Welcome to the Twilight of Big Tax Prep
PLUS: Rental housing price-fixing probes heat up.
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If the creation last year of a public tax filing website was the beginning of the end for tax prep corporations such as Intuit (the makers of TurboTax) and H&R Block, then a recent announcement — hopefully! — puts us at the end of the beginning, so to speak, of the effort to stop middlemen leeches from profiting off our civic duty to pay our taxes.
The IRS and Treasury Department said last week that they are opening the Direct File program — which allows taxpayers to directly file their taxes through a government website — to all 50 states next year, after a successful pilot program in 12 states this year. Of the nearly 141,000 users who paid their 2024 taxes using Direct File, 90 percent rated the experience as “excellent,” or “above average,” per an IRS survey.
This is all great news: As I’ve been saying for years, the government has needlessly allowed the likes of Intuit and H&R Block, who dominate the tax prep market, to profit off the taxpaying process, which has cost American taxpayers significant amounts of wasted time and money. Instead of finding ways to facilitate faster and easier payments, these corporations take the misaligned incentives presented to them by government policy and channel them into endlessly innovative ways to dupe people into paying for tax prep who either don’t need it or who qualify, by law, for free filing.
There’s a reason Intuit’s stock price sank on news that Direct File is expanding, and that investor reports for tax prep corporations have, for years, identified a public filing option as an existential threat: They have a cash cow and a public system could slaughter it.
You can read the background to how we got here in the links above, but the short recap is that the government, from the George W. Bush administration until last year, “partnered” with tax prep corporations to supposedly provide free tax filing to those who qualify, in exchange for not creating a public filing option. But because of the corrupt nature of that bargain, the privatized “free filing” program is massively underutilized. Tax prep corporations spent their time intentionally bamboozling taxpayers and lobbying, rather than providing a widely available service.
The Federal Trade Commission even needed to intervene to stop Intuit from claiming products were “free” when they weren’t. Acting like the Ticketmaster of tax prep, Intuit would let users start the process, and only ding them with a fee at the end.
So moving toward a public filing system, which the Biden Administration did as part of its 2022 Inflation Reduction Act, is all to the good on the basis of fairness and civic duty: Society needn’t tolerate a corporate extraction machine built on deception in any sector, but it especially shouldn’t tolerate one built on top of an activity that is legally required of everyone.
But there’s more good news. One of the chief objections to the creation of a direct government-run filing program since time immemorial has been its cost. But the IRS reports that the cost of the pilot program this year was just $13 million. Obviously that would go up with widespread adoption, but it was also get incrementally cheaper as more people use it and the system gets more entrenched.
Compare that to the estimates showing how much of a benefit a public filing program can provide. According to the Economic Security Project, free filing can save Americans $8 billion annually in filing fees, plus another $3 billion in time savings. It could also help provide $12 billion in tax credits, such as the Earned Income Tax Credit and Child Tax Credit, to folks who currently qualify but aren’t claiming them.
Finally, a full-scale adoption of Direct File could eventually save the IRS hundreds of millions of dollars by obviating the need for the agency to deal with paper returns every year.
So a little public money on the front end could save a lot of money and eliminate a lot of corporate extraction on the back end. Tax prep is one of those areas in which the long, neoliberal push away from public goods really hurt society, on both fairness and cost; what should be a niche industry catering to people with truly complicated tax situations instead became a functional extension of the government, with a complicated and easily abused qualifying process leading to heaps of waste.
Now, while many of the things I write about in this newsletter are pretty bipartisan, this is one of the issues that is very much not, and I want to make that very clear. My colleague Bharat Ramamurti is almost certainly right that a future Trump Administration and Republican Congress would eliminate the Direct File program if they could, helping no one but shareholders of the tax prep corporations.
Congressional Republicans, in fact, have been trying to use the budget process to unravel Direct File ever since it came into being. House Republicans proposed eliminating it again just this week!
State governments could also simply not opt in to the program, or could do a lousy job linking their state tax-filing systems to the federal version. This kind of sabotage would lead to unnecessary complications or frustrations for taxpayers, and a bifurcated system in which some states have a pleasant, easy-to-use public option, and others have a janky, messy one that undermines public faith.
Of course, nothing is ever perfect, and Direct File won’t be either. I would prefer an even swifter system of pre-populated returns, which the IRS could absolutely provide, rather than having individuals manually enter information the government already has. As I’ve explained before, California piloted such a program back in 2005 and 2006, and users reported that it was significantly faster, and that returns were much less likely to have errors.
But Direct File is still a big improvement over the status quo, and so long as states and the federal government keep investing in it, it’s going to provide long-term value and end an era of corporate extraction that was never justified.
No one except Intuit executives is going to miss TurboTax when it’s gone.
UPDATE: The FBI raided an Atlanta-area property management company last week as part of the Department of Justice’s ongoing investigation into price-fixing and collusion among landlords in rental housing markets. You can catch up here and here on how antitrust enforcers are going after landlords and several algorithmic price-setting corporations, the most prominent of which is RealPage, for colluding to raise rents in metro areas across the country.
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— Pat Garofalo