Moneybox

It Is Unclear Whether the New IRS Reform Bill Is a Disastrous Giveaway to TurboTax

TurboTax is displayed on a device.
TurboTax might be sticking around for a long time.
Kimberly White/Getty Images

Policy wonks have long argued that the government could make it radically easier and cheaper for most Americans to complete their tax returns each year by using one neat trick: Just have the IRS fill out the forms for them. Instead of making people slog through the spring ritual of firing up TurboTax or trudging to H&R Block, the feds would send everybody a prewritten return including all of their financial information and what they owe. Taxpayers could then choose to either approve it and go on with their lives or reject the return and complete one themselves.

This idea might sound a bit like sci-fi. But many countries—Denmark, Norway, Sweden, Estonia, Chile, and Spain, among them—already have this system in place. The U.S. could do it too for people with simple tax situations, since the IRS already gets our earning info directly from our employers and banks. (That’s how they check to make sure people aren’t cheating.) In the past, Democrats and Republicans have introduced legislation that would make this kind of free and easy filing system—which would likely save Americans billions of dollars and untold hours of tedium—a reality. But their efforts have been defeated thanks to intense lobbying by a coalition of tax preparation companies, which want to defend their bottom lines, and anti-tax conservative groups, which want to ensure that filing remains as much of a headache as possible.

And now, depending on whom you ask, it appears that Congress might be poised to snuff out the dream of bringing Nordic-style, zero-hassle tax filing to the U.S. for good. On Tuesday, the House of Representatives passed the Taxpayer First Act, an expansive, bipartisan reform bill designed to modernize different aspects of the IRS. (It was introduced by Rep. John Lewis of Georgia—as in, the civil rights hero.) Its companion in the Senate has backing from both Democrats and Republicans as well. But consumer advocates claim the legislation would effectively ban the IRS from creating any sort of a free online filing system that could compete with software like TurboTax. At least one key Democrat, citing the IRS’s own lawyers, has said that’s not the case, however.

Here’s what the controversy—which ProPublica’s Justin Elliott first reported on—is about. Since 2002, the IRS has teamed up with a nonprofit industry group made up of tax software companies to provide a free online filing system for middle and low-income households. It’s called the Free File Program. People are currently eligible if they make less than $66,000. And under the agreement that governs the effort, the IRS isn’t allowed to offer its own competing free service.

Currently, the government and the tax prep industry have to re-up their deal every few years. The Taxpayer First Act would effectively write the agreement into permanent law, including the part that bars the IRS from creating an alternative while the Free File program is running. Activist groups—including the National Consumer Law Center, U.S. PIRG, and Consumer Action—have argued that this would not only bar the government from creating its own no-cost product that could compete with the likes of TurboTax, but also prevent the IRS from implementing a return-free, no-sweat system like the ones that exist in Europe.

But Oregon Sen. Ron Wyden, the ranking Democrat on the Senate Finance Committee, says that’s not the case. On Wednesday, he announced that the IRS’s chief counsel had told him that the Taxpayer First Act would not preempt the government from developing its own public filing program.

When I asked Wyden’s staff to explain the IRS’s legal reasoning, I was told that under the current Free File agreement, the government has the right to terminate the program and create its own product, as long as it gives the industry a year’s notice. Since the Taxpayer First Act basically sets the terms of that deal in stone, the IRS believes the government would still have the right to shut the program down.

Wyden has a good deal of credibility on this issue: He’s long been an advocate of simplifying tax filing, and he introduced a bipartisan bill in 2011 that would have created a return-free system. But his assurance hasn’t assuaged the concerns of consumer groups. Mandi Matlock, who is a counsel to the National Consumer Law Center, told me her group’s interpretation of the bill “hasn’t changed”—in part because its text says the government “shall continue to operate” the current Free File Program. In their reading, that would prevent the government from terminating it.

What to make of all this? At best, the situation seems ambiguous. If Wyden wanted to clarify the situation, he could demand an amendment specifying that the IRS still had the right to create its own free tax-filing system to go up against private companies. When I asked Wyden’s office if that would be a potential solution, they responded, “Senator Wyden wants to work with his colleagues on a path forward and ensure it’s clear.” (I also asked the Free File Alliance, the industry group that works with the government, about its interpretation of the bill, but haven’t heard back).

To some extent, this is all missing the forest for the trees. By any reasonable standard, the Free File Program has been a flop, and there’s no particular reason to enshrine it in federal law, especially if it might put limits on the IRS’s ability to create something better. Americans sent in 154 million tax returns in 2018. Just 2.5 million, or 1.6 percent, were submitted via Free File. That stat comes from the National Taxpayer Advocate, which recently published a blog post titled “The Free File Program Is Failing to Achieve Its Objectives and Should be Substantially Improved or Eliminated.” Part of the problem is that Free File has basically zero marketing budget. (“The IRS does not promote or advertise Free File, outside of placing it on its website,” the post notes). But it also apparently has a buggy interface.

What Free File lacks in actual, demonstrable success, it makes up for mostly in lobbying support. As ProPublica has documented, tax prep companies like Intuit, the maker of TurboTax, and H&R Block are a force on Capitol Hill. Last year, they spent $6.6 billion trying to influence lawmakers. Over the last two elections, they gave $16,000 to House Ways and Means Committee Chair Richard Neal, a Democrat who calls himself a “longtime champion” of Free File.

Democrats do have good reasons to support parts of the Taxpayer First Act. For instance, the bill would bar the IRS from using private debt collectors to pursue low-income Americans who end up in arrears. (Really, the IRS shouldn’t be using private debt collectors at all, since aggressively hiring them as contractors is less cost-effective than having public servants handle collections.) But even if the bill has upsides, and may be less damaging than some of its critics fear, it still seems like a win for lobbying clout over basic, good government.