Paul L. Caron

Tuesday, March 26, 2013

How Maker of TurboTax Fought Free, Simple Tax Filing

TurboTax (2013)Philadelphia Inquirer:  How Maker of TurboTax Fought Free, Simple Tax Filing, by Liz Day (ProPublica):

Imagine filing your income taxes in five minutes — and for free. You'd open up a pre-filled return, see what the government thinks you owe, make any needed changes and be done. The miserable annual IRS shuffle, gone.

It's already a reality in Denmark, Sweden and Spain. The government-prepared return would estimate your taxes using information your employer and bank already send it. Advocates say tens of millions of taxpayers could use such a system each year, saving them a collective $2 billion and 225 million hours in prep costs and time, according to one estimate.

The idea, known as "return-free filing," would be a voluntary alternative to hiring a tax preparer or using commercial tax software. The concept has been around for decades and has been endorsed by both President Ronald Reagan and a campaigning President Obama.

"This is not some pie-in-the-sky that's never been done before," said William Gale, co-director of the Urban-Brookings Tax Policy Center. "It's doable, feasible, implementable, and at a relatively low cost."

So why hasn't it become a reality?

Well, for one thing, it doesn't help that it's been opposed for years by the company behind the most popular consumer tax software — Intuit, maker of TurboTax. Conservative tax activist Grover Norquist and an influential computer industry group also have fought return-free filing.

Intuit has spent about $11.5 million on federal lobbying in the past five years — more than Apple or Amazon. Although the lobbying spans a range of issues, Intuit's disclosures pointedly note that the company "opposes IRS government tax preparation." ...

Proponents of return-free filing say Intuit and other critics are exaggerating the risks of government involvement. No one would be forced to accept the IRS accounting of their taxes, they say, so there's little to fear. Other advocates point out that the IRS would be doing essentially the same work it does now. The agency would simply share its tax calculation before a taxpayer files rather than afterward when it checks a return.

"When you make an appointment for a car to get serviced, the service history is all there. Since the IRS already has all that info anyway, it's not a big challenge to put it in a format where we could see it," said Paul Caron, a tax professor at University of Cincinnati College of Law. "For a big slice of the population, that's 100 percent of what's on their tax return."

Taxpayers would have three options when they receive a pre-filled return: accept it as is; make adjustments, say to filing status or income; or reject it and file a return by other means. "I've been shocked as a tax person and citizen that this hasn't happened by now," Caron said.

Some conservative activists have sided with Intuit. In 2005, Norquist testified before the President's Advisory Panel on Federal Tax Reform arguing against return-free filing. The next year, Norquist and others wrote in a letter to President Bush that getting an official-looking "bill" from the IRS could be "extremely intimidating, particularly for seniors, low-income and non-English speaking citizens." ...

In separate reports, the CCIA and a think tank that Intuit helps sponsor argue that potential costs outweigh return-free filing's benefits. Among other things, the reports say that not many taxpayers are likely to use return-free, that new data reporting requirements could raise costs for employers, and that taxpayers could face new privacy and security risks. ...

James Maule, a professor at Villanova University School of Law, said the average taxpayer probably wouldn't scrutinize a pre-filled return for accuracy or potential credits. "Some people might get this thing that says this is your tax bill and just pay it, like with property tax bills," said Maule.

So far, the only true test case for return-free filing in the U.S. has been in Intuit's home state.

In 2005, California launched a pilot program called ReadyReturn. As it fought against the program over the next five years, Intuit spent more than $3 million on overall lobbying and political campaigns in the state, according to Dennis J. Ventry Jr., a professor at UC Davis School of Law who specializes in tax policy and legal ethics. ...

Joseph Bankman, a Stanford Law School professor who helped design ReadyReturn, says he spent close to $30,000 of his own money to hire a lobbyist to defend the program in the legislature. Intuit made political contributions to scores of legislative candidates, Bankman said, and gave $1 million in 2006 to a group backing a ReadyReturn opponent for state controller.

ReadyReturn survived, but with essentially no marketing budget it is not widely known. Fewer than 90,000 California taxpayers used it last year – although those who do use it seem to be happy. Ninety-eight percent of users who filled out a survey said they would use it again. The state's tax agency has also praised ReadyReturns, saying they are cheaper to process than paper returns.

Bankman thinks national return-free filing could make many others happy, too. "We'd have tens of millions of taxpayers," he said, "no longer find April 15 a day of frustration and anxiety."

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@air65cav... But AmEx is billing you in a way like getting a prefilled tax return. You don't save your receipts and calculate your interest and send what you think you owe to AmEx, they bill you and you review it and pay it.

For "Joe Paycheck" who gets a W2 and maybe some bank interest I think this is great - and I think this class of taxpayer accounts for a large percent of the population.

Posted by: Derek | Apr 10, 2013 6:21:04 AM

Air65cav you also live in a world where you take a part of a statement and ignore what you don't like. If you want to assume that people are "responsible" then they should accept enough responsibility to look at the form received and make corrections and / or file their own return separately as noted in the story above. Efficiency my friend. I do my own taxes resulting in a big waste of my time. I am not going to pay some exorbitant price to have someone else do it. If the IRS can send a pre-filled out document where my responsibility lies in verification of its accuracy then God bless them especially if "saves taxpayers money".

Posted by: michael | Mar 28, 2013 6:48:47 AM

Charles: What exactly do you think the proposal involves? The IRS already gets copies of all your W-2s and 1099s. This system would pre-fill a tax form with all of the information the IRS has. You could then make changes for information they do not have and submit. Sounds pretty simple, and it involves no more government intrusion than already exists.

Posted by: James | Mar 27, 2013 9:42:22 AM

We already have return-free filing for procrastinators (intentional or otherwise). It's called the SFR (Substitute for Return)!

If you don't file, the IRS will prepare an SFR for you based on information it has available - W-2s, 1099s, etc. (if married, filing status will generally be a separate return) and send you a bill. If you disagree, you can file a return to replace the SFR.

Downsides of intentionally waiting for an SFR (and I know a few people who do) include interest and penalties if you owe tax or possible loss of a refund if the statute of limitations expires before you file an actual return. Also, since the IRS has sales information, but, until very recently, not basis, gain on security sales will usually equal gross proceeds.

Posted by: LJB | Mar 27, 2013 8:54:02 AM

Having the IRS send out pre-perpared tax forms presents a conflict of interest on the IRS's part. They cannot have complete information for an individual. And cannot act in the best interest of taxpayers regardless of how much information is sent into them.

Posted by: Karen | Mar 27, 2013 8:30:15 AM

michael - I apparently live in a different world than you do. You live in a world that "It's not about trusting the govt but a more cost effective method for the govt (which is harped on by conservatives)...."

I am sure it would be more cost effciient for the IRS to bill me. The world I live in I review my credit card statement - it's more cost efficient for AmeX to just bill, but I count my change and cut the cards.

Let's imagine the class law suits against the IRS when we discovered that they billed TPs the wrong amount. Or do you think sovreign immunity should protect them?

Of course the tax code is screwed up and needs reform. Do we really need three separate college tax "expenditures" with different rules and different phase outs? BUT THAT IS CONGRESS.

Posted by: air65cav | Mar 27, 2013 8:28:17 AM

Wow. I never thought I'd see Grover Norquist crying crocodile tears for low-income taxpayers.

Wait a second. Aren't those the same people that are leeches because they don't pay income taxes? How confusing.

Posted by: G.E. Moore | Mar 27, 2013 8:24:51 AM

How about, as a first step, sending a timely transcript to taxpayers? A year or two later start sending it in the form of a draft tax return, but without the calculations performed. Then with the calculations performed, but still always ultimately requiring the taxpayer's signature and transmission.

Ultimately, simplify the tax code. This paper shuffle through snail mail of W-2s, 1099s is ridiculous in this day.

Posted by: OttoAuto | Mar 27, 2013 8:01:38 AM

When the words "Conservative tax activist Grover Norquist " come out, and your not one of the 1%, your going to get ripped off. "bank" on it.....

Posted by: rw | Mar 27, 2013 7:56:45 AM

It's not about trusting the govt but a more cost effective method for the govt (which is harped on by conservatives) and a time efficient method for filers. If a person is responsible, as indicated in the article, adjustments can be made or one can fill out the enormous debacle that are tax forms. It appears to provide more choice.

Posted by: michael | Mar 27, 2013 7:51:24 AM

Under Pay As You Earn in the UK, 85% of all wage earners need not file a tax return. HMRS figures out your taxes based on info you provided earlier. Withholding is done by your employer with a code provided by HMRS. Withholding at the source also plays a role. High income earners, the self employed and those with unusual circumstances make up the ranks of the filets.

Posted by: Bill Turnier | Mar 27, 2013 5:49:12 AM

Do you really trust the government to compute your taxes correctly? Do you? Is this because they have such a terrific record? What is the percentage of questions the IRS answers incorrectly? Isn't it more than a third?

I'm not a fan of TurboTax but I count my change and cut the cards.

Posted by: air65cav | Mar 27, 2013 4:51:52 AM

Australia has something like this too. For most people, it makes preparing taxes an easy and time-cheap affair. It should be noted, however, that the Australian Taxation Office is a far more intelligent and flexible beast than the IRS.

Posted by: Dennis | Mar 27, 2013 3:54:38 AM

Uuhhh.. well, for starters, I have to imagine that eventually we will grow tired of our 'of the people, for the people and by the people' looking into our bank accounts.

I really don't know the story behind this story, but I feel like I am reading propaganda. There is a villain (intuit). There is a presumed acceptance of a now very controversial law (the law which allows government to spy on our financial lives to 'prevent terrorism').

May you live in interesting times.

Posted by: Diesel Chadron | Mar 26, 2013 9:14:46 PM

I don't know whether the service is still available, but at one time the Feds offered touch tone phone filing for people with basic information (1040EZ level). In this area, Jackson & Hewett and H & R Block (two tax return preparers who probably also lobbied against IRS prepared draft returns) are offering free 1040EZ preparation.

Most people's interest in income tax returns is limited to 1) how much is my refund and 2) I hope I don't get audited.

Posted by: Charles | Mar 26, 2013 6:17:16 PM