The Fight Over Making Taxes Less Awful

Today is tax day, and like every tax season, Americans have collectively spent billions of dollars and millions of hours preparing their taxes for federal and state governments.

But in the future, there’s a chance that thing could look different for a large number of American taxpayers: Last week, Senator Elizabeth Warren introduced legislation that would require the Internal Revenue Service to provide American taxpayers with tax forms that are automatically filled out in advance. This is called return-free filing, and it means that the IRS populates tax forms with the information it already gathers, by law, from employers. And it’s hasn’t always been a liberal issue: Ronald Reagan, in a 1985 speech, praised the idea of return-free filing.

While return-free filing wouldn’t work for everyone—taxpayers with, say, capital gains would need to fill out additional paperwork on their own—it would simplify the process for tens of millions of taxpayers. And if for whatever reason they don’t want to sign off on the forms the IRS sends them, they would still have the option to prepare their own taxes or go to an accountant. Such a system is already the norm in eight OECD countries, and many taxpayers there have reported that return-free filing means that they can spend just five minutes (and zero dollars) to file their taxes.

Why isn’t this in place in the U.S.? It all goes back to an agreement that the IRS made with private tax-preparation companies more than a decade ago. In 2001, one initiative of the White House’s Office of Management and Budget instructed the IRS to provide Americans with the option of free online tax preparation. But instead of developing its own software, the IRS turned to the tax software industry. What resulted was the IRS’s partnership with the Free File Alliance—a nonprofit that counts among its members several major U.S. private-sector tax-preparation companies—which guarantees free e-filing for anyone who makes $62,000 or less. The catch is that since 2003, the IRS has been prohibited from creating its own tax-preparation and e-filing software.

Which is where Warren’s proposed legislation comes in. The Tax Filing Simplification Act would do away with this partnership by banning the IRS from “entering into agreements that restrict its ability to provide free online tax preparation or filing services.” The bill also mandates that the IRS would have to develop its own free online software.

According to Warren’s bill, the problem with Free File is that less than 3 percent of eligible taxpayers use it—a dismally low rate that is often attributed to the fact that not many people know it exists and that it is not very easy to use. The National Taxpayer Advocate, an organization within the IRS that represents taxpayer interests, has been calling for the Free File program to end for years.

Return-free filing isn’t some unattainable foreign law to pine for; it’s actually already established in California. The state’s program, CalFile, uses information the state already has to calculate taxes for single filers making up to $169,730 and married filers making up to $339,464 a year. (Virginia once had a similar program, called iFile, which existed for decade before it was outlawed and replaced in 2010 by a Free File Alliance-backed program similar to the current IRS partnership that’s now in place in 19 states.)

Joseph Bankman, a professor of tax law at Stanford Law School who has been an advocate for return-free filing, says that while state programs are useful, a federal program would be better, because that’s the one that people almost always fill out first. Bankman was one of the creators, in 2005, of California’s ReadyReturn, another return-free program that has since been rolled into CalFile. According to the Franchise Tax Board of California, 97 percent of those who used ReadyReturn said they’d use it again, and ReadyReturn filers were significantly less likely to have errors in their returns.

Private tax-preparation companies, naturally, oppose Warren’s bill, as their bottom lines would likely be affected if return-free filing takes off. Reporting by ProPublica shows that Intuit, the maker of Turbotax and a member of the Free File Alliance, has spent millions on lobbying against return-free filing. A company spokeswoman recently told ProPublica that Intuit remains “a staunch opponent to government-prepared tax returns.”

Tim Hugo, the Free File Alliance’s executive director, disputes the idea that Free File isn’t working. He notes that Free File has facilitated 48 million returns in the last 13 years, which equates to $1.4 billion worth of tax software. Hugo says he "would welcome millions more … The problem I see is that people just don't know about it. The only catch is that you have to go to IRS.gov to get it." He went further, claiming that a program like Warren’s would carry risks: Return-free filing is “doing tax preparation and tax collection all in one entity,” he says. “That is a recipe for a backdoor tax increase."

Some academics argue that this idea shouldn’t be controversial, because what the agency would be doing amounts to data entry. “Pre-populating a return for these kinds of taxpayers that we're talking about, low- and middle-income taxpayers who take the standard deduction, who don't have mortgage interests or if they do they don't have enough itemized deductions to actually itemize, which is 70 percent of taxpayers, that is just scrivener’s work,” says Dennis Ventry, a professor at UC Davis School of Law. He adds, “It's not [a] sophisticated tax practice that requires paying a cent for. Taxpayers should not have to pay for that kind of work and the government is in the perfect position to actually go ahead and do that for the taxpayers.”

And as for those concerned that the IRS would start secretly extracting additional tax revenues, Bankman says that it’s easy enough to take those forms to a tax preparer or accountant. “If the private companies say, 'We're doing more for you than the government. We're adding value,' that's great—just like your accountant can say that,” he says.

Currently, both Democratic presidential candidates have voiced support for Warren’s bill. And while the program would cost taxpayers money, the net savings could be huge. Austan Goolsbee, the former chairman of Obama’s Council of Economic Advisors and a professor at the University of Chicago’s Booth School of Business, estimated in 2006 that return-free filing would save American taxpayers $2 billion. Further, once such a program is set up, the maintenance costs would be low: According to the California Franchise Tax Board, CalFile’s annual costs are about $100,000, which goes toward updating the program in accordance with any new tax legislation, and saves the state over half a million dollars a year. (For comparison, the private-sector tax-prep industry is estimated to bring in $10 billion in revenue every year.)

“What we know is that given the choice, people really like [return-free filing] … The people who used this in California loved it,” says Bankman. “I think it's a blueprint for where the government is going to go, should go in the future, and sooner or later will get there. Because it's just too stupid for us all to spend the equivalent of $50 billion a year filing our individual income taxes.”