Tax Preparation Software Companies Lobby against Prefilled Filing
The companies claim that availability of such an option would threaten their business
Online tax preparation software companies Intuit (the maker of TurboTax) and H&R Block are lobbying against allowing the government to offer taxpayers a tax solution that could make filing free and easy.
The idea is prefilled returns. The government would fill out your filing and send it to you to check over. You would review it and, if it were accurate, you would sign it; if there were errors, you would either fix it or prepare the return yourself. Doing it yourself would save money on an accountant, and prefilled returns—if they were correct—would get rid of hours spent using complicated software.
It would not be hard to implement this solution. Parts of Europe already have a prefilled tax filing system, and the federal government already receives earnings information from employers.
Good for Consumers, Bad for Profits
Unsurprisingly, companies that make tax preparation software are against such a move. Intuit and H&R Block, for example, have been lobbying for years against a system like this, and they continue to do so.
Intuit spent more than $2 million in 2016 on lobbying, much of the money going to legislation permanently preventing the government from offering prefilled returns. H&R Block spent more than $3 million and also contributed to the bill.
The legislation in question is called the Free File Act of 2016, and it seems consumer-friendly at first glance. There is a public-private partnership involving 13 private tax preparation companies—Intuit and H&R Block included—known as the Free File Alliance. This partnership offers free online tax filing to lower- and middle-income families. The Free File Act would make this partnership permanent.
The Act would also permanently prevent the IRS from offering its own free filing option.
Intuit has warned its investors repeatedly about government-prepared returns. In its latest corporate filings, it cautioned: "We anticipate that governmental encroachment at both the federal and state levels may present a continued competitive threat to our business for the foreseeable future."
In 2016, Senator Elizabeth Warren offered a bill allowing the government to begin offering prefilled returns. Tax giant H&R Block lobbied against the bill, though Intuit did not.
Neither the Free File Act nor Warren's bill made it out of committee.
The Free Filing Program
Few taxpayers eligible for the Alliance's free filing program actually use it. This may be because the system is confusing and promotes paid tax products.
According to a report made to Congress by the National Taxpayer Advocate, less than two percent of all individual tax returns were filed through the Free File Alliance program in 2016 in spite of the Alliance's claim that 70 percent of U.S. taxpayers are eligible to use the service.
"Let's call the so-called Free File Alliance what it really is — a front for tax prep companies that use it as a gateway to sell expensive products no one would even need if we'd just made it easier for people to pay their taxes," Warren stated to ProPublica.
Free File Alliance Executive Director Tim Hugo stated that it does not promote paid tax products automatically to taxpayers who use the program, but they do "have the option of 'opting in' to receive additional information and offers from the tax preparation company they have selected."
In reply to Warren's bill, the Alliance issued a press release warning that letting the IRS prepare returns would create "a tremendous and potentially harmful conflict of interest for the American people by enshrining the roles of tax preparer, tax collector, tax auditor and tax enforcer in one entity."
Hugo also serves as a state legislator in Virginia, which in 2010 cancelled its cost-free tax filing system and replaced it with a "Free File" bill that connected taxpayers to private companies. He serves on the committee that gave the green light to the bill.
Hugo said that he did not see a conflict of interest in the situation because the Free File program he represents is federal rather than state and because he recused himself from voting in the committee and on the floor.
Overreach or Advantage?
Joseph Bankman, Stanford Law School law professor in tax law, said that government overreach arguments are false because participation is optional and actually gives the advantage to taxpayers, since it makes the government "show its hand."
In addition, a prefilled system would get everyone's returns to them, including the millions of people who should receive a refund but don't because they don't file. The IRS said that more than one million taxpayers didn't receive the refund they were due in 2012 alone because they didn't file.
The refunds amounted to $950 million.
Although many consumers would benefit from prefilled returns, not everyone would.
"We might never get everybody in the system, because some people's tax situations are quite complicated," William Gale, tax expert at the Brookings Institution, told The Atlantic.
Examples of such taxpayers include those who itemize deductions and/or are self-employed. The latter, as Bankrate points out, do not receive W-2s or, in some cases, even 1099s.
There are also other concerns about prefilled returns. Some taxpayers may not inform the IRS about extra income if the agency doesn't receive a 1099. It would also be easy to miss certain tax breaks if you claim any income adjustments.
In addition, an IRS-only system might be particularly vulnerable to hackers, who currently have to search through several systems to get the information they want.
Though there are many advantages to a tax system in which the government provides prefilled returns, it is clear that there are many hurdles it will have to overcome before such a system could become a reality.