More than half a billion dollars in federal money is there for the taking by almost a quarter of a million New Yorkers who need it most, but they either don’t know about it, or don’t know how to get it; in either case, the money remains unclaimed.

This is just one of the odd consequences of a program designed to give tax breaks to the working poor, which is not working the way it is supposed to.

The federal program is called the earned income tax credit. It enables a family of four earning up to $34,692 to receive a tax refund as high as $4,204, with an additional refund given by New York State.

“There are 230,000 New Yorkers eligible for the [earned income tax credit] who didn't claim it last year,” Mayor Michael Bloomberg said in January. “If they did this year, the credits they would earn would pump more than $540 million into our neighborhoods.”

But even many of those who did claim it were victims of exploitation. In 2002, some 174,000 New Yorkers signed up for what the commercial tax payers called an “instant refund” but was actually a very high-interest loan. The average fee paid -- a whopping $250. The typical customer who paid this fee, according to a report, earned less than $15,000 a year.

WHY PEOPLE DON’T CLAIM FREE GOVERNMENT MONEY

There are many reasons why the earned income tax credit is being underused, and abused.

For one, the rules governing who is eligible are complex and changing. Navigating those rules often requires expert help, but this is expensive. H&R Block, the largest tax preparer in the city and nation, charges a minimum of $46 for filling out a federal 1040-EZ form and $36 for the corresponding state tax form. Potential customers cannot get estimates over the telephone for the full cost of preparation and filing. The second largest commercial preparer, Jackson Hewitt, quotes a total of $86 for the simplest federal and state forms, plus $100 in fees for filing and handling the returns.

More to the point, many of those eligible have little reason to know about the benefit. Workers who don’t owe any income taxes do not have to file tax returns. A full-time minimum-wage job pays so little that a single parent with one child would have less than zero taxable income, and thus would not owe any taxes. A worker in this situation may never have filed a tax return, and may not be aware that filing could bring her $3,311 in combined federal and state refunds.

“IT’S YOUR MONEY, COME AND GET IT”

There are alternatives to paying a commercial tax preparer. Community organizations offer free tax preparation to low-income people at 42 locations throughout the five boroughs. Many sites offer services in Spanish, and several offer services in Chinese or Russian. A list of sites and their hours is available from the Department of Consumer Affairs on its Web site , or by dialing 311.

The city has launched a campaign to make people more aware of the tax credit. The motto for its campaign is “It’s Your Money, Come and Get It,” and this is plastered in bold letters on flyers in ten languages, which are being distributed by a coalition of nonprofit agencies, schools, city departments and corporate partners. According to Gretchen Dykstra, Commissioner of Consumer Affairs, the motto will soon be “on television and the radio, in ads, utility bills, paystubs, subways, McDonald’s placemats, and more.”

Last year, free tax clinics operated by the Community Food Resource Center helped 10,000 low-income families prepare and file their returns. The organization hopes to assist 25,000 families with their returns this year. To qualify for free tax preparation, a family must have earnings less than $35,000 for 2003; an individual with no children must have earnings under $15,000.

HIGH-INTEREST LOANS

Because the earned income tax credit is used only by very poor people, they are likely to have unpaid bills, have too little money to pay a tax preparer’s fee, or have other reasons for wanting a refund as soon as possible. In New York City, nearly one in four taxpayers filing for the credit receives their refund through a loan. These low-income filers make up 40 percent of the customers for so-called “refund anticipation loans,” for which the average interest rate last year was an astonishing 222.5 percent -- about 10 times that of a credit card.

For years, consumer advocates and government regulators have been trying to get tax preparers to tell customers the true cost of getting a refund in two days, and that alternatives include receiving a refund by direct deposit from the Internal Revenue Service within as little as two weeks.

Last year, the New York City Department of Consumer Affairs reached the largest settlement in the agency’s history in a lawsuit against H&R Block. The company agreed to pay over $2.7 million in restitution to 61,700 low-income consumers who were eligible for the tax credit. H&R Block had to pay the city itself over $1,000,000 in fines, legal costs, and support for the city’s outreach campaign for the tax credit, in addition to $475,000 for H&R Block’s own educational and outreach materials, which now require approval by the city.

“I think everyone has learned that they have to use the word ‘loan’,” says Lisa Donner of ACORN, a nationwide community organization. ACORN demonstrations targeted H&R Block offices in 30 cities last month. Using the correct term, Donner warns, doesn’t mean that consumers understand what they are getting for their money. Linking “rapid refunds” to the earned income tax credit has muddled the nature of the credit to many recipients. “It’s magic to them,” she says.

Commercial tax preparers are legally required to give each customer a copy of the Consumer Bill of Rights Regarding Tax Preparers(in pdf format). As of April 2003, more than half of the tax preparers surveyed by the Department of Consumer Affairs did not give out the Bill of Rights when asked.

CONFUSION ABOUT ELECTRONIC FILING

Taxpayers who want a rapid refund directly from the Internal Revenue Service must deal with companies like H&R Block, because the fastest refunds go to those who file their returns electronically. On-line filing through the federal “Free File” program can only be done on websites of selected commercial tax preparers. Consumers filing from participating websites are barraged with offers for additional services.

The Internal Revenue Service’s corporate partners limit free services to groups of consumers based on income, age, military status, or whether they are entitled to the earned income tax credit. Each company has different standards, and taxpayers may not find out that they do not qualify for free services until they have already filled out a series of electronic forms and are about to send off the completed return.

NEXT UP: THE REFUND CARD

Some tax preparers are offering refunds in the form of pre-paid cards, which can be used to make purchases and withdraw cash from automatic teller machines. Tax refund cards could be a helpful new option for people who have no bank accounts. However, it is not clear how much issuers will charge for them.

“What people really need,” says Donner of ACORN, “are bank accounts. These refunds could be the biggest lump sum payment they see in a year, and a bank account is the best way to encourage them to save it.” Instead, tax preparation is becoming a sideline for car dealers and check cashing services, encouraging people to spend their refunds as soon as possible.

Linda Ostreicher, a former budget analyst for the New York City Council, is a freelance writer and consultant to nonprofits.