Intuit, the maker of TurboTax, has used all kinds of tricks to keep our tax system complicated and expensive. Most Americans pay the price, especially those who can least afford it. But there is legislation in Congress that would fix the problem, creating a truly free and simple tax filing system for most folks. Guests: Janet Bauer of The Oregon Center for Public Policy and Susan Harley of Public Citizen.

Transcript

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Juan Carlos Ordóñez (host): Why is filing taxes time consuming and expensive? Why do we spend so many hours collecting tax documents and then paying someone to figure out our tax bill and file our tax return?

The cost and hassle of filing our taxes is especially weird when considering that for many of us, the IRS already has all the information on hand to figure out our tax bill. Many of us spend time and money just to tell the IRS what it already knows.

The main reason why it’s so complicated is because the tax filing system is a cash cow for the tax preparation industry, and one corporation above all. Today on Policy for the People, we examine our nation’s system of tax filing: who profits and who pays. I’ll be talking with my colleague from the Oregon Center for Public Policy, Janet Bauer, and Susan Harley of Public Citizen. Stay tuned.

Juan Carlos: It was the year 2002. George W Bush sat in the Oval Office. While the Bush administration’s tax policy is mostly remembered by the huge tax cuts it pushed through — tax cuts that mainly benefited the rich — it also floated a commonsense idea. It proposed having the IRS create an easy and free way to file taxes. “No one,” Bush administration officials said, “should be forced to pay extra just to file his or her tax return.”

But even before the administration made the proposal public, Intuit, the maker of TurboTax, went on a lobbying rampage that succeeded in killing the proposal.

Truly amazing, in-depth reporting by ProPublica — reporting that’s gone on for several years — has shown how Intuit “waged a sophisticated, sometimes covert war” to stop Congress from creating a free and simple way for most Americans to file taxes. Under a lobbying blitz by Intuit, the Bush administration gave up on having the IRS create a free tax filing service. Instead, the administration accepted a proposal by Intuit: in exchange for the IRS not developing its own tax filing software, the industry would offer a free tax filing option for most Americans.

The IRS entered into this agreement with a group of tax preparation companies, including Intuit, operating under the name of the Free File Alliance.

[Audio clip] Interviewer: We have a special guest, Tim Hugo, who’s the executive director of the Free File Alliance. Tell our viewers what the Free File Alliance is.

Tim Hugo: The Free File Alliance is a public private partnership that 20 companies have put together with the IRS, whereby you go through irs.gov, their website, and you can get a free federal tax return. We make it eligible to 70% of American taxpayers.

Juan Carlos: Sounds great, right? Most Americans, 70% now had an option to file taxes for free. Only it didn’t turn out so great. According to ProPublica, since Free File’s launch, “Intuit has done everything it could to limit the program’s reach while making sure the government stuck to its end of the deal.” Among the many tricks pulled off by Intuit is to offer its own competing version of a free tax filing system, at least supposedly free.

[Audio clip] News reporter: And the ads ran all through tax season. TurboTax, telling people they can file their income taxes for free. Well, Attorneys General from all 50 states say it was not true for everyone. Intuit, the company that makes TurboTax, agreed to pay $141 million to customers to settle the claims. In a statement Intuit says it “admitted no wrongdoing” as part of the settlement. The lawsuit claimed TurboTax would steer customers away from free products and towards paid offerings, even though they might have qualified for free IRS services.

Juan Carlos: As it was doing this, Intuit was hiding the service it had agreed to provide for free, the service under the deal with the IRS. Intuit made it so that this true free service would not appear on Google searches. So on the one hand, Intuit was hiding what it had agreed to provide to the public: a free tax filing option for most people. On the other hand, it was blasting advertisements for a different, supposedly free tax filing service, that steered people into paying. Today, less than 3% of people actually file taxes for free.

For two decades, Intuit has been cheating and reneging on its deal with the public as it rakes in billions at our expense. Last year alone, the company’s CEO made $25 million. Enough is enough. It’s time for Congress to stop favoring the profits of Intuit and the tax preparation industry and to start acting on behalf of the American people.

Juan Carlos: If you’re just joining us, we’re discussing why filing taxes in our country is complicated. The big winners of this situation is the tax preparation industry, and one corporation in particular. The public at large loses out in this situation. And one group gets hit especially hard: those who can least afford it. I spoke with my colleague at the Oregon Center for Public Policy, Janet Bauer, on why a complicated tax filing system is especially harmful for workers paid low wages. Janet is the Center’s Director of Policy Research.

Janet, our tax system is, of course, how we raise resources to pay for the public services and structures that create quality of life and opportunity for people: education, health care, transportation and so on. But the tax system also plays a pivotal and direct role in addressing poverty and economic insecurity. Can you explain to the listeners how it does that?

Janet: Sure. Thank you, Juan Carlos. As you said, the tax structure is the way we pay for things that help our country function. But not only does the tax code raise revenue, it’s a means to give benefits too. For instance, for generations rich people have gotten tax breaks to shrink or even eliminate what they pay. And it wasn’t until the 1970s that the tax code started working for working people in a real, meaningful way.

The first major tax credit for low-paid workers was the Earned Income Tax Credit, and it was passed during the Ford administration. It lowers or even eliminates federal taxes for people who qualify. And for most people, it actually boosts their income by giving them money in the form of a check from the IRS when they file their taxes. You have to have earnings from a job to get it. And there are income limits. For instance, for a single person with one child, the EITC starts to phase out at an income of $19,000 a year and it disappears when that household earns $42,000 per year. So it’s a credit for people with pretty modest incomes. And families with more children are eligible for larger credits.

Now, the Child Tax Credit works in a similar way, but it also benefits wealthier households. It lowers taxes by several thousand dollars per child. And some families can get money back to boost their income in the same way they can with the Earned Income Tax Credit. Congress made the Child Tax Credit even more generous during the pandemic, and because of those changes, child poverty plummeted during the pandemic. It was a remarkable experiment in public policy, which was very effective. But those improvements, unfortunately, have expired. They were just for one year.

But all in all, you can see that between these two credits, the Earned Income Tax Credit and the Child Tax Credit, families with children really can get a substantial benefit. They’re really meaningful. They help families make ends meet and avoid having really severe economic stress. And one other thing I wanted to mention is that states also have enacted their own credits for low-income households. We have our own Earned Income Tax Credit here in Oregon.

Juan Carlos: So it seems pretty clear that tax credits for working families can be very effective in reducing economic hardship. But the caveat is that people need to actually claim the tax credit to benefit from it, right?

Janet: Yes, absolutely. You have to file a tax return to get any of those benefits. And not everybody files a tax return. You know, some families aren’t required to file if their income is below a certain threshold. And many have trouble, you know, filing a tax return if they if they’re not required to.

Juan Carlos: Do we know how many people in Oregon who would benefit from these tax credits don’t claim it for one reason or another?

Janet: Yeah. Oregon is, unfortunately, one of the lowest usage states in the Earned Income Tax Credit among all states across the country. We’ve scored very poorly for years. You know, more than 25% of the people in Oregon who are eligible for the EITC don’t claim it. And that’s about 75,000 working households. They’re missing out on a lot of money. The latest figures are nearly $100 million goes unclaimed. And that’s, you know, between the federal and the state credits.

Juan Carlos: Why is it that folks don’t take advantage of these tax credits that would mean greater economic security for them and their families?

Janet: Part of it is that some people may not know that they can get the benefits if they file. You know, as I mentioned, quite a few low-income households aren’t required to file. But really, mostly it’s because tax filing is such a hassle and it can be intimidating. It’s complicated. And it takes a lot of time. The IRS estimates people spend about 13 hours on average each year preparing their tax return. That’s a lot of time that people may not have or want to go through. And plus, if people are filing just to get the tax credits, they don’t want to get in trouble for making a mistake and getting a bigger tax credit than they’re supposed to get and get called out by the IRS about it. So in the end, if they aren’t required to file, they may think it’s just safer, you know, than trying to get the tax credits.

Juan Carlos: So what are the consequences when families who are eligible for these tax credits don’t claim them?

Janet: The consequences are big. For kids, the EITC has a lasting impact on their future. We’ve seen research that shows that tax credits like the EITC improve children’s health. Kids do better in school when their household is getting the EITC. They’re more likely to go to college and they tend to earn more when they become adults. You know, these are really meaningful improvements to childhood outcomes. I would also say that the economy suffers too. The EITC adds many dollars to the state’s economy by giving working people more money in their pocket to spend.

Juan Carlos: Have the federal government and state government done anything to try to increase participation in these tax credits? In other words, have they taken steps to make it more likely that families who qualify for the tax credit actually claim them? And have those efforts been successful at all?

Janet: Well, Oregon has definitely tried to improve the situation. In fact, it now requires employers to tell employees in writing each year at tax time that they might be eligible for the Earned Income Tax Credit and other tax benefits. But, all in all, these efforts that are really aimed at educating people about the benefits haven’t really reaped results. We haven’t seen any meaningful change in Oregon in terms of people claiming the Earned Income Tax Credit.

Juan Carlos: So what do you think would be effective in terms of allowing families who get by on low wages, actually get the tax credits that would improve their lives?

Janet: Well, without a doubt, people need help filing their taxes. They need someone to walk them through the process, help them understand the forms, gather the information they need so they can file.

One way to improve the situation is for the state and the federal government to invest more money in free tax preparation services. I want to be sure to highlight that there is a great network of nonprofit volunteer services that helps people file their taxes in Oregon. And they do amazing work. But it’s really under-resourced. That network can only help about one of every seven people who really need help filing their taxes. So we know that more investment in free tax prep is really important.

That said, an approach that would be even more impactful is for the government to actually prepare tax forms itself for people. And let me tell you how that might work. The IRS already has most, if not all, of the information that goes on a tax form. So, do you work for an employer? Well, the IRS already has information on your earnings because your boss had to give them that information. And do you have interest income from maybe a savings account that you have to report on your form? The IRS knows about that, too, because banks have to give them that information.

So let’s look at this. Why doesn’t the government just fill out a form based on the information it already has, send it to you, ask you if it looks right? If it looks right, you go ahead and sign it and you file it and you’re good to go. And if there are things that are missing or inaccurate, you can complete it, you can correct it and then you can file it. But automating the system, starting by the government filling out a form based on information it already had has, would remove a lot of hassles for people and make tax filing really much easier.

By the way, this is true for the Oregon Department of Revenue, too. It already has much of the information that goes onto a tax form. So the Oregon legislature doesn’t have to wait for the federal government to innovate in this area. It can start doing that now and make the filing of state taxes, at least, so much easier for Oregonians.

Juan Carlos: If you’re just joining us, we’ve been looking into why we have a complicated tax filing system that enriches one corporation in particular and harms the public. Ultimately, this whole situation is a policy choice. Congress has chosen to favor Intuit and the tax preparation industry over the interest of people. Congress, of course, can make a different choice.

And right now, there is a different choice on the table. There is legislation in Congress that would take us in a new direction. I spoke about it with Susan Harley, the Managing Director for Public Citizen’s Congress Watch Division. Public Citizen is a nonprofit consumer advocacy organization that champions the public interest in the halls of power.

Juan Carlos: Susan, let me start by asking: your organization advocates on behalf of consumers and the public interest. How well would you say our tax filing system is serving the interests of the public and consumers right now?

Susan: Unfortunately, there are many ways in which our nation’s entire tax system has generally left the American people down, such as by letting the rich and huge profitable corporations get away with not paying their fair share. There are also egregious loopholes that are being exploited by those who have the resources to use the tricks that allow them to game the system.

But even more basically than that, the way that we file our taxes each year in April has been made overly complicated. And that’s why average taxpayers spend around 13 hours doing their taxes and frequently spend more than $200 for paid preparers to help them file their taxes. Those fees take a huge chunk out of the refunds that low-income folks should be receiving.

Juan Carlos: So your organization recently came out in support of a bill introduced in Congress. What is the goal of this legislation?

Susan: Yeah, so that bill is the Tax Filing Simplification Act, and I think the goal of the legislation is right there in the name. It’s simplifying the tax filing process here in the U.S.. Senator Warren and Representatives Sherman and Porter’s goal in introducing the legislation is simply to save people time, money and ensure that it’s as easy as possible for people to claim their benefits that are distributed by the IRS. And the goal is also to keep the IRS from having to waste its precious staff resources answering questions from taxpayers that have simple returns or for having to correct mistakes made by well-meaning filers.

Juan Carlos: The IRS already has a lot of the information needed to file taxes, and for many Americans, it already has everything. That’s part of why this legislation makes sense, right?

Susan: Absolutely, yes. In fact, in other countries, there’s something called return-free filing. So if the government has all the information it needs, people are not even required to file their own information. They just use what the government has already pre-populated. So that’s one of the major elements of this legislation: requiring the government to do that, return-free filing. So that if they already know how much you owe or how much you’ll be getting back, they might as well do your taxes for you. Easy peasy.

Juan Carlos: What else would this legislation accomplish, in addition to the common sense step of pre-filled tax returns?

Susan: Yeah. So the second thing that I think is a real game-changer about this legislation is that it would require the IRS to create a free government run online tax filing software instead of having to partner with corporations to provide that service. It’s been shown that customers are getting pushed to buy paid products instead of that free service as well. Only a tiny fraction of eligible users even use those, quote unquote, free services. Also, this legislation would protect filers’ privacy, since they won’t then have to share sensitive information with an outside party. Another thing that this bill does — it’s super important — is that it makes sure that the IRS is making it easier for non-filers. Those are the people who don’t actually meet the income thresholds that make them have to pay taxes or file taxes. But they do still need to access benefits that are provided through the IRS.

Juan Carlos: So just to recap, it would have the IRS prepare tax returns for a lot of folks for whom it already has all the information. And that’s a good chunk of people. And for everybody else, they would have the option to file their taxes for free on the IRS website. A true free filing system.

Susan: Yeah, so really simple changes that will take away the cost and headache that each of us have every year when it comes to paying our taxes. Those of us with simple taxes, that is. Obviously, if you have really complicated taxes, you’re probably going to want to still use an accountant. But this makes it easy for those of us who are just trying to do our fair share, and do our duty as citizens or residents of this country, to pay our taxes.

Juan Carlos: And speaking of duty, it’s sort of a strange thing that we would have to pay money in addition to filing taxes just to fulfill this civic duty.

Susan: Exactly. And it’s particularly harsh if you’re thinking about a low-income individual that’s only getting, you know, so much money back through a return. If you’re taking a pretty large percentage of that return away from them and giving it to the pocket of a paid tax preparer, then we’re really doing a disservice to the people who we really should be helping in this country.

Juan Carlos: So in the past, big corporations, those that dominate the tax preparation industry, companies like Intuit, the maker of TurboTax, these companies have used their lobbying muscle to kill efforts to create a system of free, simple tax filing. How has the tax prep industry reacted to the Tax Filing Simplification Act?

Susan: On the history of this issue, I really suggest folks check out some great reporting from ProPublica from back in 2019 that really goes into the 20-year history of Intuit’s campaign to ensure that the government did not create its own free file program. Luckily, we were able to beat back those efforts and the government is no longer putting itself into these memorandums of understanding where it’s limiting or blocking itself from being able to do that. I will say that Congress gave the IRS the power to do a free filing tool back in 1998, but it’s never acted upon that. So that’s why this legislation so important. Intuit is currently the subject of a Federal Trade Commission complaint for deceiving customers about its supposedly free services. It did pull out of the free file partnership with the government last year.

There has been a fair amount of reporting, for example, by our partner Open Secrets. They look through lobbying and campaign contributions and they did a piece recently showing that Intuit spends millions every year lobbying. They cited a figure of $3.3 million spent in 2021 to lobby, as well as a highlighted some revolving door issues at the company, where they’ve hired former members of Congress to lobby on its behalf. Now, I will say our current lobby disclosure system is not very specific. So while we know that that’s how much overall the company spent, we don’t know how much of that was focused on blocking any sort of move to push for a government free file program.

Juan Carlos: So what do you think needs to happen for this time to actually achieve a system of free, simple tax filing? What needs to happen for the Tax Simplification Act to make it through the end of the finish line?

Susan: Obviously, this is true when it comes to all issues: when enough people stand up and demand a change, the government has to listen. So helping spread the word about these needed policy changes, it’s the first step. But right now, the filibuster in the Senate stands as a major roadblock to moving this legislation forward. Until we make this a bipartisan issue again, that filibuster will stand as a roadblock.

However, there is hope right now that there will be a path forward, at least on the government free file program. The budget reconciliation bill, the Inflation Reduction Act — that’s the thing that everyone’s talking about today — the tax section of that bill, according to the reporting and fact sheets that have been released by the Hill, includes funding for the IRS that would include a requirement that it write a report about implementing a government run free file program. So the path forward to implementation, seems like, will already have a really good start on that after this bill, hopefully, makes it all the way through and is signed into law.

Juan Carlos: Are there any final thoughts you want to share with us regarding the Tax Filing Simplification Act?

Susan: Sure. I am just really enthusiastic about the increased support that this legislation has received. When it was introduced last Congress, it only had 11 co-sponsors in the Senate. Now that’s doubled to 22 co-sponsors in the Senate. That’s almost half of the Democratic caucus in the Senate. So a huge amount of support. And on the House side, last Congress it started with only ten co-sponsors and now it’s up to 50. So that’s an amazing amount of increased support over a short amount of time. And we saw 147 different organizations from across the country sign on in support of the legislation. So I’m just thrilled that people across the country are paying attention to this issue.

But I just really hope that all of your listeners out there make their thoughts known about how they’d like their taxes to be simple and how they want the government to take action on their behalf. So you call your U.S. rep and senators or write a letter to the editor, maybe do a TikTok saying how you want the IRS to offer a truly free software option and return free filing because we need you to join the fight if we’re going to win.