financial situation at tax time by taking the opportunity to engage or re-engage with mainstream financial institutions by opening a new checking or savings account at tax time when they file at a free, in-person tax preparation site that offers account opening services (known as VITA sites in the tax industry). However, the millions of Americans using free, online tax prep websites do not have the opportunity to open accounts—federal regulation does not allow the tax prep companies to offer products inside the Free File tax filing process. Policymakers, of course, are just trying to keep households from becoming victim to buying harmful financial products, but by doing so regulators are missing an opportunity to expand tax time’s impact as a catalyst for financial inclusion for lower income households. Experiments conducted since 2012 inside the Freedom Edition of TurboTax (done in part, in the interest of full disclosure, by the authors of this article) have looked for ways to encourage tax filers to save a portion of their refund when filing online. Survey results from the 2013 experiment showed that 30 percent of unbanked households would be interested in opening a new account at tax time. Policymakers should remove barriers for them to do so.

Why? Because unbanked participants in our survey had more dire financial circumstances than their banked counterparts: Over half of the unbanked households found it very difficult just to afford regular monthly expenses. Nearly 90 percent of unbanked households had skipped a bill in the six months leading up to filing their taxes; more than half skipped medical treatment, medications, or visits to the dentist’s office. As one participant put it: “Everything goes directly into rent and bills as soon as it is received. My long term plan is to keep the lights on and heat in the kids' rooms this month. My tax refund will cover some of that at least.” Households without bank accounts were also more likely to have some kind of financial shock in the six month time period after filing their taxes, such as periods of unemployment, becoming hospitalized, or having a car breakdown. These financial shocks make it even more difficult for families to juggle their already tight budgets, and often unpredictable incomes.

Given these challenges, many people in the tax industry have wondered if unbanked households would be better off with bank accounts, instead of squirreling their money away under mattresses or inside of shoe boxes, and using high-cost financial services like check cashers to meet their financial needs. Our survey results show that over 40 percent of participants who were unbanked at tax time actually had bank accounts six months later (although we should note some of this is probably due to attrition bias). On the other hand, some participants who had been banked actually lost or closed their bank accounts in the six month time period after filing. Nationally, unbanked households say the main reason they do not have accounts is because they do not have enough money to keep in an account and/or to meet the minimum account requirement. People without accounts also say they do not trust banks, or the account fees are too high or too unpredictable to keep an account. One participant confessed, “Actually, I am truly exhausted from living this way... I have cut absolutely everything to the bone, but I find that it is very expensive to be poor. I have overdrafts on all of my accounts that I cannot pay for, so now I am unable to use my checking accounts. I need to pay all of my bills in person, and there is usually a fee attached to that ‘privilege.’”

Basic tools for financial management should not be a privilege. Taxpayers like this participant need access to affordable and safe accounts so they can participate in typical financial transactions that many of us take for granted, like paying our bills online or mailing in a check. Tax time offers households a moment to pause and consider their finances moving forward. The tax season may provide them with more financial slack than any other time during the year, especially for lower- and moderate-income households, which are more likely to receive a big refund. Tax time could be a good time for unbanked households to consider opening simple, safe, and low-cost accounts they can use to build credit, direct-deposit their pay checks, pay bills, make online purchases, and maybe even save a little money for later. Each year, 100 million low-and moderate-income households are eligible to file their federal taxes online for free—but they cannot open bank accounts while they file their taxes.

Tax time should not be the only time of the year when lower-income households do not feel financially insecure because they have extra money in their pockets. It should be a kick-off point to make it easy for people to maintain their sense of financial security throughout the year by enabling them to put their refund dollars into new, safe, and low-cost bank accounts. Then, Americans of all income levels might stop cringing at the thought of doing their taxes and start embracing the opportunity to build their financial well-being.