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.
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 a 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.”