SETI, CFED-Style

With my interest in promoting the Savers’ Credit for self-employed tax filers, I’ve been reading up on CFED’s Self Employment Tax Initiative, also known as SETI (gotta love that the asset-building field has come up with an even nerdier use of the SETI acronym, which is somewhat better known to space-loving geeks as the shorthand for the Search of Extra Terrestrial Intelligence, which has its own SETI Institute).

I see a strong need for free tax assistance for self-employed people in the low- to moderate-income range. Here in Berkshire County, our local Volunteer Income Tax Assistance (VITA) sites are still small and not well equipped to assist Schedule C filers. I’ve been pondering how to expand that capacity.

Then I had this idea: would it be inappropriate to provide VITA services to low/moderate-income self-employed people for free, but only on the condition that the taxpayer make a deposit into a restricted investment account (IRA, 529 college savings plan, or IDA, for example) in an amount equal to or greater than the approximate cost of paying a professional preparer to file such a return?

In theory, one could make this argument about any VITA site with free tax preparation, but it strikes me as different for the self-employed because people filing a Schedule C are often still accustomed to paying a preparer (they have rarely gotten used to filing taxes for free through a VITA site) so they’re more likely to be able to switch the amount that’s in the tax prep line in their budget over to a new savings line item instead and not really notice the difference.

Yes, this smacks of paternalism, suggesting that the person can’t determine for herself how best to “invest” the money that would otherwise have gone to tax preparation. And certainly some self-employed people might be better off investing the difference in their business rather than an IRA or some other savings vehicle.

But if the program could be set up in such a way as to connect with and encourage the use/expansion of small business IDAs for self-employed people whose short-term focus needs to be on business investment, then the charge of favoring retirement investments at the expense of small business investments is less relevant. Free tax prep could be one of the benefits associated with a small business IDA, allowing the saver to make a tax-time deposit in the IDA that would otherwise have gone to tax prep costs.

Administrators at VITA sites often lament that few of their clients use tax day to put funds into savings despite efforts to promote such options. I understand why it’s not practical for most VITA sites to require a certain amount of savings as a condition for receiving free tax prep (the need to put emergency savings first, for one), but perhaps it should be tested in connection with self-employed people, who I suspect may have a bit more emergency savings and income security than the typical VITA client (I don’t have the data to substantiate that latter hypothesis — it’s just my gut instinct at this point).

Banks and investment firms might like the forced savings enough to take a stronger interest in funding the scale-up of self-employment VITA services (you’d have to be careful not to take money from certain firms just in order to steer clients into investments that aren’t appropriate for them, but that kind of ethical issue always exists in asset-building work and can be managed by programs with strong policies and procedures around always putting the client’s best interests first).

I’d love to find out if some VITA sites have tried anything like this.