Yves here. Grrr, I had this IRS post 100% ready to go in the morning and didn’t launch it.
Sing after me: “Because H&R Block!” Well, actually, it’s not just H&R Block that keeps the IRS hostage. From ProPublica in Inside TurboTax’s 20-Year Fight to Stop Americans From Filing Their Taxes for Free:
Intuit’s QuickBooks accounting product remains a steady moneymaker, but in the past two decades TurboTax, its tax preparation product, has driven the company’s steadily growing profits and made it a Wall Street phenom….
But the success of TurboTax rests on a shaky foundation, one that could collapse overnight if the U.S. government did what most wealthy countries did long ago and made tax filing simple and free for most citizens.
For more than 20 years, Intuit has waged a sophisticated, sometimes covert war to prevent the government from doing just that, according to internal company and IRS documents and interviews with insiders. The company unleashed a battalion of lobbyists and hired top officials from the agency that regulates it. From the beginning, Intuit recognized that its success depended on two parallel missions: stoking innovation in Silicon Valley while stifling it in Washington. Indeed, employees ruefully joke that the company’s motto should actually be “compromise without integrity.”
Internal presentations lay out company tactics for fighting “encroachment,” Intuit’s catchall term for any government initiative to make filing taxes easier — such as creating a free government filing system or pre-filling people’s returns with payroll or other data the IRS already has.
Although The Verge in 2020 said maybe there is hope, thanks to that another ProPublica story:
Earlier this year, ProPublicapublished a report showing how Intuit, the company behind TurboTax, was misleading users into paying to file their taxes — something that’s supposed to be free in the first place for many. They, along with H&R Block, went so far as to keep the free versions from showing up in search engine results. This made it harder for users to find the free versions online, and many people ended up paying to file their taxes when they really didn’t have to. Now, ProPublicareports that the IRS is taking steps against this.
On Monday, the IRS released an addendum to its Free File program — the agreement with tax preparation companies intended to keep tax filing free — that now prohibits these companies from hiding the pages that allow you to file for free from Google and other search engines. They’ve also eliminated a restriction against the IRS making its own filing software.
In several other countries, filing your taxes is a lot easier. The government uses data it already has on your income to fill out your taxes. But in the United States, Intuit has spent millions each year lobbying against these simpler systems which would eliminate the need for their services. Tax industry lobbying was how the IRS’s Free File was initially created, with the IRS agreeing to leave it up to those companies.
The Free File program initially said that filing software had to allow lower- and middle-income taxpayers to be able to file for free. In return, the IRS agreed to not make its own free filing software, something that the tax preparation companies thought could be a big competitor to their business. The new addendum also requires all these tax preparation companies to give their truly free options a specific badge: “IRS Free File program delivered by [Member company name or product name],” so you can tell them apart from other versions which might sneakily require you to pay.
When ProPublicapublished their groundbreaking report in April, they found that TurboTax’s main page didn’t even link to the page that lets you file for free. You couldn’t access the free version from TurboTax.com at all. Some of the links in the free version of TurboTax would link to the paid version, tricking you into paying more than you should. And TurboTax had also deliberately targeted students and low-income users with the paid version of their service, moving necessary forms like student loan interest deduction into the “Deluxe” tier.
I hope some of you manage to get your IRS duties completed easily and inexpensively. We small business owners, even with simple operations, wind up eating a lot of costs. And I have to confess that the complexity of tax filings has made me a bit phobic about filling out any official document.
By Beverly Moran, Professor Emerita of Law, Vanderbilt University. Originally published at The Conversation
The Internal Revenue Service has postponed the April 15 tax filing deadline to May 17. If taxpayers need even more time to file federal returns, the agency added, they can request an extension until Oct. 15.
“This continues to be a tough time for many people, and the IRS wants to continue to do everything possible to help taxpayers navigate the unusual circumstances related to the pandemic, while also working on important tax administration responsibilities,” said IRS Commissioner Chuck Rettig.
The announcement may come as welcome news for many Americans, but it also raises an important question: Why should taxpayers have to navigate the tedious, costly tax filing system at all?
The case for a ‘Simple Return’
In 1985, President Ronald Reagan promised a “return-free” tax system in which half of all Americans would never fill out a tax return again. Under the framework, taxpayers with simple returns would automatically receive a refund or a letter detailing any tax owed. Taxpayers with more complicated returns would use the system in place today.
In 2006, President Barack Obama’s chief economist, Austan Goolsbee, premiered the “simple return,” where taxpayers would receive already completed tax forms for their review or correction. Goolsbee estimated his system would save taxpayers more than US$2 billion a year in tax preparation fees.
Though never implemented, the two proposals illustrate what we all know: No one enjoys filling out tax forms.
So why do we have to?
A Costly and Time-Consuming System
Return-free filing is not difficult.
At least 30 countries permit return-free filing, including Denmark, Sweden, Spain and the United Kingdom.
Furthermore, 95% of American taxpayers receive more than 30 types of information returns that let the government know their exact income. These information returns give the government everything it needs in order to fill out most taxpayers’ returns.
The U.S. system is 10 times more expensive than tax systems in 36 other countries with robust economies. But those costs vanish in a return-free system, as would the 2.6 billion hours Americans spend on tax preparation each year.
Maybe you’re wondering whether Congress is just behind the times, unaware that it can release us from tax preparation? Not true.
As an expert on the U.S. tax system, I see America’s costly and time-consuming tax reporting system as a consequence of its relationship with the commercial tax preparation industry, which lobbies Congress to maintain the status quo.
Commercial Tax Preparation
Almost 20 years ago, Congress directed the IRS to provide low-income taxpayers with free tax preparation. The agency responded in 2002 with “Free File,” a public-private partnership between the government and the tax preparation industry. As part of the deal, the IRS agreed to not compete with the private sector in the free tax preparation market.
In 2007, the House of Representatives rejected legislation to provide free, government tax preparation. And in 2019, Congress tried to legally bar the IRS from ever providing free online tax preparation services.
Only a public outcry turned the tide.
The public part of Free File consists of the IRS herding taxpayers to commercial tax preparation websites. The private part consists of those commercial entities diverting taxpayers toward costly alternatives.
According to the Treasury Inspector General for Tax Administration, which oversees IRS activities, private partners use computer code to hide the free websites and take unsuspecting taxpayers to paid sites.
Should a taxpayer discover a free preparation alternative, the private preparers impose various restrictions such as income or the use of various forms as an excuse to kick taxpayers back to paid preparation.
Consequently, of the more than 100 million taxpayers eligible for free help, 35% end up paying for tax preparation and 60% never even visit the free websites. Instead of 70% of Americans receiving free tax preparation, commercial companies whittle that percentage down to 3%.
Tax Savings and Evasion
Perhaps you are guessing that there are valid policy justifications for avoiding government and empowering the private sector. Judge those arguments yourself.
One argument from commercial tax preparers is that taxpayers will miss out on valuable tax savings if they rely on free government preparation.
In fact, the government software would reflect the same laws used by the paid preparers with the same access to tax saving deductions or credits. Further, tax preparers like H & R Block promise to pay all taxes and interest resulting from a failed audit. As a result, these services have every incentive to take conservative, pro-government tax positions.
A second argument is that government-prepared tax returns encourage tax evasion.
In a no-return system, the government reveals its knowledge of the taxpayer’s income before the taxpayer files. Thus, the argument goes, the taxpayer knows if the government has missed something and has reason to let the mistake stand.
But taxpayers already know what information forms the government has because they receive duplicates of those forms. The incentive to lie does not increase because the taxpayer avoids weeks of tax preparation.
Bolstering the Anti-Taxers
Finally, there is the anti-tax argument for onerous tax preparation: Keep tax preparation unpleasant to fuel anti-tax sentiment.
In the past, Republicans argued against high taxes. But after decades of tax cuts, Americans are no longer swayed by that argument.
Exasperating tax preparation, according to this argument, helps keep the anti-tax fever high. And that fuels public hate for government and the tax system.
Unfortunately, the anti-tax contingent’s desire to force Americans to spend time and money on tax preparation dovetails with the tax preparation industry’s desire to collect billions of dollars in fees.
Tax preparation companies lobby Congress to keep tax preparation costly and complicated.
Indeed, Intuit, maker of TurboTax, the tax preparation software, lists government tax preparation as a threat to its business model.
One example is the earned income tax credit, a government program for low-income people. The credit is so complicated that 20% of the people who are eligible never file.
If the government prepared people’s tax returns, that 20% would receive government support. Nonetheless, Intuit has lobbied lawmakers to make the credit more complicated, thereby driving more taxpayers to paid preparation services.
To date, the tax preparation industry has kept the system complicated because the potential cost to it in terms of lost revenue is vast.
Only public outcry can change the system.
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I still do my taxes manually, so I am aware of how grossly awful the system is. Everyone else uses Turbotax, blithely unaware of how insanely oppressive and complex the rules are, how many 28-step ‘worksheets’ must be navigated if you have a bit of retirement savings or a pension.
To say we have been fucked by Intuit and the accounting ‘profession’ is an understatement. Disgraceful to let one greedy industry screw with hundreds of millions of people. And kudos to NC for at least letting us know about the deadline change.
I did them when I was a young thing at Goldman. Even with the rules being simpler then, it was torture. Took me the better part of 2 days and made me nervous as hell.
I do not know why the US does not deduct people’s income taxes automatically like it is done in some countries. As the IRS has to examine income data anyway to see if you did your taxes properly, it would not be that much more of an undertaking.
Basically, many countries send you a statement in the mail showing what taxes were taken out of your earnings and what deductions you qualified for which were either credited to your bank account or were sent a check if you ended up getting a net refund. If you disagreed with the government’s assessment, you could file your taxes yourself and show where you think the government made an error.
It would make things much simpler and more streamlined, but I think part of the motivation as to why our tax code has gotten so byzantine is to allow loophole abuse and wiggle room for the ranks of lawyers employed by our financial aristocracy to avoid paying much of anything.
Exactly. Complexity is a tool for manipulation. It deters those on the outside from questioning it because they don’t understand it, and allows those on the inside to sneak through the loopholes you mentioned.
And, as this article explains, it’s a heck of a cash cow for those private services that do the complex work for us serfs.
Wouldn’t want a system that makes our lives easier, would we? Where’s the profit in that?
On a different topic: Anyone know if Molotov cocktail components can be deducted as business expenses? Also, is it possible to upload one through TurboTax directly to Intuit’s servers? Just curious. :)
As an art school dropout who has worked freelance and had my own “business” (a one person production company) for 20 years that hires numerous people every year (sometimes 5-10, sometimes hundreds), and whose pay usually is feast or nibble with client checks arriving anywhere between 30 to 180 days after invoicing (rarely on any regular schedule and occasionally never at all) I absolutely dread tax time.
Reading this article really helps knowing where the anger for that dread should be directed. I’ve found in the past the IRS isn’t nearly as bad as their reputation makes them out to be. They’re actually very helpful and accommodating. Seems they understand I’m just a dumb artist who messes up sometimes! Makes sense it’s the private companies throwing wrenches in the gears.
Since the free market has become a religion in America, can we enforce a separation of church and state between corporations and government? Let them have their free market to peddle their snake oil while small businesses (like local only) and individuals can have a government that focuses on our needs?
Not only does the U.K. have a return free tax system, if you do need to do self assessment then it can all be done on the HMRC website very easily.
To be fair my requirements for self-assessment are pretty easy, just declaring additional income from dividends, but it looks like it covers what most people would need.
If your tax affairs are complicated you would likely to use an accountant to a prepare and file for you.
Also, there are systems in place that allow things to be done on your behalf with tax deductions. For example, deductions for pension contributions can be claimed directly by your pension provider to top up your pension. And you can let charities claim your deduction for a donation and use that to increase your donation (“gift aid”).
The system does require you to be aware of how it works though. You need to understand what your tax code is and if it’s correct. I hear stories of people paying more tax than they should for years because their tax code is wrong.
Can confirm. I started out in the UK,work-wise, then moved back to the USA. I sure do miss lots of what the UK did tax-wise. To say nothing of where my tax dollars went in Britain vs where they go here (National Health Service, Heathrow’s jazzy Terminal 5, the Queen vs WTF health system, Military-Industrial Complex, The Donald).
The worst part is that in the USA, I know of people who were denied a clear path to Naturalization because they screwed up on their taxes once upon a time, but it was blatantly that they just wanted to deny ‘those’ people Citizenship, kind of getting Al Capone on racketeering style. I can’t prove it, but I’ve seen it a few times. And the taxes here are baffling! This article shows the blame doesn’t belong where I sort of guessed it must though.
If you can believe it, CDN returns make you calculate to two decimals. This could easily be eliminated. I will leave it to a mathematician to estimate how many kazillions of extra keystrokes are required because of this. And the net out extra revenue is ????
I could write a letter today to the Prime Minister pointing out how stupid, etc. it all is and the letter, if ever even read, would end up in the trash bin.
The real lesson here is that even such a simple, beneficial change is incredibly hard to ever get implemented.
Suprisingly, in a similar matter, the CDN Government did get rid of the penny but it apparently escaped their attention to get rid of it on the tax forms. Guess there were Insiders and Influencers who wanted that.
And, oh yes, Canada Revenue, forcing you to tap away to two decimals, has not prosecuted any Canadians hiding bezzle in the Panama Papers. We want your 5 cents but if you are Elite, you can keep the $200000000.
I free file my taxes each year. Before I free file I manually do my taxes to compare to the free file software. Mine is simple because my income is a public employees pension and SS for myself and wife. The one form that baffles me is the form that determines how much of your SS is taxable. I’m a retired math teacher but I am amazed at how complex this form is.It take more time filling out this form than actually doing you taxes. I could never understand why this particular form has to be so complicated. I’m one of those that shouldn’t even have to actually file. The IRS should be able to do my taxes without filing. if I have a refund coming they could simply issue it. If I owe they could send me a bill and payment deadline.In some respects when I am filing I think some kind of flat tax would be much better. I would be much simpler. NYS is even more ridiculous. Even though none of my income is NYS taxable I still have to file a NYS tax return.
That Social Security thing!!! That is why I don’t do paper forms. I was seriously considering doing the paper forms this year when I remembered that back when I did my parents’ taxes it was the Social Security issue that put me over the edge. Reagan and Tip O’Neil have a lot to answer for there.
My own opinion is that (in addition to the Federal Gov simply sending refunds or bills) they should double or more the personal deductions to equal an amount that is more or less livable (with built in cost of living increases).
The federal government, being Monetarily Sovereign, neither needs nor uses tax dollars. In fact, your tax dollars are destroyed upon receipt; they are not used for anything.
The federal government (unlike state/local governments) creates dollars, ad hoc, every time it pays a creditor. No tax dollars used.
The process is this: To pay a creditor, the federal government sends instructions (not dollars) to the creditor’s bank, instructing the bank to increase the balance in the creditor’s checking account.
The instructions are in the form of a check or wire (“Pay to the order of ______”).
When the creditor’s bank does as instructed, new dollars instantly are created and added to the M1 money supply.
The creditor’s bank balances its books by clearing the transaction through the Federal Reserve, which always clears federal checks.
And that is how U.S. dollars are created. It’s a circular process with no tax dollars involved.
The Monetarily Sovereign federal government could collect $0 taxes, yet continue spending, forever.
I am sure the IRS is trying their best, but there’s over a million 2019 tax returns still out in the wild: https://www.nbcconnecticut.com/investigations/nbc-ct-responds/havent-received-your-2019-tax-refund-yet-youre-not-alone/2435027/
Is the May filing delay for the sake of the taxpayer or because the IRS simply isn’t ready for another year of returns?
Combined with the unnecessary complexity mentioned in the post, my guess is that we will see no reform of the tax system at all. Sometimes, it seems as if a bad system actually breeds its own complacency.
Not quite on topic, but Bloomberg Biz Week had a couple articles recently on taxes being systemically biased toward the less affluent: (1) “Tax Code So White”, and (2) “The $500 Billion Bias Problem” (on real estate taxes). I found these interesting to read.
The complexity of the U.S tax system is something to behold. When I realized how much money low-income people were paying to H&R and others to file taxes I became a tax-aide volunteer. I thought low-income meant simple tax forms. How wrong I was. Low income people deal with a mass of complexities if they want to get refunds or benefits. These include earned income and child tax credits, affordable care act premuium refunds or payments. Many retired low income people now have small amounts in IRA or 401K accounts with withdrawals with which to process. Others work in the so-called gig economy so they have 1099-K and 1099-MISC forms and business deductions. It’s a nightmare
The ultimate in paperwork simplfication:
File an exemption from withholding form.
https://www.irs.gov/pub/irs-pdf/fw4.pdf
That way you retain whatever they would owe you, for immediate use, without any paperwork, and you can send them money, or not, if you owe them.
And then try being a US expat, where filing is fiendishly difficult, different tax accountants can come to different results even for a simple case (majority of income is not-huge) salary), but if the IRS does not like it you may be the subject of criminal charges (rather than civil). Yeah! 3 European countries I am familiar with, you can put together your own tax return in less than 2 hours in a simple case.
Been a TurboTax customer from back in the days when it was published by a small San Diego startup, Chipsoft. If IRS offered a tax computation software I would consider it, but I’m not interested in IRS “doing” my taxes. The core issue is that “income” is an accounting concept, and that will always be subject to interpretation. And the federal system (which is pretty much copied in state income tax regimes) is based on 3 different definitions of income for regular tax (gross, adjusted, taxable) and 2 more for the AMT. Most of the problem is actually the bookkeeping. Once that is done doing the return isn’t that much additional work. For me, the flow of data from the federal return to the states (we pay income tax in three states) is one of the most valuable features of tax software, as well as maintaining carryover data and asset depreciation records year-to-year.
But yes, less complexity would help everyone (I’m looking at the form from hell, Form 1666). Another complexity is trying to minimize your estimated tax payments, given the options. The problems really started with the 1986 tax law which has only been added to since. (The concept of “passive income” had to be developed for the benefit of the accounting business.)
I do have to laugh at the “Form 1040SR” that’s supposed to make me happy. All it means is that the numbers which used to flow directly to the 1040 now have to go to intermediate schedules first.
We could go back to the old system of the “direct tax” apportioned to the states by census population and requiring federal tax assessors in each assessment district.