Simplify the Tax Code Instead of Creating an IRS Rival to TurboTax
Americans collectively spend billions of hours each year preparing their taxes. Rather than adding a government-run website into the mix, politicians should just simplify the tax code.
The Wall Street Journal reported today that "the IRS is working on steps to improve tax administration." Most notably, this would include a free, government-run tax preparation service that would allow taxpayers to file simple returns on the IRS' website. The move is opposed by tax-prep behemoths like H&R Block and Intuit, TurboTax's parent company.
Lawmakers from both parties have promised simple and/or free tax preparation for decades. In May 1985, President Ronald Reagan proposed "a system where more than half of us would not even have to fill out a return," wherein "you would automatically receive your refund or a letter explaining any additional tax you owe." In 2006, Austan Goolsbee, who later served as chairman of the Council of Economic Advisers under President Barack Obama, proposed the "Simple Return," a system of return-free filing that "might apply to as many as 40 percent of Americans, for whom it could save up to 225 million hours of time and more than $2 billion a year in tax preparation fees."
The 2017 Tax Cuts and Jobs Act was passed with the pledge that taxpayers would be able to file their taxes on "a form the size of a postcard." But in practice, that isn't what we got: Americans still spend billions of hours and hundreds of billions of dollars to file.
Part of the reason, as the Journal article intimates, is industry pressure: Intuit alone has spent nearly $45 million since 1998 lobbying Congress. The company even managed to help kill a 2013 proposal that would allow the IRS to pre-fill tax return information, similar to Reagan's proposition from decades earlier.
Notably, the IRS already offers Free File, as it has since 2002. The program allows taxpayers earning less than a certain amount (currently $73,000) to use major tax-prep firms' software to electronically file their taxes—including, in some cases, state taxes—for free. In recent years, H&R Block and Intuit have each withdrawn from the list of competing companies, known as Free File Alliance.
Free File is also little-used, even by those who could benefit: The Journal article notes that while 100 million Americans are eligible to use Free File, only about 3 percent of them do. In 2019, internal agency emails revealed that in exchange for companies' participation in Free File, the IRS agreed not to develop its own free filing system that could compete. But some Free File Alliance companies intentionally made it more difficult to actually utilize their free services—Intuit, for example, inserted code on its website that would hide the free file page from search engine results.
The problem is not that taxpayers lack filing options; it's that the process is overly complicated from the start. Rather than simply collecting revenue to fund the government, the American tax code also seeks to shape behavior by incentivizing or disincentivizing certain activity. As a result, fully complying with the rules while taking advantage of every credit and deduction one is eligible for tends to require paying an expert.
Instead of building a whole new web portal, lawmakers should work to simplify the tax code and make all that extra work unnecessary.