Will the New Tax Reform Bill Kill H&R Block?

Sens. Ron Wyden and Judd Gregg introduced what could be the most significant piece of tax reform in 25 years: the Bipartisan Tax Fairness and Simplification Act of 2010. It dramatically streamlines the tax system, eliminates key deductions, and -- crucially for taxpayers -- invites the IRS to prepare easy-to-understand tax returns for payers to read and sign.

I spoke with Roberton Williams, a senior fellow with the Tax Policy Center about the bill. He likes it, a lot. His first reason for liking it a lot is that it makes tax returns so easy that most taxpayers will be able to request the IRS to send them a one-page form to review and sign rather than go through tax preparer services.

But what does that mean for the H&R Blocks of the world? Williams explains:


What do you like most about this bill?

The whole idea of simplifying the tax system makes a lot of sense. A lot of people don't understand how the tax system works. They're worried about other people finding benefits they're not finding. If you can simplify it, you can get away from those problems.

The IRS knows everything they need to know for most tax papers. They know your income from the W-2 and 1099. They know your mortgage interest. Presumably they know the charitable organizations that you give money to, because those organizations could report the amounts. If you put money into a 401k or IRA, a bank can report that. That' s most of what you need. The information comes to the IRS. Most of us do have straightforward tax returns. The IRS can do that. That would take a big load off of people. As simple as it is, people should be able to look at a simple tax form and say: "Yep, that's what I earned. That's what I give to charities." It takes a lot of pressure off people.

There's a reason why almost 80 percent of us have other people do our taxes. We don't want to be hassled. It's easier to let the software do they job. I do TurboTax tax And I wonder why the numbers are what they are. And I'm a tax expert!

Does this mean the end for companies like H&R Block? Some companies make a living by wading through tax return language. If the system is straightforward, we won't need it interpreted.

It would not be good for the standpoint of the H&R Block's of the world. It would reduce the demand for their services. I think about 60 percent of tax returns are done by services like H&R or Liberty. It's a huge faction, because people know there are hidden extra benefits and they want to get them.

But one of the things the IRS has found with preparers is that often they don't follow the letter of the law. There was a study I think in Alabama where they went to a number of preparers with a fake tax case that legally couldn't qualify for the earned income tax credit. But this particular tax preparer's thing was to tell people, "We'll get you the EITC." And guess what? In only one case did the tax preparers say, "You don't qualify for this credit." You pay people a couple hundred bucks for a tax return, you want a real return. You want a credit. If you don't get it, there goes the business model.

Obviously H&R Block and companies like it won't go down without a fight. Will they lobby against this? What can they say?

That they employ thousands of people doing something that is no longer necessary? I don't know. From a political perspective, you say, "We've got to do it because you can't trust big government." That's it. That's all you can say. That's the only argument i can see.

{A fuller transcript of our interview, which breaks down the basics and not-so-basics of the new major tax reform legislation is forthcoming...}

(Image: Howdy I'm H Michael Karshis/Flickr)

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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