Filing Your Taxes Is Already Difficult. The House Just Passed a Bill That Keeps It That Way Forever.

The new bill could keep H&R Block and Intuit’s profits high—while keeping your taxes complicated to file.

Elizabeth Zach April 1, 2019

Jill Young reviews old tax returns she recently stored in her garage. (Photo by Joe Proudman)

On April 2, the House passed the Tax­pay­er First Act of 2019, a bill co-signed by 18 Democ­rats and 10 Repub­li­cans, which would per­ma­nent­ly pro­hib­it the IRS from cre­at­ing its own elec­tron­ic tax fil­ing system. 

'Congress should be making it easier for Americans to file their taxes each year, not bowing to the interests of the tax prep industry,' wrote Sen. Elizabeth Warren in a 2016 press release.

This may not seem like a big deal; many Amer­i­cans already use online ser­vices pro­vid­ed from tax com­pa­nies, such as Tur­b­o­Tax. But what most might not real­ize is that tax fil­ing could be a lot sim­pler – and cheap­er — for everyone.

Accord­ing to the IRS, U.S. non-busi­ness tax­pay­ers spend an aver­age of 7 hours and $110 fil­ing their tax returns, an expense par­tic­u­lar­ly bur­den­some on the work­ing poor. While free” tax-fil­ing ser­vices are mar­ket­ed as easy to use,” the major tax-fil­ing com­pa­nies, such as Intu­it and H&R Block, ulti­mate­ly have a vest­ed inter­est in keep­ing tax­es com­pli­cat­ed — the more com­pli­cat­ed tax fil­ing is, the more like­ly res­i­dents are to buy tax-fil­ing soft­ware from these companies.

Toward that end, com­pa­nies such as H&R Block spend mil­lions on con­vinc­ing Con­gress to keep the sta­tus quo,” says Joe Bankman, a Stan­ford tax law pro­fes­sor who has cham­pi­oned a sim­pli­fied tax fil­ing sys­tem. The result is that we now have the most com­pli­cat­ed sys­tem on Earth here in the Unit­ed States.”

This com­plex­i­ty can have cat­a­stroph­ic effects on Amer­i­cans. Take, for exam­ple, Jill Young’s expe­ri­ence with tax-fil­ing. In 1981, when she was 10, Young moved with her fam­i­ly from Cal­i­for­nia to Wash­ing­ton state for her father’s job. The job paid a six-fig­ure salary, which Young says led the fam­i­ly to believe their finan­cial sit­u­a­tion was pret­ty great. But a year lat­er, their fam­i­ly moved back to Cal­i­for­nia. Not long after, the Inter­nal Rev­enue Ser­vice (IRS) flagged them for an audit. Amid man­ag­ing three young chil­dren and two moves with­in such a short time span, Young’s par­ents were sud­den­ly under the gun to dig up old paperwork.

They fought con­stant­ly,” Young remem­bers, and it vast­ly affect­ed” her father’s cred­it. He had to find all his relat­ed paper­work and receipts to prove that he filled out his tax­es cor­rect­ly. But he could not find the paper­work from that year, and so he was forced to pay penal­ties since he couldn’t offer proof otherwise.”

This mem­o­ry feels more potent this time of year as Young, who works as a con­tract ana­lyst for the state of Cal­i­for­nia, pre­pares her own fed­er­al and state tax returns. A sin­gle moth­er of two, she lives pay­check to pay­check. Fil­ing her tax return, she says, has always been stressful.

The increas­ing­ly pop­u­lar free” tax-fil­ing soft­ware Young used this year cost her $80 in added-on fees (for pro­cess­ing, cloud stor­age and review of her return). The fees, she says, are not so oner­ous, as com­pared with hir­ing an accoun­tant, but the adver­tis­ing is mis­lead­ing. The soft­ware is the lead­ing alter­na­tive to an accoun­tant, which on aver­age costs $273 for an item­ized tax return.

Young describes one par­tic­u­lar­ly vex­ing expe­ri­ence in 2009 at the height of the finan­cial cri­sis, after she had been fur­loughed from her job. To help pay off her bills, she reduced the amount of tax­es with­held from her pay­check. When she neglect­ed to change things back after the fur­lough end­ed, the IRS locked her into with­hold­ing the max­i­mum amount of tax­es from her checks for the next five years, leav­ing her with a much small­er month­ly income. (Because she couldn’t fig­ure out how to change her with­hold­ings after­ward, it was close to sev­en years before she final­ly changed it.)

Tax­pay­ers like Young, who under­pay their tax­es (whether inten­tion­al­ly or not) must pay addi­tion­al penal­ties, plus the orig­i­nal amount.

Young says her tax with­hold­ing and fil­ing is like hav­ing a sav­ings account with zero per­cent inter­est that I can’t access.” Her refunds may reach her fair­ly quick­ly — with­in two weeks of fil­ing her return — but Young post­pones buy­ing var­i­ous essen­tials through­out the year, such as cloth­ing for her chil­dren and car repairs, until that refund mate­ri­al­izes. Dur­ing Young’s five-year penal­ty peri­od, her refunds were around $8,000 – $9,000,” she says, a sig­nif­i­cant over­pay­ment. Now that the peri­od has expired, Young says her refund is typ­i­cal­ly around $5,000. She’s afraid of with­hold­ing less for tax­es through the year, she says, out of fear of owing the IRS come Tax Day.

In 2005, Joe Bankman worked on a Cal­i­for­nia pilot pro­gram called ReadyRe­turn, which California’s tax agency, the Fran­chise Tax Board, care­ful­ly devel­oped. The pro­gram allowed Cal­i­for­nia res­i­dents to sim­ply review their state tax returns, pre­pared for them in advance by the state’s Fran­chise Tax Board, at no cost. Such a mod­el is com­mon in sev­er­al coun­tries, includ­ing the Nether­lands, Japan and Swe­den. Pre-filled forms save res­i­dents count­less hours doing tax returns with­out cost­ing them any mon­ey. For exam­ple, accord­ing to report­ing by Eston­ian jour­nal­ists, Estonia’s res­i­dents take an aver­age of five min­utes to com­plete their returns. Some Swedish res­i­dents sim­ply need to respond yes” to a text mes­sage to file their taxes.

Bankman believes the method, which no oth­er state has attempt­ed, could be applied to fed­er­al tax fil­ings, too: The IRS would cal­cu­late the ten­ta­tive return and the tax­pay­er would have the right to either approve or refuse it.

ReadyRe­turn was imple­ment­ed in 2004, mak­ing this pro­gram avail­able to 50,000 Cal­i­for­nia tax­pay­ers. Since then, the num­ber of peo­ple using the ser­vice has grown. Of the 88,000 Cal­i­for­ni­ans who used ReadyRe­turn for the 2011 tax year, 99 per­cent said they were sat­is­fied with the pro­gram, accord­ing to the Fran­chise Tax Board. In 2015, ReadyReturn’s fea­tures were absorbed by Cal­File, California’s e‑filing ser­vice used by more than 125,000 out of six mil­lion eli­gi­ble Cal­i­for­nia taxpayers.

Bankman sin­gles out two major road­blocks to the sim­pli­fi­ca­tion of fil­ing tax­es: the influ­ence of anti-tax activists such as Grover Norquist and Rush Lim­baugh, and the so-called tax lob­by that rep­re­sents the inter­ests of tax soft­ware companies.

Norquist has fought California’s ReadyRe­turn pro­gram, as well as the idea of free fed­er­al tax prepa­ra­tion. In 2013, Norquist sent an open let­ter to Con­gress signed by Amer­i­cans for Pros­per­i­ty and oth­er cor­po­rate-fund­ed, far-right advo­ca­cy groups, warn­ing that the IRS want­ed to social­ize all tax prepa­ra­tion in America.”

The tax lob­by is spear­head­ed by the soft­ware giant Intu­it, mak­er of the tax-fil­ing pro­gram Tur­b­o­Tax. Intu­it alone has spent more than $20 mil­lion since 2009 in fed­er­al lob­by­ing to main­tain the sta­tus quo. H&R Block has spent $3.4 mil­lion lob­by­ing the cur­rent Con­gress and main­tains a per­ma­nent gov­ern­men­tal rela­tions staff. An analy­sis by Uni­ver­si­ty of Cal­i­for­nia at Davis law pro­fes­sor Den­nis J. Ven­try Jr. found that, in the five years in which Cal­i­for­nia was test­ing ReadyRe­turn, Intu­it spent more than $3 mil­lion on lob­by­ing and polit­i­cal cam­paigns, includ­ing $1 mil­lion cam­paign­ing for a state con­troller can­di­date who opposed ReadyReturn.

Intu­it, H&R Block and oth­er for-prof­it tax prepa­ra­tion com­pa­nies, such as Lib­er­ty Tax, are mem­bers of a con­sor­tium called the Free File Alliance, which seeks to pre­empt any IRS free online tax prepa­ra­tion pro­grams with their own ser­vices for low-income taxpayers.

The Free File Alliance struck a deal with the IRS in 2002 to have the IRS offer the com­pa­nies’ tax prep soft­ware on the IRS web­site, on the con­di­tion that the Free File Alliance would pro­vide free ser­vice to low-income Amer­i­cans. The deal also bars the IRS from offer­ing its own soft­ware, stat­ing the fed­er­al gov­ern­ment has pledged to not enter the tax prepa­ra­tion soft­ware and e‑filing ser­vice mar­ket­place.” This agree­ment, known as Free File,” was part of the President’s Man­age­ment Agen­da, a 2001 ini­tia­tive by George W. Bush, which instruct­ed gov­ern­ment agen­cies to adopt mar­ket-friend­ly e‑government reforms.

Although Free File indeed allows low-income tax­pay­ers to file their tax­es at no cost, only 3 per­cent of eli­gi­ble tax­pay­ers actu­al­ly use it. Free File is bare­ly used by any­one,” says Jere­my Bear­er-Friend, act­ing assis­tant pro­fes­sor of tax law at New York Uni­ver­si­ty. It mere­ly baits tax­pay­ers into more expen­sive ser­vices while block­ing the IRS from devel­op­ing uni­ver­sal­ly acces­si­ble and free online filing.”

Pres­i­dent Barack Oba­ma cam­paigned in 2008 on a fil­ing sys­tem called The Sim­ple Return.” In one speech Oba­ma stat­ed, There is no rea­son the IRS can’t send Amer­i­cans pre-filled tax forms to ver­i­fy.” Two years pri­or, his senior eco­nom­ic advi­sor, Aus­tan Gools­bee, had authored The Sim­ple Return’: Reduc­ing America’s Tax Bur­den Through Return-Free Fil­ing,” which echoed Bankman’s ReadyRe­turn plans, to make tax fil­ing sim­pler by hav­ing the IRS use all of the infor­ma­tion they already have to cre­ate a pre­pared return the tax­pay­er can approve or reject.

How­ev­er, even with Gools­bee in his cab­i­net, Oba­ma nev­er passed any fed­er­al sim­ple return leg­is­la­tion. Mean­while, in 2008, Intu­it almost dou­bled its lob­by­ing bud­get and since then has spent between $2 mil­lion and $3 mil­lion per year lob­by­ing Con­gress. To date, Intu­it has lob­bied against almost every tax-return sim­pli­fi­ca­tion bill proposed.

The IRS’s bind­ing Free File agree­ment has been extend­ed five times since its incep­tion, and it will be up for renew­al again in 2021. Con­gres­sion­al rep­re­sen­ta­tives from both par­ties have endorsed Free File. In April 2018, the House vot­ed unan­i­mous­ly to make Free File per­ma­nent, but the mea­sure has yet to be vot­ed on in the Sen­ate. It has nev­er been seri­ous­ly chal­lenged,” Bankman says, and the deal is such that the IRS can’t offer an alternative.

With the pas­sage of the Tax­pay­er First Act in the House, the tax lob­by has again moved a step clos­er to pro­tect­ing its prof­its for the fore­see­able future. 

Sen. Eliz­a­beth War­ren (D.-Mass.) sin­gled out these tax lob­by­ists in April 2016 when she intro­duced a bill to sim­pli­fy tax fil­ing. She would lat­er pitch a sim­i­lar bill in 2017 with 10 Demo­c­ra­t­ic cospon­sors, includ­ing Sen. Bernie Sanders (I‑Vt.), which was the most heav­i­ly lob­bied against bill of 2017 and 2018.

Con­gress should be mak­ing it eas­i­er for Amer­i­cans to file their tax­es each year, not bow­ing to the inter­ests of the tax prep indus­try,” War­ren wrote in a 2016 press release. The Tax Fil­ing Sim­pli­fi­ca­tion Act is a com­mon­sense bill that would help tax­pay­ers all across the coun­try file their tax­es with less stress and few­er costs, and it would push the IRS to use the author­i­ty it already has to sim­pli­fy Tax Day for all Americans.”

Dur­ing the longest gov­ern­ment shut­down in U.S. his­to­ry — 35 days — ear­li­er this year, an audit by the office of the Nation­al Tax­pay­er Advo­cate high­light­ed Amer­i­cans’ extreme frus­tra­tion” with the IRS. Thanks to the agency’s reliance on 1960s-era tech­nol­o­gy, mil­lions of tax returns were delayed in 2018 due to a sys­tems fail­ure hours before the fil­ing dead­line. And this, accord­ing to Bankman, has made over­all fil­ing more ardu­ous for taxpayers.

Kristi­na Wolf, 39, a moth­er of two, and an ecol­o­gy sci­en­tist, doesn’t nec­es­sar­i­ly har­bor resent­ment at the byzan­tine nature of the U.S. income tax fil­ing sys­tem, but she is frus­trat­ed — so much so that she has not filed her tax­es in two years. Wolf is ful­ly aware of the problem.

I’ll owe inter­est on at least a year’s worth of tax­es, plus the penal­ty,” Wolf says with pal­pa­ble sur­ren­der, plus inter­est on the entire­ty of my fees.”

Since Wolf divorced in 2011, fil­ing state and fed­er­al income tax returns has just about done her in. At the time, she lived below the pover­ty line and worked three part-time jobs plus a full-time job to make ends meet. That, com­bined with her stu­dent debt and a com­pli­cat­ed divorce set­tle­ment that includ­ed her pay­ing off her husband’s debts, made her fil­ings espe­cial­ly overwhelming.

One tax advi­sor told Wolf he wasn’t sure him­self how to help. A sec­ond one died in the midst of help­ing her file. Between the two, Wolf spent close to $600 and still hadn’t com­plet­ed her tax return. Although Wolf is trained in sta­tis­tics and has done her best to edu­cate her­self on how to file her tax­es, she’s still at a loss. Today, Wolf is so pet­ri­fied of the amount she owes in back tax­es and fees that the prospect of fig­ur­ing out how to square it all away par­a­lyzes her. She mean­while goes with­out need­ed den­tal work and med­ical surg­eries for fear of spend­ing the mon­ey she will need to pay her tax­es; she broke her thumb and tore the lig­a­ment in 2018 but couldn’t afford her health insur­ance deductible for the surgery.

Wolf says she would be grate­ful for a sys­tem like the one Bankman pro­posed. Jill Young agrees, rea­son­ing that, if the gov­ern­ment is essen­tial­ly fil­ing her tax return for her, then she would have no role in fig­ur­ing out her refund and so would not be audited.

While Wolf and Young receive reg­u­lar pay­checks, their finan­cial capac­i­ty is severe­ly con­strained because of debt and, for Wolf, child­care expens­es, too. These con­straints are large­ly why a tax refund can be so crit­i­cal. While the work­ing poor do have some spe­cial tax cred­its to reduce the tax bur­den, such as the Earned Income Tax Cred­it (EITC), claim­ing them still requires fil­ing an income tax return that demon­strates their eligibility.

But just claim­ing legit­i­mate tax cred­its can cause a prob­lem for the work­ing poor. Accord­ing to 2018 ProP­ub­li­ca inves­ti­ga­tion, peo­ple who made under $20,000 a year and claimed the EITC were twice as like­ly to be audit­ed in 2017 than peo­ple who made $200,000 – $500,000. While audit­ing rates have slowed due to bud­get cuts and out­dat­ed tech­nol­o­gy, those rates have slowed down less for the work­ing poor than for the wealthy. The rea­son is in part because of a 2015 law passed by a Repub­li­can Con­gress and signed by Oba­ma. The law com­pelled the IRS to with­hold EITC refunds in order to check for mis­state­ments appli­cants might have made on their forms.

The fed­er­al government’s attempt to alle­vi­ate the cost of fil­ing tax­es has been woe­ful­ly inad­e­quate. The tax-fil­ing onus is entire­ly upon the aver­age work­ing per­son — to know the tax code and any changes made to it in the last year, to strate­gize and orga­nize for fil­ing, and then to pay for it.

Sim­pli­fy­ing tax fil­ing would ben­e­fit low-income tax­pay­ers claim­ing the EITC, [which] is one of the most impor­tant anti-pover­ty pro­vi­sions we have,” says Jere­my Bear­er-Friend. The com­plex tax-fil­ing process has made it lucra­tive for pri­vate inter­me­di­aries to skim EITC refunds for per­son­al prof­it. Return pre­par­ers charge steep fees, mean­ing less mon­ey goes to the work­ing fam­i­lies who actu­al­ly earned the tax cred­it.” Low-income tax­pay­ers who are eli­gi­ble for EITC, he adds, are actu­al­ly more like­ly to rely on paid tax pre­par­ers than oth­er fil­ers, result­ing in pay­ing $400 on aver­age per fil­ing sea­son, which amounts to about 16 per­cent of their EITC.

Wolf’s and Young’s predica­ments would bewil­der Kon­rad Ender­lein, a cer­ti­fied pub­lic accoun­tant in Ham­burg who, from 1997 until 2002, worked in New York as a tax advi­sor to Ger­mans liv­ing in the Unit­ed States who were pay­ing their tax­es to both coun­tries. The posi­tion gave him a bird’s‑eye view of the Amer­i­can and Ger­man tax sys­tems, and while he says they have more sim­i­lar­i­ties than dif­fer­ences, one major facet dis­tin­guish­es them: The aver­age Ger­man might not under­stand their country’s tax laws either, but doesn’t need to.

The work­ing poor in Ger­many usu­al­ly don’t file tax­es at all,” Ender­lein says. Ger­man employ­ers do the wage with­hold­ing and report those taxes.”

Accord­ing to Bankman, many Euro­pean nations offer tax­pay­ers pre­pop­u­lat­ed returns that they need only review and approve. It takes about 15 min­utes or less. The bills pro­posed by law­mak­ers such as Warren’s can put the Unit­ed States on track to make tax fil­ing as sim­ple as it is for many oth­er coun­tries. Her pro­posed tax bill would imme­di­ate­ly do away with the Free File sys­tem and replace it with a return-free” fil­ing option where­by mil­lions of Amer­i­cans with uncom­pli­cat­ed tax sit­u­a­tions receive a pre-filled tax return.

The bill has been esti­mat­ed to save a col­lec­tive 225 mil­lion hours and $2 bil­lion in costs spent on prepar­ing tax­es. If you start off with a return with every­thing on it, it is rea­son­able to assume you wouldn’t have to spend much time fill­ing it out,” says Bankman. The chal­lenge, in the long term, is to make sure our fil­ing sys­tem doesn’t pri­mar­i­ly serve industry.”

Eliz­a­beth Zach is the staff writer at the non­prof­it Rur­al Com­mu­ni­ty Assis­tance Cor­po­ra­tion, where she cov­ers rur­al pover­ty and economies, the envi­ron­ment, and trib­al issues across the 13 states of the Amer­i­can West, includ­ing Alas­ka and Hawaii. In 2018, she report­ed on per­sis­tent pover­ty as a Mar­guerite Casey Foun­da­tion Equal Voic­es Jour­nal­ism Fel­low. In 2016, she was a fel­low at the Uni­ver­si­ty of South­ern Cal­i­for­ni­a’s Annen­berg School of Jour­nal­ism, writ­ing on rur­al health­care in Cal­i­for­nia. In 2015, she was a media fel­low at Stan­ford Uni­ver­si­ty’s Bill Lane Cen­ter for the Amer­i­can West, for which she researched and wrote about women farm­ers and ranchers.
Limited Time: