March 21, 2017
By Jessica Huseman, ProPublica
Here’s how preparing your taxes could work: You sit down, review a prefilled filing from the government. If it’s accurate, you sign it. If it’s not, you fix it or ignore it altogether and prepare your return yourself. It’s your choice. You might not have to pay for an accountant, or fiddle for hours with complex software. It could all be over in minutes.
It’s already like that in parts of Europe. And it would not be particularly difficult to give U.S. taxpayers the same option. After all, the government already gets earnings information from employers.
Intuit spent more than $2 million lobbying last year, much of it spent on legislation that would permanently bar the government from offering taxpayers prefilled returns. H&R Block spent $3 million, also directing some of their efforts towards the bill. Among the 60 co-sponsors of the bipartisan bill: then congressman and now Health and Human Services Secretary Tom Price.
The bill, called the Free File Act of 2016, looks on the surface to be consumer-friendly. It makes permanent a public-private partnership in which 13 private tax preparation companies — called the “Free File Alliance” —have offered free online tax filings to lower- and middle-income families. The Free File Alliance include both Intuit and H&R Block.
But the legislation would also permanently bar the IRS from offering its own free alternative.
Intuit has repeatedly warned investors about the prospect of government-prepared returns. “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,” Intuit said in its latest corporate filings.
Sen. Elizabeth Warren, D-Mass., offered a bill last year that would have actually allowed the government to start offering prefill tax returns. While Intuit did not lobby against Warren’s bill — presumably because the legislation had little chance of success — tax giant H&R Block did. (H&R Block did not respond to a request for comment.)
Neither Warren’s bill nor the Free File Act made it out of committee.
Very few of those eligible for the industry’s no-charge filing program actually use it, perhaps because the system is confusing and pushes people toward paid products.
While the Free File Alliance says 70 percent of U.S. taxpayers can use the service, less than 2 percent of all individual tax returns were filed through the program in last year, according to a National Taxpayer Advocate’s report to Congress.
“Let’s call the so-called Free File Alliance what it really is — a front for tax prep companies who 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,” said Warren in a statement to ProPublica. Warren’s office put out a report on the issue last year that repeatedly cited our coverage.
In an emailed statement the Free File Alliance’s executive director, Tim Hugo, said that the alliance does not automatically push paid products to those that use the Free File program but the taxpayer does “have the option of ‘opting in’ to receive additional information and offers from the tax preparation company they have selected.”
He said that the lack of awareness of the program is “unfortunate,” and placed blame on the IRS. While the tax agency previously had a large budget to advertise the Free File program, “today that budget is $0, making it difficult to reach the general public,” he said.
In response to Warren’s bill, the Free File Alliance warned in press release that allowing the IRS to prep 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 is also a state legislator in Virginia, which canceled its own cost-free system of tax filing in 2010 and replaced it with a “Free File” bill connecting taxpayers to private companies. Hugo serves on the committee that greenlighted the legislation. Hugo said he saw no conflict of interest here, as the Free File program he represents is federal, not state, and he recused himself from voting in the committee and on the floor.
Joseph Bankman, a law professor in tax law at Stanford Law School said arguments about government overreach are false. Participation is voluntary and actually gives taxpayers the upper hand, forcing the government to “show its hand.”
“Now you know what the government knows,” Bankman said, who added that there are multiple ways taxpayers could benefit. “If there’s a mistake that goes in your favor, maybe you don’t call attention to it.” Also, everyone would receive the returns — including the millions of Americans who are due tax refunds but don’t get them because they don’t file. In 2012 alone, the IRS said more than 1 million Americans did not receive their refunds — amounting to $950 million — because they did not file.
The authors of the federal Free File bill have repeatedly voiced fears of big-government interference.
Since the 2008 election cycle, Roskam has taken in more than $32,000 in donations from Intuit’s political action committee and Intuit employees. He received a far smaller amount, $2,500, from H&R Block — all for the 2016 election cycle. Roskam’s office did not return a request for comment.
HHS Secretary Price received only modest donations from Intuit, $3,500 since 2008 — $2,500 of which came six days after the Free File Act of 2016 was announced. He received $2,000 total from H&R Block. (Price’s office did not respond to a request for comment.)
In a statement, Kind said he is “open to working with anyone” to find ways for “hardworking Wisconsin families” to file their taxes with ease. “At the same time, I want to make sure that Wisconsinites can access programs, like Free File, that they have come to depend on.”
When asked for details on how many Wisconsinites actually rely on the program, given that few of those who qualify for it actually use it, a spokesperson for Kind did not respond.
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