The Strange and Successful Campaign to Make Taxes More Taxing

Filing your taxes online can look like the ultimate series of trick questions: First you fill in a government-mandated form with numbers the government already knows, then you go to somebody else’s site to send those details to the government and either pay what you owe or collect a refund on your free loan of an overpayment.

Tax prep doesn’t have to be so difficult. But corporate lobbying at the state and federal levels, ideological hostility in Washington, and deeper technical hangups all combine to protect today’s system — and to generate the fees that many of us pay for apps from Intuit, H&R Block, and others.

And the thing is, usage numbers suggest we don’t even mind.

Alternative minimum tax prep
What are the alternatives? In one scenario, you’d log into a government site and see the income numbers that today arrive on separate pieces of paper. These are the forms that employers and banks and other people who pay you each send separately to the feds anyway. This option could be confined to taxpayers not itemizing deductions — which is 70 percent in 2010 — or you could also plug in relevant deductions and credits before seeing the totals.

This idea goes by the term “return-free” filing, and it’s not new. President Reagan unsuccessfully advocated it in 1985 in a tax-simplification push, and President Obama campaigned on the issue in 2008. Other countries do it, and Californians with simple state-tax situations can use ReadyReturn.

In a less ambitious change from the current setup in which you collect the data and send it to the feds yourself, you wouldn’t have any numbers presented to you on an official site, but you could still file and pay at a tax agency’s site instead of handing your data to a third-party tax preparer. That’s an option in many states — see, for instance, California’s CalFile, Kansas’ WebFile, Massachusetts’ WebFile and Utah’s Taxpayer Access Point.

You won’t be surprised to learn that the leading vendor of tax-prep software, Intuit, doesn’t like either scenario and has lobbied consistently and successfully for “Free File.” In that program, started in 2003 with the IRS, tax-prep companies offer service for free to people below an income level. They’re subsidized by the fees paid by everybody else who opts out of the no-charge option, the “free fillable forms” that do basic math but little else.

(If you’re only just now doing your taxes and had an adjusted gross income below $58,000 last year, you must start your Free File quest at the IRS’s Free File portal, not a tax preparer’s site.)

As Pro Publica recounted last year and in an update Monday, Intuit has worked hard to keep things this way. In 2013, the San Diego firm had $2.62 million in lobbying expenses, while it’s made $372,600 in campaign contributions so far in the 2014 election cycle.

Keeping the money flowing
Pennsylvania, Indiana, Iowa, and Virginia, among others, have ditched direct-filing systems and ceded online tax prep to Free File. At the federal level, a bill introduced by Reps. Peter Roskam (R-Ill.) and Ron Kind (D-Wisc.) would do the same thing, making the Free File system permanent.

“We think Free File is the better alternative for taxpayers,” wrote Intuit communications vice president Julie Miller. “We exist to make tax preparation and compliance easy, giving people a simple and accurate way to file their taxes and get their own money back.”

Tax preparers like Intuit don’t particularly welcome competition from the government, even if individual free-file options can persist next to direct-filing systems. “We basically provide our services to states who don’t compete with us,” said Free File Alliance general counsel Steve Ryan.

Intuit and other tax preparers have vocal company from such Washington organizations as Americans for Tax Reform and the Computer & Communications Industry Association. They go a step beyond complimenting Free File to condemning government-run tax prep as flawed on a philosophical level, vaguely French, and a form of creeping tyranny.

(Disclosures: For a year, I wrote about tech-policy issues for a CCIA-sponsored blog called the Disruptive Competition Project.)

Let’s look at the arguments against automatic or government options for filing taxes.

Argument 1: People will pay more. The idea here is that without a third party in your corner, you’ll pay what the form suggests you owe and forget about eligible deductions and credits. But that’s also a risk with paper forms — as it’s been with asking the IRS to compute your taxes, as it was in the “TeleFile” phone option the IRS ended in 2005.

Further, no serious proposals for government-run taxing, or direct file, would make it mandatory. Taxpayers could choose to use it or prepare their own forms. Tax preparers would still have work to do.

Argument 2: It’s a conflict of interest that eats away at our autonomy. I respect the argument that direct file crosses a line: It allows the IRS to tell a citizen what he owes upfront, instead of having to disprove the citizen’s math later on. However, the impenetrable math of the tax code means many of us have no idea if we’re paying what we should anyway.

We already have to take somebody else’s word for it, whether it’s an unelected bureaucrat or an unelected company. This isn’t a fair fight; we lost long ago.

Argument 3: Free File works fine. Some 100 million taxpayers are eligible to file their taxes at no charge through this program, but fewer than 4 million did so last year. “I’d love to see the take-up rate higher,” said the Free File Alliance’s Ryan. He blames inadequate marketing by the IRS.

Where do taxpayers eligible for Free File turn instead? It’s not always paper forms. A front-pager in The New York Times last week noted how corrupt tax preparers rip off poor and anxious taxpayers by filing sloppy or fraudulent returns, and then charging too much for the privilege.

Argument 4: The government can’t do this right. At a federal level, it’s true that a return-free system isn’t possible today. IRS commissioner John Koskinen said so at a February hearing, complaining that just like us, the IRS has to wait for tax forms to come its way from employers: “We don’t get the … W-2 forms from Social Security or the 1099 forms until late in the spring.”

But the states are different. Their tax returns are generally simpler than the federal returns, and they don’t need to operate at the massive scale that can gum up federal technology projects. California, the most populous state, has shown that it’s possible to do a return-free program.

Argument 5: Nobody will use these government sites. Intuit and company may have a point here. Of about 2 million California taxpayers eligible for ReadyReturn last year, only about 80,000 used it, while 260,000 returns came in via CalFile. Meanwhile, 2.9 million returns arrived on paper.

My state of Virginia, however, provides a different exhibit. The state’s iFile system peaked at almost 317,000 returns in the 2010 tax year; the next year, after a state law mandated its shutdown, Free File delivered just over 111,000 returns and has since slid to about 101,000 in the 2013 tax year. Paper returns have continued to decline, as well, to 976,000. But the growth in paid e-filing has more than compensated for Free File’s lack of success.

It certainly looks like Big Tax Prep is winning. And it may be because it’s been successful at outlawing potential competition.

Email Rob at rob@robpegoraro.com; follow him on Twitter at @robpegoraro.