Tax Software Companies are the Reason Americans Pay Fees to File Taxes

The United States’ taxation system is often referred to as “voluntary” even though taxpayers are required to file returns and pay taxes. “Voluntary tax compliance” means taxpayers do so “without direct compulsion from the IRS.”[1] What this means is that payment of income taxes is mandatory, but taxpayers voluntarily calculate their taxes owed.[2] While the tax system is really more “self-assessment-with-a-low-audit-rate,” voluntary compliance is more patriotic.[3] However, not only do U.S. taxpayers calculate their own taxes owed, many of them pay (often unnecessarily) to file their tax returns.

The IRS partnered with the Free File Alliance, a coalition of private tax preparation companies (think Intuit, the maker of TurboTax), to offer “IRS Free File.” [4] This program allows taxpayers with incomes under $66,000 to use Free File Software to prepare and file their taxes for free.[5] The Free File Alliance estimates that 70 percent of taxpayers are eligible for the Free File program, but only 3 percent actually take advantage of it.[6] But that is by design,[7] with companies upselling paid products and underpromoting free options.[8] For example, not only does TurboTax’s source code tag eligible free-filers as potential paying customers, thereby not directing them to the truly free software, the company admits on its website that “[t]he TurboTax Free File program . . . is not accessible from the ‘regular’ TurboTax.com website.”[9] In fact, the free program is not even called the “Free Edition,”[10] but instead the “Freedom Edition.”[11] Luckily, some eligible free-file taxpayers who were directed to a paid version of TurboTax have obtained refunds after complaining to the company.[12]

Not all voluntary tax systems rely on taxpayers to calculate their own taxes. Countries such as Denmark, Sweden, Spain, Estonia, and Chile use a “return-free filing” system in which taxpayers receive a pre-filled return containing the government’s estimation of what the taxpayer owes, and the taxpayers make any necessary changes.[13] California also uses the return-free filing system as the basis for its RedyReturn income tax program.[14] This free filing method is not only estimated to save taxpayers $2 billion, but also 225 million hours of tax preparation time[15] since the IRS gets the same forms taxpayers use to fill out their return.[16] So why is the U.S. not using this system and why do taxpayers still have to pay to file their taxes?

H&R Block spent $3 million dollars lobbying against the adoption of the prefilled return system in 2016.[17] Intuit, the maker of TurboTax spent $2.6 million.[18] In fact, between 2011 and 2015, Intuit spent $13 million lobbying Congress and filed 41 lobbying reports regarding taxes in 2015.[19] Many of the reports aim to “enhance voluntary compliance,” but what Intuit actually means by that is “prevent automatic filing.”[20]

Automatic return filing is not the only thing the tax preparation industries are lobbying against. On April 9, 2019, the House passed the Taxpayer First Act,[21] which contains a provision that would prevent the IRS from offering its own free tax preparation service to compete with commercial tax preparation.[22] Section 1102, entitled “IRS Free File Program,” states:

(a) IN GENERAL.–

(1) The Secretary of the Treasury, or the Secretary’s delegate, shall continue to operate the IRS Free File Program as established by the Internal Revenue Service and published in the Federal Register on November 4, 2002 (67 Fed. Reg. 67247), including any subsequent agreements and governing rules established pursuant thereto.

(2) The IRS Free File Program shall continue to provide free commercial-type online individual income tax preparation and electronic filing services to the lowest 70 percent of taxpayers by adjusted gross income. The number of taxpayers eligible to receive such services each year shall be calculated by the Internal Revenue Service annually based on prior year aggregate taxpayer adjusted gross income data.

(3) In addition to the services described in paragraph (2), and in the same manner, the IRS Free File Program shall continue to make available to all taxpayers (without regard to income) a basic, online electronic fillable forms utility.

(4) The IRS Free File Program shall continue to work cooperatively with the private sector to provide the free individual income tax preparation and the electronic filing services described in paragraphs (2) and (3).

(5) The IRS Free File Program shall work cooperatively with State government agencies to enhance and expand the use of the program to provide needed benefits to the taxpayer while reducing the cost of processing returns.

(b) INNOVATIONS.–The Secretary of the Treasury, or the Secretary’s delegate, shall work with the private sector through the IRS Free File Program to identify and implement, consistent with applicable law, innovative new program features to improve and simplify the taxpayer’s experience with completing and filing individual income tax returns through voluntary compliance.[23]

The purpose of the provision is to codify the existing agreement between the IRS and Free File Alliance.[24] However, there is a dispute over what the provision actually means, with some arguing that the provision does not preclude the IRS from offering its own system.[25] It is worth noting that there is currently a memorandum of understanding between the IRS and private tax preparers that “the government may not offer free online filing services to taxpayers.”[26] Whatever Section 1102 actually means, a working group has been created to examine the IRS’s partnership with private tax preparers,[27] that have a clear and demonstrated interest in preventing taxpayers from accessing free tax filing software.

[1] J.T. Manhire, What Does Voluntary Tax Compliance Mean?: A Government Perspective, 164 U. Pa. L. Rev. Online 11, 12 (2015) (emphasis in original).

[2] David Mikkelson, Is Payment of Income Taxes Voluntary?, Snopes (Apr. 14, 2010), www.snopes.com/fact-check/is-income-tax-voluntary/; What Does it Mean that Taxes are Voluntary?, Intuit TurboTax, turbotax.intuit.com/tax-tips/general/what-does-it-mean-that-taxes-are-voluntary/L5cjhVlhh (updated for Tax Year 2018).

[3] Manhire, supra note 1, at 22. About 3% of tax revenue is derived from additional tax collected as a result of IRS audits. Id.

[4] About the Free File Program, IRS, https://www.irs.gov/e-file-providers/about-the-free-file-program (last updated Nov. 21, 2018).

[5] Id.

[6] Justin Elliot, Congress is About to Ban the Government from Offering Free Online Tax Filing. Thank TurboTax., ProPublica (Apr. 9, 2019, 5:00 AM), www.propublica.org/article/congress-is-about-to-ban-the-government-from-offering-free-online-tax-filing-thank-turbotax.

[7] See Justin Elliot & Lucas Waldron, Here’s how TurboTax Just Tricked You into Paying to File Your Taxes, ProPublica (Apr. 22, 2019, 5:00 AM), www.propublica.org/article/turbotax-just-tricked-you-into-paying-to-file-your-taxes (detailing the process the authors went through to try to find and utilize the free filing service).

[8] Elliot, supra note 6.

[9] Elliot & Waldron, supra note 7.

[10] The Free Edition is only free for taxpayers with very simple tax situations. Justin Elliot, If You Paid TurboTax but Make Under $34,000, You Could get a Refund. Here’s How., ProPublica (Apr. 23, 2019, 1:57 PM), www.propublica.org/article/how-to-get-turbotax-refund.

[11] Id.

[12] Elliot, supra note 10.

[13] Liz Day, How the Maker of TurboTax Fought Free, Simple Tax Filing, ProPublica (Mar. 26, 2013, 5:00 AM), www.propublica.org/article/how-the-maker-of-turbotax-fought-free-simple-tax-filing; Dylan Matthews, Why I’m Boycotting TurboTax this Year, Vox (Apr. 15, 2019, 1:58 PM), www.vox.com/2016/3/29/11320386/turbotax-boycott-lobbying-tax-filing-season-tax-day-april-15.

[14] Matthews, supra note 13.

[15] Day, supra note 13.

[16] Matthews, supra note 13.

[17] Jessica Huseman, Filing Taxes Could be Free and Simple. But H&R Block and Intuit Are Still Lobbying Against it., ProPublica (Mar. 20, 2017, 1:22 PM), www.propublica.org/article/filing-taxes-could-be-free-simple-hr-block-intuit-lobbying-against-it.

[18] Id.

[19] Matthews, supra note 13.

[20] Id.

[21] See Press Release, Congressman Sean Casten, Casten Statement: Fighting for Free Tax Filing Services (Apr. 9, 2019) available at: casten.house.gov/media/press-releases/casten-statement-fighting-free-tax-filling-services (lamenting that the house passed a bill containing a problematic provision, which Congressman Casten opposed).

[22] Justin Elliot, Bill to Limit IRS’ Ability to Offer Free Tax Filing Service is Getting New Scrutiny, ProPublica (April 10, 2019, 6:40 PM), www.propublica.org/article/bill-to-limit-irs-ability-to-offer-free-tax-filing-service-is-getting-new-scrutiny.

[23] Taxpayer First Act of 2019, H.R. 1957, 116th Cong. §1102 (as passed by House, Apr. 9, 2019).

[24] Jeff Stein & Rachel Bade, House Backs Bill Barring IRS from Offering Free Tax Filing Services, Wash. Post, Apr. 9, 2019, www.washingtonpost.com/business/economy/house-backs-bill-barring-irs-from-offering-free-tax-filing-services/2019/04/09/f9eba6ee-5ae9-11e9-9625-01d48d50ef75_story.html?utm_term=.73d1bc555007.

[25] Id.

[26] Id.

[27] Id.