The Working Poor (4 page)

Evon Johnson never dared do another return herself after the IRS charged her $2,072 in taxes, penalties, and interest. Newly arrived from Honduras, she was working from 5 a.m. for a cleaning service in Boston that never withheld taxes and never sent her a W-2. She didn’t know they were supposed to do either. “I did my taxes, I fill it out, fine,” she said. But not so fine, evidently. “Three years after or four years after, IRS contact me saying that I owe them … like, $2,072. ‘Why do I owe you?’ And they say: because I didn’t declare my taxes. I say I did.… They say no. … I sent them a letter saying I was sending them $1,072 I think it was, ’cause I didn’t have no money at the time, and I was going to make small installments for the rest of the money.… You know what they did? I had a bank account, and they took the money from my bank account—every penny I had.” Ever since, she has happily paid $100 a year to a tax preparer, $100 a year for peace of mind. “I don’t want the IRS back on me,” she explained. “He do it and he sign it and put everything, so if any mistake, he gonna be the one who will have to deal with them.”

By the end of February, H&R Block’s storefront office on a dismal stretch of Washington’s 14th Street looked like a well-used campaign headquarters a week after Election Day. Most computer screens were dark, and the place was quiet and cavernous. All the desks were empty but one, occupied by Claudia Rivera, who used to prepare returns without charge at a library in Virginia. She and the manager, Carl Caton, didn’t have much to do now that the rush had passed, so they were happy to sit at a keyboard and explain.

Each form the taxpayer needed carried a fee: $41 for a 1040, $10 for an EIC (the Earned Income Credit), $1 for each W-2, and so on. Electronic filing cost another $25. So a simple return with two W-2s filed electronically would run $78. But it didn’t stop there. Block had a smorgasbord of services for people who lived on the edge. If you had no bank account, your refund could be loaded onto an ATM card that charged $2 per withdrawal. Or a temporary account could be opened into which the IRS payment could be deposited for a fee of $24.95. If you were enticed by Block’s offer of a “rapid refund” and wanted a check in a day or two, you paid H&R Block an additional $50 to $90, depending on the amount you were getting. The fee on 14th Street could be as much as $50 on a $200 refund, up to $90 for $2,000 or more.
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This was actually a loan, and for a very short time. Filing electronically usually gets you a check in two and a half weeks, according to the IRS, and five days sooner if it’s deposited directly into a bank account. At the most, then, the “rapid refund” loan, issued a day or two after filing, would run about fifteen days, which made the $90 fee on a $2,000 payment equivalent to an annual interest rate of 108 percent. At the least, the loan could run as little as four days, propelling the annualized rate to 410 percent on $2,000, and 2,281 percent on $200. (The highest percentage is incurred if the timing occurs perfectly: the return is filed by the IRS’s weekly deadline of noon Thursday, the loan check is not issued until after banks close Friday, the taxpayer can’t put it into his account until Monday, and the IRS is fast enough to deposit the refund directly with the lending bank the following Friday.)
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After a spate of lawsuits, a federal judge in Norfolk ordered Block to stop using the misleading term “rapid refund” in advertising loans, but Block continued with the ads by redefining “rapid refund” as a reference to electronic filing only. The company called its loan program a “refund anticipation loan,” a distinction lost on many of the low-wage workers who ventured into Block offices in search of a rapid refund. In 2000 such loans went to 4.8 million taxpayers.

Among all the working people I interviewed who used the loan service, not one understood the terms or the options. Hector and Maribel Delgado, who earned about $28,000 a year picking and packing vegetables in North Carolina, were stunned when I sat with them in their trailer, looked over their tax return, and explained how it all worked. They had paid Block $109 to prepare their return, file it electronically, and give them an advance on their payment from the IRS of $1,307.05. The form they had signed disclosed a finance charge of 69.888 percent annually, but they had not understood it. Even as Block employees presented a contract in fine print, they were trained to avoid the word “loan,” and say “two-day refunds” instead, a Maryland judge found in hearing a lawsuit on the lending practices. And the refund loans were lucrative enough to provide 8 percent of Block’s entire profits in 1999, mainly because a Block subsidiary owned a 49.99 percent interest in the loans, made by Household Bank.

Something else illicit happened to the Delgados in the Block offices. Although they filed electronically in January, a time when the IRS promises checks within a couple of weeks, “We were told we’d have to wait six to eight weeks,” Maribel said. This was patently false. “We needed the money
to pay bills,” she explained. “We send one part to Mexico, another part to here. We usually send $100 every two weeks to Mexico. We have a big family.”

In 2000, after facing a decade of class-action lawsuits alleging misleading lending practices, H&R Block agreed to a $25 million settlement without admitting any wrongdoing. The only practice the company changed was to present the federally required truth-in-lending disclosures earlier in the process, according to a spokeswoman. Do employees at least explain the terms verbally? “A lot of it depends on questions customers ask,” she said. “If they ask questions, preparers are supposed to answer.” Many customers simply do not know what questions to ask.

Poverty is like a bleeding wound. It weakens the defenses. It lowers resistance. It attracts predators. The loan sharks operate not only from bars and street corners, but also legally from behind bulletproof glass. Their beckoning signs are posted at some 10,000 locations across the country: “Payday Loans,” “Quick Cash,” “Easy Money.” You see them in check-cashing joints and storefront offices in poor and working-class neighborhoods. They have organized themselves into at least a dozen national chains, and they charge fees equivalent to more than 500 percent annual-ized interest.

They also provide a much needed service. Say you’re short of cash, and the bills are piling up, along with some disconnection notices. Payday is two weeks away, and your phone and electricity will be shut off before then. The guy at the local convenience store, who has a booth for cashing checks, throws you a lifeline. If you need $100 now, you write him a check for $120, postdated by two weeks. He’ll give you the $100 in cash today, hold your check until your wages are in your bank account, and then put the check through. Or you can give him the $120 in cash when you get it, and he’ll return your check. Either way, 20 percent interest for two weeks equals 1.428 percent a day, or 521 percent annually.

If you’re still stuck after payday, if your paycheck doesn’t quite cover your needs, or if your check for $120 bounces, no problem. The guy behind the bulletproof glass will gladly roll over your loan—for another $20. This pattern prevails in Illinois, for example, where state examiners found that rollovers made up
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percent of all payday loan transactions. The average customer had ten such renewals, which meant paying fees totaling up to
twice the amount borrowed.
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Eventually, you may have to borrow from another payday loan merchant to pay the fees at the first. And so on and on and on.

Furthermore, the loans are not technically loans in some states, because there’s a check. And if a check bounces, more severe penalties apply than those for unrepaid loans. Borrowing $300, for instance, an Indiana woman paid a $30 fee and wrote a check for $330. When the check bounced, her bank and the payday loan establishment charged $80 in fees. Then the lender took her to court, won triple damages of $990, lawyer’s fees of $150, and $60 in court costs. The total charge on the $300 loan: $1,310.
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Con artists have also enticed the working poor with false promises of outright grants from foundations; all people have to do, the mailings promise, is pay $19.95 to $49.95 for a list of foundation names and addresses, then write heart-rending letters. “There are literally hundreds of private foundations that are anxious to donate money by mail to people who have genuine reasons for needing the money,” says one solicitation. “Many foundations are not concerned with what you wish to use the money for as long as it is something legal … to pay off bills, go on vacation, meet emergency need or to buy anything that you might need.” This absurd assertion has swamped foundations large and small with desperate pleas for cash to repair houses, pay medical bills, and pay off debt. In 2001 an Ohio judge sentenced one operator to five years in prison for bilking people out of at least $500,000 this way. A New Jersey man was raking in $30,000 a week, a prosecutor charged.
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Another marvelous setting for scams is the workplace. Korean restaurants in Los Angeles have come under scrutiny for their inventive ways of swindling waiters and cooks, almost all of whom are Korean or Latino, said Roy Hong, head of Korean Immigrant Workers Advocate. Many are paid a flat monthly wage, which is customary in South Korea, and have to work up to twelve hours a day, six days a week, violating state wage laws. Unlike the federal minimum wage of $6.55 an hour, California’s minimum of $8.00 applies to waiters, so many restaurateurs cook the books by faking time cards to show employees working shorter shifts.

Some restaurants also file W-2s that exaggerate the amount of tips paid to workers, a way of transferring part of the tax burden from the business to the employee. When a customer puts a $20 meal on a credit card and adds a $2 tip, for example, the owner pays the worker the $2 tip but
tells the IRS that $3 went for the tip and $19 for the meal. (Businesses, as well as individuals, get audited more frequently when their incomes are under $25,000.)

In campaigning for Korean workers, the association has uncovered a pernicious scheme in the custodial business. Korean mom-and-pop janitorial contractors in Los Angeles offer their newly arrived compatriots a tempting deal. Eager for jobs, devoid of English, and frightened that their illegal status may be discovered, the recent immigrants are enticed by the proposition that they can become subcontractors making $1,000 or more a month cleaning commercial buildings where dentists and doctors, lawyers and executives keep their offices. All they have to do, the contractor explains, is put up two and a half months’ wages as a contracting fee.

Many Koreans come to the United States with extensive family ties for pooling money and cushioning financial hardship. So the up-front funds can usually be scraped together. “They give away the last bit of their savings in the hope that they too can start a janitorial company,” Roy Hong noted. The immigrants usually work at night, cleaning the offices, and everything goes along nicely for a few months. But then the contractor may delay a wage, saying he hasn’t yet been paid by the building management. “The next thing you know, you’re owed several thousand dollars, and you wonder what happened,” Roy explained. Finally, “three or four months later,” he said, “the contractor shows up. ‘You’re out of here. Give me the key’

“ ‘What did I do?’

“ ‘There’s been too many complaints.’ ”

And the next “subcontractor” is offered a tempting deal, if he’ll just put up two and a half months’ wages.

Behind respectable facades, some major institutions also have their way with the poor. Few banks want depositors who keep low balances, so in states where no laws require otherwise, banks set high minimums and charge prohibitive fees. Many impoverished neighborhoods have no branches at all. This forces low-income families into the expensive check-cashing services, whose outlets have multiplied across the country.

Even where state law requires “lifeline” accounts for the poor, they are rarely advertised because banks tend to lose money on them. Branch officers often don’t know about them, and most potential depositors don’t either. The best-kept financial secret in New York is the state requirement that banks offer accounts with a $25 minimum opening deposit, a one-cent
minimum balance, and eight free withdrawals a month for a $3 monthly fee. Most depositors are kept ignorant of such terms, and major banks report few people opening those accounts.
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One reason may be that many workers prefer to earn under the table and keep their finances unrecorded. Others may believe folklore they’ve heard about unscrupulous banks. “We have our little methods of stashing stuff,” said Wendy Waxler, a single mother who had just moved off welfare to a job. “What I plan on doing is getting a safe. It won’t draw interest. But at the same time, if the bank go bankrupt, I still have money! You know, I know how they do that money exchange with the bank. It’s your money but it’s being bought by somebody. It’s some kind of system they go through, so when you get there and you say I want all my money, you can’t get it right away, you have to wait a certain amount of days so they can get it back. That’s what I was told. It’s some kind of money something exchange of hands.”

Wendy was wrong about the waiting period, but her suspicions were understandable. At the confluence of private industry and government, American society devises numerous techniques of separating the working poor from their meager cash. State lotteries do a booming business at the corner stores in poor parts of town as people pray for the right number to come up and deliver them from hardship. Businesses large and small practice American consumer culture’s universal deception: the sweet-sounding come-on that doesn’t quite resemble the fine print. Everything is strictly legal; it’s just that you have to listen and read carefully before signing, and you have to be a little savvy about the ways of the commercial world. In Debra Hall’s case, the enticement was a cellular phone that she got for her daughter, who was in her early twenties. It seemed ridiculously cheap. “It was easy to get,” she recalled. “I didn’t have the credit, and they still gave it to me. The contract, she just filled it out and I signed it. I didn’t take time to read it…. The lady made it sound so good. It was gonna be $9 a month. That turned out to be a tale.” Debra had somehow missed a digit. “It was $89 a month. I got tricked into a three-year contract. They give you like two thousand minutes. My calls over the weekend were supposed to be free. They weren’t. It ended up costing me. I done made two payments toward them. They called me, threatened to take me to court, but they accepted I made two payments. I told the man I feel like I got ripped off.”