Paul L. Caron

Tuesday, November 2, 2021

L.A. Times: California Tried To Save The Nation From The Misery Of Tax Filing — Then Intuit Stepped In

Following up on my previous posts (links below):  L.A. Times, California Tried to Save the Nation From the Misery of Tax Filing — Then Intuit Stepped In:

An unexpected letter from the state tax board is the kind of thing known to spike blood pressure. But the note that arrived in tens of thousands of Californians’ mailboxes in 2005 promised to ease anxiety.

The state proposed that these mostly modest-income taxpayers skip the aggravations of hunting for W-2s, the hassling with tax software, the lost evenings and weekends completing returns. Instead, the state could do it for them.

Californians participating in this test run of a “return free” tax system — a goal tax reformers had been chasing since President Reagan proposed it to the nation in 1985 — were so impressed that the thousands of comments that poured into a survey brought tears of joy to Joe Bankman, the Stanford law professor who guided the state’s effort, which was branded “ReadyReturn.”

“They were just so touching,” he said of the comments about ReadyReturn, which was designed as a voluntary offering targeted at taxpayers on the lower end of the income scale. “One said, ‘Finally the government is doing something to make my life better for a change.’ Almost all the comments had the words ‘thank you.’ People were thanking the government for taking something that drove them crazy and improving it.”

Yet not everyone was thankful. Tax software firms faced an existential threat if the federal government were to follow California’s lead. Over the next decade and a half they worked relentlessly — and successfully — to stymie the California project and prevent others like it. They persuaded the Internal Revenue Service for more than a decade to pledge in writing not to adopt California’s innovation or develop any other offerings that threatened their business model. ...

Those companies persuaded the IRS to let them provide the government’s congressionally mandated free electronic filing service meant for most Americans, which was branded Free File. And now they stand accused of using that authority to swindle taxpayers by obscuring the Free File offerings online and luring consumers to other products marketed as free, but which often include steep fees.

Amid the unraveling of the industry-government partnership, California’s blueprint for ending the nightmare of tax filing for millions is getting another look at the national level.

This follows years in which a coalition of software firms led by Silicon Valley-based Intuit, the maker of TurboTax and a colossus that boasts 73% of the market share for tax preparation services, fought against California’s plan to follow the lead of countries like Germany and Japan. In those places, tax day is a nonevent. Citizens may get a pre-filled return that has all the salary, investment and other information the government already has in its files.

“There are about 30 countries that do this for a big chunk of their populations,” said William Gale, a senior fellow at the Brookings Institution, who has been writing since the mid-1990s about the potential for the U.S. to go that route. “I would have thought we would be further along by now.” ...

Intuit in July exited the Free File partnership with the IRS, following the same move by H&R Block last year. The departures came after the IRS said companies could no longer hide Free File from searches and after the agency in 2019 ended its pledge not to design software that competes with the tax preparers’ products.

That pledge had been pivotal to depriving the California experiment of oxygen. ...

Where the IRS goes next is unclear. It has a new head of tax policy at the Treasury Department, Lily Batchelder, who is considered an ally by Warren and other return-free proponents. Officials at the department, which oversees the IRS, said the administration is committed to simplifying tax filing but declined to elaborate. ...

Yet dozens of highly credentialed scholars from such institutions as Stanford, Yale, Berkeley Law, University of Chicago and Georgetown University are adamant that the U.S. could easily transition to a return-free model. They acknowledge the U.S. tax system is more complicated than that of countries now using it and that adjustments would be needed in the tax code to make it work here. But recent innovations at the IRS, they say, show the agency can give taxpayers a viable return-free option. ...

Bankman isn’t giving up. The professor is so committed that at one point early in the fight he took leave from Stanford, hired a professional Sacramento lobbyist and roamed the state Capitol to pitch lawmakers on ReadyReturn. He compares his quest to make tax filing simple to Charlie Brown trying to kick a football.

He gets close, and then the ball gets pulled away.

Prior TaxProf Blog coverage:

Tax, Tax News | Permalink