One of the most reviled agencies of the federal government, the Internal Revenue Service, is taking a surprising step to make tax season less arduous and expensive for the average American. But the tax preparation industry is trying to thwart the IRS’s efforts in a brazen move to protect its own profits.
Filing taxes can be intimidating to everyday Americans, especially those in the lower income brackets who may have less financial sophistication. As a result, many turn to the tax preparation industry for help: About half of all taxpayers use paid preparers each year, and another 40% use tax preparation software. Tax code complexity costs taxpayers $104 billion per year associated with tax preparation and filing, an estimate that takes into account the opportunity cost of taxpayers spending an estimated 6.55 billion hours to comply with tax laws. The IRS estimates that individuals spend an average of 8 hours and $140 to prepare and file their annual tax return.
Tax time is always stressful, but it is especially so at a time when inflation has increased the costs for basics such as food and gasoline and many families’ incomes have not kept up. At a time when the American public can rarely agree on anything – it is safe to say that the majority of taxpayers are hungry for a simplified, less costly option.
Against this backdrop, the IRS is proposing a Direct File system that could reduce the cost of tax filing and help some 87 percent of taxpayers who do not itemize. While this may seem an obvious way to lessen the cost and stress of filing taxes, the political headwind for doing such a thing is quite strong.
Over the last thirty years, there have been multiple initiatives to create IRS tax software along the lines of Direct File, all of which have been thwarted by the tax preparation industry. Beginning in 1998, a bill overhauling the IRS included a provision encouraging the IRS to cooperate with the private sector to increase electronic filing. In 2002, the Bush Administration proposed that the IRS develop “an easy, no-cost option for taxpayers to file their tax return online” as part of a broader initiative to upgrade government technology.
A recent ProPublica report observed that Intuit views any government effort to make tax filing easier as “encroachment,” and perceives these efforts as a threat to its own tax preparation business. Accordingly, it influenced the language in the 1998 bill to position itself in the catbird seat. The 2002 administration proposal posed a very serious threat, but Intuit was able to offer a solution that maintained its market position while also addressing administration concerns.
Intuit’s TurboTax has been offering free tax prep to poorer filers since 1999, and this became the basis for a deal that became the IRS’ Free File program. Intuit and other tax preparers (under the moniker the Free File Alliance) contracted with the IRS to provide free federal filing to 60% of taxpayers in exchange for the IRS not competing with the alliance by developing free, online tax return preparation. The deal has been updated and reaffirmed several times since. While this was a huge win for the Free File Alliance, it also appealed to the capitalist free market ideals Americans hold dear – as a nominally competitive private sector solution rather than government intervention.
The company similarly beat back efforts by the Obama Administration to have the IRS establish a simple return system, and–for added insurance–it successfully lobbied to ensure that the IRS was restricted from using any appropriated funds to create one. It was on the way to having the Free File program enshrined in law when alarm bells started going off.
About 70 percent of taxpayers qualify for Free File each year, but less than three percent actually use it. This is not an accident; it is by design. According to ProPublica, Intuit has done everything it could to limit the program’s reach,” such as adding code to hide Free File from search engines like Google and prompting users to upgrade to paid services that often weren’t necessary.
The Taxpayer Advocate Service and the Government Accounting Office have investigated several aspects of the paid preparer industry and found other disturbing results, including non-credentialed tax preparers filing 58% of returns filed online, incorrectly-filed claims for refundable credits, and lack of adequate cybersecurity to protect taxpayer information.
The tax preparation industry has spent millions on lobbying efforts to defeat reform efforts that threaten their bottom line. Intuit has spent $44 million since 1998, while H&R Block has spent $9.6 million since 2006.
The latest salvo in this dispute is section 10310(1)(B) of the Inflation Reduction Act (IRA) (PL No. 117-169, enacted August 16, 2022) which directs the IRS to deliver a report to Congress on the potential for an IRS-developed Free File program. The IRS issued its report on May 16, 2023, finding there is significant taxpayer interest in a Direct File option provided by the IRS. The IRS has moved forward with this information and is now conducting a limited pilot for the 2023 tax season. Predictably, the tax preparation industry has responded by again ramping up its lobbying in opposition.
A Direct File system provided by the IRS would offer an alternative without ulterior financial motives to taxpayers who need assistance filing. It would also save taxpayers millions of dollars in compliance costs each year, as well as ensure that taxpayers are able to claim credits for which they may be eligible – like the Earned Income Tax Credit and the Child Tax Credit. And since taxpayers would be filing directly through the IRS, the potential third-party cybersecurity risks would also be diminished.
Now, with the IRS’s latest Direct File plan, we have an opportunity to help average taxpayers. Allowing the tax preparation industry to defeat this plan would be a failure of good governance.
Authors Bio: Kimberly Pinter is a former Visiting Fellow at Independent Women’s Forum. She is a tax, budget, and economic policy expert with more than two and a half decades of both government and private sector experience. She most recently served as the Deputy Assistant Secretary, Legislative Affairs (Tax & Budget) at the U.S. Department of the Treasury under President Trump. She had previously worked for Senator Ted Cruz (R-TX), whom she staffed on tax reform as his Legislative Counsel for Tax and Economic Policy. She also worked for Chairman Steve Chabot (R-OH) as tax counsel to the House Small Business Committee and Senator Craig Thomas (R-WY) as tax counsel, staffing him on the Senate Finance Committee.
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