Why Isn’t It Easier To File Your Tax Return For Free? Thank TurboTax, H&R Block

Image courtesy of Mike Mozart

For most people, the IRS now has all the information it needs to estimate how much you owe in taxes, or how much of a refund you are due. So why is the burden on you to tell the federal government this same information? It may have something to do with the millions of dollars that H&R Block, Intuit (maker of TurboTax), and others have spent lobbying to maintain their exclusive arrangement with the IRS.

The IRS Restructuring and Reform Act of 1998 directed the Secretary of the Treasury to come up with a “return-free” tax filing system by 2008. Under such a system, the IRS would take the W-2s, 1099s, and other tax forms it receives to automatically calculate and prepare a rough draft tax return for taxpayers who want it — and for free.

If the taxpayer agreed with what they saw in a return-free filing, they would simply sign it. If there’s a problem or something that needs to be changed, the taxpayer would make those corrections and submit. Taxpayers who wanted to file their own returns would be free to do so; no mandate that everyone goes through this process.

It’s been nearly a decade since that deadline came and went. What happened?

Rather than work toward meeting the 2008 deadline for offering return-free filing, the IRS (at the direction of the Bush administration) instead established the Free File program in 2002, allowing certain tax prep companies the ability to offer free electronic filing software.

Those companies are known as the Free File Alliance, whose members include Intuit and H&R Block. Since 2002, the Alliance has repeatedly extended its exclusivity agreement with the IRS. The seventh and most recent deal [PDF] between the IRS and the Alliance extends their relationship through Oct. 2020.

Even though the tax prep industry and the IRS have this long-term agreement, ProPublica points out that both Intuit and H&R Block have continued to use money in an effort to Congress to stop laws that would open up the door to return-free filing, or to support legislation that would make this IRS relationship permanent.

Of the nearly $2.4 million Intuit spent on lobbying in 2016, about 75% of it involved one particular piece of legislation, the Free File Act of 2016, which sought to lock in the public-private partnership with the Free File Alliance.

H&R Block also spent $1.7 million lobbying in support of this bill, more than half of the $3.26 million it used for lobbying last year.

A large chunk of H&R Block’s lobbying money also went against legislation intended to make sure paid tax preparers are competent.

Block also spent $210,000 trying to defeat Sen. Elizabeth Warren’s attempt to jumpstart the movement toward return-free filing — even though that bill had no chance of getting out of committee, let alone being signed into law.

The Free File Alliance and supporters of legislation like the Free File Act argue that having the government present you with a pre-filled form is a matter over federal overreach, despite the fact that the taxpayer would not be required to agree with the IRS estimate.

Tax law specialist Joseph Bankman of Stanford Law School tells ProPublica that he doesn’t see it that way. Having the government pre-fill the tax return could actually help taxpayers, by compelling the IRS to “show its hand.”

“Now you know what the government knows,” Bankman explains. “If there’s a mistake that goes in your favor, maybe you don’t call attention to it.”

While the Free File Alliance website brags that “70% of American taxpayers” are eligible for Free File, and “98% of users would recommend the program to others,” what the site glosses over is that, according to the IRS, only about 2-3% of eligible taxpayers actually take advantage of Free File.