Free online tax filing? Yeah, that'll soon be illegal thanks to rare US Congressional unity

Tax software lobbying unites politicians like nothing else. Happy Tax Day America!

Money clown

It may soon be illegal for American citizens to file their taxes online for free, as both sides of a frequently fractured US Congress united on this important issue.

The move is one of the provisions in the ironically titled Taxpayer First Act, a new bill in Congress that is backed by both Democrats and Republicans and which has passed a critical committee stage, just one week before the US tax filing deadline of April 15.

Under the current bill, the Internal Revenue Service (IRS) would be prevented from creating electronic filing software for its own tax system. Instead, the America's 140 million taxpayers would be obliged to use fee-charging software from one of the companies that dominates the extremely profitable tax-filing market, the largest being TurboTax and H&R Block.

The extraordinary measure – preventing a government agency from developing software to interact with its own systems – is the result of intense lobbying on the part of the software companies who fear that a free IRS filing system would undercut their profits.

It is a staggering case of the tail wagging the dog, especially since the IRS is in a position to simplify tax filing for millions of Americans because it receives much of the information that citizens currently pay third-parties to manually input. Copies of all main tax forms - W2, 1099 – are sent to the government as the same time they are provided to individuals.

The provision is the result of more than a decade of lobbying from the software companies. Back in 2007, a bipartisan bill that would limit free filing was introduced by the House majority leader Eric Cantor (R-VA) and – surprising many – Silicon Valley representative Zoe Lofgren (D-CA). Both politicians had received healthy donations from software company Intuit – makers of TurboTax – that same year.

Squash

The industry spends millions every year in lobbying to both squash plans to simplify the tax code and filing, as well as occasionally push for changes - like this one - which directly benefit it.

As just one example, when one law professor came up with a simple way (called ReadyReturn) to file taxes for free in California back in 2005, it proved so popular that he made plans to roll it out across America. And that's when the software industry got involved. The whole sorry tale was recently featured in a NPR podcast.

This time, civil rights legend John Lewis (D-GA) was the main author of the Taxpayer First Act and the senator has proudly referred to its passing. "I am very proud of our work to improve taxpayer service, protect taxpayers during enforcement, and enhance the appeals process," he said in a speech, adding that it contains lots of "good, commonsense proposals."

Lewis repeatedly referenced low-income and moderate-income taxpayers as being the focus of the bill and outlined how it was designed to help them. But a ban on a free filing service from the IRS would seemingly act against those interests.

And in the Senate...

There is also a companion bill in the Senate that contains the same provision and also has bipartisan backing with Chuck Grassley (R-IA) and, surprisingly, Ron Wyden (D-OR) introducing it.

"Again and again in my service in the Senate I have battled the tax-preparation software industry to simplify filing taxes for the typical American," a Wyden spokesperson told The Register.

"In fact, the industry spent millions to fight my proposals in two tax-reform bills to allow a ‘simple return,’ which would require the IRS to send any American a pre-filed tax return on request using the agency’s tax information.

"During the debate on the tax administration bill, my staff pushed back on a prohibition on the agency competing with private tax preparation services, and I will continue to push for my proposal for the pre-filed ‘simple’ return and the principle that a taxpayer should not have to use a private company to pay their taxes online. In addition, the final package reduced the role of private debt collection on the most vulnerable Americans and made a permanent a highly-successful program for low-income taxpayers.”

Currently the commercial tax-filing companies offer free filing services through industry group the Free File Alliance if the taxpayer earns under a certain income level – currently $66,000 – but critics point out that just three per cent of Americans use this service, despite around 70 per cent being eligible.

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The disparity is obvious as soon you attempt to use such free services: the companies go to great lengths to direct people to their paid products and offer a wide range of additional services that in many cases aren't needed. Those add-ons are also written into the software itself, prompting taxpayers before they start filing and before they send their return to take advantage of them, for an additional fee, complete with explanations on the risks they face if they don't adopt them.

Just last month, experts noted that the free filing program was failing Americans and should be "substantially improved or eliminated."

TurboTax and H&R Block also spend millions in advertising each year to pull people toward their products – but the free versions are notably absent in such material.

In return for offering the free versions, the IRS has, in the past, voluntarily agreed not to develop its own software. The current bill passing through Congress would make that agreement the law rather than voluntary, blocking the IRS from ever offering such a service again.

Why the push?

A tax bill passed by the Trump Administration simplified tax filing to a certain degree by doubling people's personal allowance. In many cases that meant that there was no benefit to taxpayers carefully itemizing their expenses: a key differentiator in the market for tax-filing software.

This simplified process has alarmed software companies who fear that simplified tax filing would undercut their market. In the past the industry has repeatedly prevented simplifications to the tax code from being passed – despite their obvious benefits to hundreds of millions of Americans - in case it caused people to drop their paid-for services.

Joke's on you

The US is infamous for its unnecessarily complex tax system, with the IRS used in the past as a kind of cultural bogeyman. But over the years the service has seen its budget repeatedly cut, prompting experts to note that a lack of enforcement thanks to reduced resources has probably already led to widespread tax evasion.

That reduced budget may, ironically, be the cause of current fears by the software industry that the IRS will create its own filing system in order to reduce costs and increase internal efficiency.

It is also worth noting that in many advanced economies, there is very little stress around tax filing. Since most citizens are employed by corporations that also report to the government, many countries auto-fill people's tax returns and only require citizens to add additional relevant information. The government calculates the tax rate – and in many cases the entire filing process takes only a few minutes, as opposed to the hours and sometimes days that an American IRS filing takes.

The ban on free IRS software – a provision that was first noted and highlighted in an article by ProPublica – has already caused widespread upset and some lawmakers have already vowed to oppose it. ®

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