Bury the Tax Prep Industry for Good
Federal and state leaders can end the scam perpetrated by worthless corporate middlemen.
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Recently, several members of Congress, including Sens. Elizabeth Warren and Bernie Sanders, released the results of an investigation finding that the tax preparation firms H&R Block, TaxAct, and TaxSlayer leaked sensitive taxpayer information to big tech corporations, including Facebook and Google. This did this by adding tracking tools built by the tech companies to their own websites in ways that were not only sloppy but may have been illegal.
The congressional investigation was spurred by a piece in The Markup showing that tax prep corporations were sending to Facebook “not only information like names and email addresses but often even more detailed information, including data on users’ income, filing status, refund amounts, and dependents’ college scholarship amounts.” Meta, Facebook’s parent company, confirmed it used that data for ad targeting. The exact mechanics of how the data leak occurred can be found here, if you’re interested.
Warren said this is “all the more reason for the IRS to launch its own free tax filing service — so taxpayers don’t have to go through untrustworthy and incompetent tax prep firms.” Indeed, this incident shows it’s not just Turbotax (made by Intuit) that is a scourge on the taxpaying public, it’s the whole rotten tax prep industry ripping us off, making our sensitive information less secure, and acting as leeches on our civic duty.
It’s time for both federal and state elected leaders to bury this scam for good.
As I’ve written before, here and elsewhere, the U.S. could absolutely join the legion of countries that has a simple, free tax filing system that would let most people file their taxes in minutes. This could take two potential forms: A version of Turbotax-like software that still requires users to input financial information, but that sends it directly to the IRS, or an even better system of pre-populated returns that users could simply verify before submitting, because the IRS actually already has most of the information it needs to essentially do most people’s tax returns for them.
The U.S. has not implemented such a system because the tax prep industry — of which Intuit and H&R Block are the largest players — spends a lot of money to ensure the status quo remains intact. Tax prep firms have formed an unholy lobbying alliance on this issue with conservative anti-tax lawmakers and organizations, who like the fact that taxes are a complicated pain in the neck because they think it will push people toward favoring more tax cuts.
To that end, back during the George W. Bush administration, tax prep corporations formed something called the FreeFile Alliance, in an effort to short-circuit efforts to create a federal, free electronic filing system. In theory, the alliance allows most taxpayers to file for free through private corporations. In practice, whereas some 70 percent of Americans are eligible for FreeFile services, only 3 percent use it, because the corporations make it intentionally difficult to find those products, and push users to paid versions instead.
Intuit and H&R Block don’t even participate in the FreeFile Alliance any more, having pulled out during the pandemic, so the whole thing is basically a sham.
Yes, of course, anyone can always file their taxes on paper for free, but that process is so cumbersome and confusing that Americans spend billions annually on tax prep. There are also state taxes to contend with, which the tax prep corporations also charge for, often enticing users in with a promise of a free federal return, before dinging them with significant charges for their state return once they’re well into the process.
Fortunately, the IRS was directed by a provision in the Inflation Reduction Act President Joe Biden signed last year to study creating federal, free-file software. The IRS released its report in May, and with the blessing of Treasury Secretary Janet Yellen, said it intends to pilot a program for select taxpayers in 2024.
Unfortunately, Republicans in Congress have been trying to prevent the IRS from implementing a free file system by attaching amendments to budget bills that would defund the program. And the tax prep industry is still pouring tons of money into lobbying, of course.
For now, it seems like the IRS will be protected enough by Senate Democrats and the Biden administration to allow it to keep moving forward, but that’s no sure thing in the medium- to long-run.
Even without federal action, states could create their own free filing programs for their residents. After the news drooped about tax prep corporations leaking data, New York State Sen. Brad Hoylman-Sigal said, “We need to pass my and [New York Assemblymember Linda Rosenthal’s] S.3256 ASAP to create a state-run e-file service for New York State—for free.”
There’s precedent not only for a state creating a free electronic filing system, ala California’s CalFile, but also sending taxpayers a pre-populated tax form that includes most of the pertinent information needed, making the process even faster. California piloted such a program back in 2005 and 2006, and users reported that it was significantly faster, and returns were much less likely to have errors. So of course, tax prep corporations successfully lobbied to kill it. But it can very much be done, if the resources were put behind it.
Widespread state-level free file systems wouldn’t fix everything, since users would still have to use a separate process to file their federal returns. But it would provide proof of concept and hopefully inspire at least some taxpayers to push for a federal version, once they see how easy their state version is.
In the meantime, enforcers such as the Federal Trade Commission and state attorneys general are working to hold tax prep corporations accountable for their misdeeds. Last year, a coalition of state AGs won $141 million for customers who should have been allowed to file for free but were pushed into paid products by Intuit, and Missouri Attorney General Andrew Bailey announced a lawsuit against H&R Block, TaxAct and TaxSlayer based on the data leak.
At this point, we don’t really need more proof: There shouldn’t be worthless corporate middlemen between taxpayers and fulfilling their civic duty. Tax prep firms should exist to serve the wealthy and their complicated tax dealings, while everyone else gets to quickly pay what they owe and get on with their lives.
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— Pat Garofalo
Ok this makes sense
Back in the 1960s, my father used to make a fair bit of money during tax season for doing people's taxes. He charged, if I remember correctly, $6-$8 and more if they had a complicated form. He was a CPA and a lawyer, so this tax work was just a sideline. Some people came to our house. He rented a restaurant booth or a corner in a pharmacy and many people had their taxes done there. He also made house calls. These often involved a number of people getting their taxes done and turned into something of a social event with coffee and pastries. He had one of those great looking Olivetti adding machines. If you liked the original Prisoner series, check out the system control unit in the surveillance dome. He carried it around in a bowling ball bag. It weighed roughly what a bowling ball weighed, so lesser carrying bags couldn't handle it.
If nothing else, I learned a lot about the ways people made their living from this. There were Ukrainian nurses, authors, engineers, Irish cops, civil servants, architects, chemists, doctors, clerks and a host of others. His fee, adjusted for inflation would be around $60 or $80 today. H&R Block's base fee is $85, so this has tracked inflation. Of course, his customers could have just picked up the forms at a post office, bank or IRS office and filled them out by themselves, but people liked having a reassuring professional handling the mechanics. It's not like everyone had a calculator in their pocket back then, so having someone who could do the math was worth something. There's less of an excuse nowadays, especially now that most, if not all, of the relevant data has already been reported to the IRS.