How tax prep companies conspired to make filing your taxes so damn hardMay 4, 2021
In 1985, President Ronald Reagan called for a simple tax filing system under which most people would not have to fill out a tax return. Instead, they’d just receive a form from the IRS showing their refund or tax liability. In 2010, a White House advisory board proposed the same idea, noting that Americans spend billions of hours and hundreds of billions of dollars annually preparing their taxes. In 2019, Sen. Elizabeth Warren (D-Mass.) also proposed a free, easy filing system that would allow the bulk of taxpayers to avoid the unpleasantness of filling out returns that are dozens of pages long, with complicated sheets of instructions. She’s recently been promoting that bill again, ahead of Tax Day 2021.
With such a long history of support from across the political spectrum, why hasn’t America followed the lead of dozens of other countries in adopting a simple, government-run system for paying taxes?
The answer is simple and infuriating: the power of the tax preparation industry. Much like a public option in health care, a public tax filing option would save many people across the country significant time and money. But it doesn’t get created because powerful corporate interests don’t want to dent their profits.
Just two companies — Intuit (the maker of TurboTax) and H&R Block — dominate the private tax preparation industry, shepherding to the IRS 81% of individual returns filed with tax prep software. This earns these companies billions of dollars annually. And that’s why, for decades now, they’ve colluded with the government to prevent the IRS from sending you a simple form with your tax bill, which you could then either accept or dispute.
To be clear: The IRS already has all the information it needs to set up such a system. All that’s missing is the political will to get it running.
Back 1993, Intuit was just a company that made accounting software — until it acquired Chipsoft, the makers of TurboTax. Intuit took TurboTax mainstream, dominating the tax prep market by the early 2000s. Intuit also anticipated that filing over the internet was likely how most folks would want to pay their taxes in the future, leading to the eventual creation of the online program many people use today.
But then a threat emerged: the George W. Bush administration, which began to explore the idea of providing a free, electronic filing system through the IRS. Intuit, H&R Block, and a bevy of other tiny tax-prep companies with names like TaxEngine and TaxBrain lobbied Congress to stymie the idea, not wanting public competition for their business. The result was a corrupt bargain, in which private tax prep corporations would provide free products to at least 60% of taxpayers in exchange for the IRS not creating its own universally free electronic system. A few years later, the tax prep corporations successfully lobbied to include an income cap on which taxpayers would receive free filing, which currently sits at $72,000.
In 2020, only about 4% of people eligible for free private filing programs used them.
According to extensive reporting by ProPublica, Intuit has spent the intervening years perfecting a system to nickel-and-dime mostly low-income folks by pushing them into paid products even though they qualify for the free version, and by rolling out programs under the free filing agreement that are hard to navigate and full of tricks. The strategy has worked: In 2020, only about 4% of people eligible for free private filing programs used them, per CNBC.
Intuit matches those efforts with an extensive lobbying campaign to ensure the private “free file” program never goes away — simply by lobbying against a free public filing option. If the government were to help taxpayers file quickly and cost-free, then the private companies would have much less reason to exist. Intuit conceded as much in its public filings last year, writing, “Government funded services that curtail or eliminate the role of taxpayers in preparing their own taxes could potentially have material and adverse revenue implications.”
The tax prep corporations have also been helped along by an alliance of convenience with anti-tax conservative groups, who oppose free, easy filing under the theory that the more complicated paying taxes is, the more anti-tax sentiment there will be. Those groups raise the dreaded “socialism” specter to scaremonger about direct IRS filing, even though their patron saint Reagan was for the idea.
That alliance has held to this day. So instead of producing a public tax-paying option, Congress and various presidential administrations have tried to jerry-rig competition in the private tax prep industry, via antitrust efforts.
For example: In 2011, the Department of Justice prevented H&R Block from buying TaxAct, a “particularly aggressive competitor” in the low-cost tax prep space, per the DOJ. And last year, the DOJ made Credit Karma, which provides credit score-tracking and other financial products like checking and savings accounts, sell its tax prep business to Square before it could be acquired by Intuit, which closed a deal to acquire the rest of the company in December. The theory was that the DOJ forcing CreditKarma to spin off its tax business before merging with Intuit would preserve some level of competition, adding Square to the menu of tax prep options rather than allowing Intuit to grow fatter. Way back in 1993, Chipsoft, the original maker of TurboTax, was also blocked from buying another competitor in the tax-prep software space.
To be clear, blocking more consolidation in the tax prep space is right on the merits. But there’s little reason to think this sort of corporate engineering will create actual competition for tax prep services. Since the DOJ blocked the TaxAct-H&R Block merger, Intuit and H&R Block’s share of the market has actually increased. Intuit also doesn’t seem worried that Square will suddenly become a major player, either. “We welcome competing with Square, and we’re not at all concerned,” said the CEO of Intuit in December. “The tax business is very, very sticky.”
He’s right: Switching services can be a huge pain, because the service you’ve used before probably saved your information from the previous year. Going elsewhere means starting over from scratch, which can be incredibly inconvenient given how complicated filing is to begin with. (And remember who’s to blame for that complexity?)
What the government can do, instead of trying to force a competitor to Intuit and H&R Block into existence, is introduce its own system to take the profit out of paying taxes. Doing your civic duty shouldn’t be a corporate profit center anyway. There are already plenty of plans to do so. All Congress has to do is pass one.