Wait, Why Are We Paying Turbo Tax Again?

The New York Times ponders:

When a taxpayer files electronically through TurboTax, the information goes first to Intuit’s data center, where the file is batched with others and then sent to I.R.S. computers. The process is almost instantaneous, the company said — when everything goes right. “We are just the transmitter of the return,” said Julie Miller, a spokeswoman for the Intuit TurboTax unit. “In the middle there are no additional steps we are taking.”

So that raises the question: Why is there a need for an intermediary? The Internet’s greatest impact on business has been to cut out the middle step and thereby cut the cost of the product or service. In this case, transmitting electrons over the Internet costs consumers several times as much as mailing the bulky return. (There is a benefit to the taxpayer for using the Internet; sending it electronically, if coupled with direct deposit of the refund, cuts the waiting time for the refund to less than 14 days.)

Chuck Schumer, the Senator from New York who isn’t Hillary Clinton, is having none of it:

But Senator Charles E. Schumer, the New York Democrat, said the Free File program should be expanded to all taxpayers. He noted that fees were not imposed on taxpayers who filed by paper, even though that cost the I.R.S. far more to process than an electronic file, $2.65 versus 29 cents. Fewer errors occur in electronic filings as well — 1 in 100 compared with 1 in 5 for paper returns.

“The software glitch that prevented many Americans from filing their taxes on the 11th hour of tax day is bad business brought on by bad public policy,” Mr. Schumer said. “The I.R.S. should be moving toward a free e-filing system for all Americans, not using a handful of preparers and software companies to get its work done.”

Well, Chuck, we’d have to agree. According to the NYT, the free filing program open to 70% of taxpayers (those with adjusted gross income under $52,000) is just part of an agreement to keep direct filing from happening:

Under a 2005 agreement that lasts for four years, certain tax preparers, including the two big tax software companies, agreed to take part in the Free File program as long as the I.R.S. did not allow direct filing.

That’s just so 1998. —MEGHANN MARCO

TurboTax Software Slows Just as the Big Deadline Nears [NYT]
(Photo: Lazy Lightning)


Edit Your Comment

  1. Falconfire says:

    I agree too, one step further I am tired of banks who do the same thing. The whole point of electronic transfer is to limit the amount of paperwork and hands that are supposed to be involved, yet many banks charge you MORE to do things electronically (IE ATM fees, balance check fees, and whatever else they want to tack on)

    Its all a scam, your paying twice for something they used to do for free (ie they are saving money, and you are paying THEM money for the privilege to write things out yourself)

    The only reason that it even exists as it does with taxes right now is so the take preparation software companies make huge sums of money that they then split between them and the IRS.

  2. forgeten says:

    because its worth it to turbo tax and the like to lobby congress. While with everyone else its not worth very much. Same reason we will never have a flat tax.

  3. enm4r says:

    This is the reason I refuse to pay to file electronically. I’d rather pay the coins for a stamp than $15-20 or whatever it is. I filed in mid Feb this year and had my (small, I planned it that way) returns back about 4 weeks later.

    This isn’t to say I don’t use Tax software, I do, I just print and mail it. I don’t know why anyone would pay as much as they do just to avoid putting something in an envelope and dropping it in a box.

  4. Yogambo says:

    TurboTax provides free e-file for those that use it to prepare their taxes. I went through the IRS freefile link to them but didn’t make the limit for a totally free filing. Regardless, I found they only charged me $10 for fed, $10 for state for preparation with free e-file. I got curious if any of the other “discounts” I’d seen advertised if I went through my credit union, my bank, Comcast, etc. met this price point. Strangely none did. I got the cheapest price by picking free e-file, failing to meet the $52k standard and taking their “base” fee — better by $40.

    But point here is, I understand that the filing itself is free and for those that just want to e-file and prepare their returns on their own, it’s a screw job. But for me, who’s used TurboTax for nearly 7 years here (nearly all for free), it’s not a problem. I use their service to prepare my returns then e-file free. I guess breaking it into a two-part process is more transparent but also raises the ire of those only using tha tpart of the service. It’s actually queer you can’t e-file on your own. I thought I recalled that you could (old days) visit your local IRS office and e-file there for free (?).

    For those that use TurboTax prep aspects, however, this has always been a fine deal.

  5. Squeezer99 says:

    I didn’t e-file because while federal was free, every place wanted 9.95-12.95 to file the state. You can forget that, so I just printed them out and mailed them in.

  6. DaveD says:

    You could use TurboTax for free if you have any StateFarm insurance. They had some sort of deal setup…

  7. g4lt says:

    what part of “free” is fulfilled by you paying them $10? I can understand the state portion sort of, as there has yet to be a state that requires by statute an opportunity for taxpayers to file their returns free. The Fed, OTOH, does exactly that. Intuit is breaking federal law every time they require money for something that must by law be free. What do you think the chances of them seeing the inside of a courtroom for this are? can you say zero?

  8. shiny says:

    I filed my son’s taxes electronically this year. As he’s only four years old and not a major earner, he qualified for the Federal free e-file — which worked out just fine when we used the free version of TaxAct. But TaxAct wanted more money to file the State return.

    Fortunately, the Commonwealth of Virginia runs its own tax reporting website — and I was able to fill out an online version of Form 760 (my state’s version of the Federal 1040). He ended up owing no tax to Virginia as well as no filing fee. Everything had been done in-house with no third-party software (aside from a trusted web browser).

    Are there other states which are doing this? If so, I don’t see how this would be a giant leap to make it work on the Federal level…

  9. mac-phisto says:

    i free-filed thru taxactonline (i don’t use turbo b/c i never liked intuit…ever since they started their directfeed b.s.), but like squeezer said, state was gonna be $15. luckily, ct lets you direct file for free.

  10. Youngman says:

    Use the software, print out the completed forms, and mail them. Easy and very cheap.

    However, I do agree with the Senator that something needs to be changed.

  11. Youngman says:

    @shiny: why did your son need to do taxes?

  12. costanza007 says:

    This is just another example of why the US needs a consumption tax instead of income taxes. Imagine not having to file, saving time and money (both yours and the feds) by having taxes collected when you make a purchase, not through witholdings and a yearly exercise in math and white lies.

  13. dazzla says:

    Transmitting the return to the IRS may not take much but writing software to hold your hand while you create that return applying the rules that change yearly is what costs money.

    Plus of course this is seasonal so they have a limited amount of time to recoup their costs.

    (No I don’t work for any Tax filling companies but I understand the costs of developing software.)

  14. breals says:

    So the issue that this Senator doesn’t bring up about the fact that he most likely would still need to use an accountant to do his/her taxes. Why? We have a complex tax code. The software has to become complex in order to handle that. We could replace that with a VAT but no one seems to go down that route.

    Remember, people aren’t being forced to use software to efile their taxes but they seem to find it a time saver and so they pay for the being able to do that, kind of like when you pay to go on a toll road.

    I think eventually the IRS will develop and maintain a free, open efiling system, but remember you and I are going to be paying for that, with our taxes, so it won’t really be free. And they will most likely ask someone to build it for them…maybe even Intuit.

  15. mathew says:

    Simple tax system doesn’t have to mean sales tax/consumption tax. We could have a simplified income tax. The problem is that people like their tax breaks, so over the years the system naturally tends to get more and more complicated.

    In hindsight, the Founding Fathers should have taken an idea from the old Icelandic parliament, and put in a constitutional restriction that the law had to be recited from memory by the president each year. Anything he couldn’t remember was thereby repealed. Not only would this make the tax law a hell of a lot simpler, it might also discourage the people from electing ex-cokehead ex-alcoholic morons.

  16. Yogambo says:

    Well, put another way, I go through the free tax file link from the IRS but it has income limits (why is another story). I know that going in so I’m not surprised when Intuit says it’ll cost something for preparation.

    But I pay the $10 not for the e-file. I pay the $10 for the preparation, the forms and questionnaires that get me into the right forms for freelance, home business, deductions, etc. $10 beats $100 + for a tax accountant and Intuit guarantees the results (to a point).

    My point is I understand those that are stymied by not having a direct e-file solution. You do the work yourself, why can’t you e-file it yourself, right? I get it.

    I’m saying for those of us that use the preparation software provided, we (or at least I) look at the $10 it costs me for THAT service as fair. Truth is, in years past when I’ve been below the threshold, even the prep was free.

    Intuit’s racket here, if you want to call it that, is that for those that want to prepare their own taxes without the TurboTax software they have to pay to e-file only. What I’m saying is that for those of us who are actually using Intuit to prepare our taxes, we are not getting a bad deal at all. $10 for preparation is great IMHO.

    I do wish those that want to e-file direct for free could do so. But in reference to the title of this post, I use TurboTax as preparation software. I’ll pay for the use of that software. They then can soft shoe me with the claim of “free e-file” with use of their preparation software because in essence, in my application, that is correct.

  17. CyGuy says:

    The cost isn’t in the transmission, it’s in setting up the trust relationship between the transmitter and the receiver. By only letting designated companies perform the transmission to IRS they only have to set up a trust relationship with those companies. Also, the IRS are farming out a major expense of setting up any consumer website, which is the edit checks for submitted data – to ensure that numbers fields have numbers, that dates occur in the appropriate century, etc. If the IRS dealt directly with every e-filer, what TurboTax experienced on 4/17 could easily have been the experience of every taxpayer in the country trying to file a last minute return.

    That being said, there are at least a couple of things the IRS could start to let taxpayers do directly:
    – File for an extension
    – Make an estimated payment with an extension
    – make quarterly estimated tax payments if they don’t have sufficient withholding by an employer.
    – download the W-4 and 1099 information filed by other reporting their income
    – pay employee taxes for domestic staff
    – verify the tax exempt status of charitable organizations

  18. Hoss says:

    Cy Guy’s analysis is right on. While I agree that the IRS and states should invent a free means of filing, I’m concerned that this ultimately will still cost us. What I mean is the Turbo Tax (Intuit) and other developers have a business plan that includes a certain profit. If we take away the filing charges, they logically will increase the price of the product to make up for lost profit.

    And I’ve always wondered by we need to put a stamp on tax returns. I mean, my congressman can mail as much as he wants for free…once a year, I should get a free mailing to pay to keep the government running.

  19. wezelboy says:

    I’ve used turbo tax in the past, but money is tight this year, and I didn’t want to fork over the $90 to Intuit. I used turbo tax to verify my paper return. Sure, I have to wait until hell freezes over for my refund, but $90 bucks is $90 bucks.

    Everyone should be able to e-file for free.

  20. RaslDasl says:

    I filed two returns on TurboTax.com for FREE. This is not the taxfreedom under $52k deal, this was just a no-frills option on the website. As long as you don’t want too much help and don’t want to do your state return you can use the same web-base program they normally charge for. They just keep asking you to buy add-ons (which I resisted). Filing of the web-based return was free and you get a PDF of your filed return at the end. I live in NJ and they also have a free site to file your state return. Total cost for 2 federal and 2 state returns with e-filing: $0.

  21. bravo says:

    If free e-filing were extended to all Americans, TurboTax would just cost you $10 more up front. They’ll get their money.