To Congress, Putting Taxpayers “First” Means Axing IRS’ Free Tax Preparation Service

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By: Nicole Campbell, 2020

While many of us were busy filing our tax returns (or our extensions) last week, our elected officials in Washington on both sides of the aisle brought us one step closer to permanently barring the IRS from creating its own free electronic tax filing system. Specifically, the House Ways and Means Committee (lead by Rep. Richard Neal, D-Mass.) passed the Taxpayer First Act--a massive piece of legislature making several administrative changes to the IRS, sponsored by Reps. John Lewis, D-Ga. and Mike Kelly, R-Pa.

The bill’s most inflammatory provision would make it illegal for the IRS to create its own online tax filing system--something that big tax prep companies have lobbied against for years, as it would threaten the industry’s profits (dominated by Intuit’s TurboTax and H&R Block). Meanwhile, even experts agree that the IRS is long overdue in optimizing how Americans file taxes. In addition to the IRS’ free online system, the IRS could easily offer pre-filled tax forms containing the personal and salary data the agency already has on hand, referred to as a “simple return” system--as is already the case in Denmark, Sweden, and Spain.

Closeup of a 1040 tax form and a pen

Closeup of a 1040 tax form and a pen

The File Free Alliance, a private industry group, states that 70% of American taxpayers are eligible for free filing (i.e. making less than $66,000 and having access to free software available from current for-profit companies). Yet only 3% of eligible U.S. taxpayers utilize the service. The current program’s critics charge that companies deliberately under-promote the free option, primarily using it as a marketing tool to upsell paid products/services while leaving consumer data vulnerable to privacy breaches. If Congress codifies the suboptimal status quo, the IRS will pledge not to create its own online filing system, and companies will continue to offer their free services to income-qualifying taxpayers.

In terms of how Congress got to this point, one only needs to follow the money to connect the dots. In the past ten years alone, Intuit spent over 26.5M lobbying federal officials. Last year, Intuit and H&R Block shoveled a combined 6.6M towards lobbying for this deal, as the big industry players (largely under the organization of the Free File Alliance) explicitly believe that the IRS “developing software… may present a continued competitive threat to our business for the foreseeable future.” This belief translated into Committee Leader Rep. Neal receiving $16,000 in contributions from Intuit and H&R Block during the last two election cycles. Even more telling, during the 2018 election cycle, Intuit and H&R Block contributed almost three-quarters of a million dollars to Federal officials in both parties.

Calculating income tax shouldn’t create additional financial burdens for taxpayers

Calculating income tax shouldn’t create additional financial burdens for taxpayers

Since the bill’s passing by voice vote in the House, Senators Chuck Grassley, R-Iowa and Ron Wyden, D-Ore have introduced a companion bill to the Senate, which is now getting renewed scrutiny thanks to its increased press coverage. Dishearteningly, several freshmen Democrats in the House reported that they did not previously understand that the epic legislation included the heavily lobbied-for provision. Bill sponsor Lewis told hesitant Congress members that the bill’s other aspects justified its support--specifically the income-based restrictions on private debt collection of unpaid taxes. As a result, Congress is creating a “working group” to study the IRS’ agreement with the industry, which could result in additional, separate legislation addressing the issue.

Wyden suggested that the inclusion of the Free File provision was a political compromise, saying, “I’m going to continue fighting for a ‘simple return’ system and the right to file directly with the IRS online.” As it stands, the average American spends eight hours (and $110) doing his/her taxes, with most of the money going to private tax-prep companies and software behemoths. An IRS-developed, truly free filing system would save taxpayers an estimated 44B over the next decade, which Congress is seemingly bipartisanly rejecting to grow their own bank accounts. Interestingly, a bill filed by Sen. Elizabeth Warren making it illegal for the IRS to enter into such deals is stagnant in the Senate, though it should get the full hearing it deserves if actual, honest dialogue is going to occur.

Rather than pointing fingers or creating “for show” working groups, our elected Congress shouldn’t need to be told to reject the idea that Americans should be forced to pay private companies for the privilege of paying their taxes. In 2019, with the bevy of technology and innovation at our fingertips, the government should be much further ahead in developing the tools that make tax preparation easy and free instead of mandatorily more cost-prohibitive.