(THE CONVERSATION) Doing taxes in the United States is notoriously complicated and expensive. And the situation gets even worse when there are delays and arrears, making it especially difficult to access the Internal Revenue Service for help.
But for me, it raises an important question: why should taxpayers have to navigate the tedious and expensive tax filing system?
The case of a “simple return”
In 1985, President Ronald Reagan promised a “no return” tax system in which half of Americans would never file taxes again. Under this framework, taxpayers with simple returns would automatically receive a refund or letter detailing any tax owing. Taxpayers with more complicated returns would use the system in place today.
In 2006, President Barack Obama’s chief economist, Austan Goolsbee, suggested a “simple filing,” in which taxpayers would receive previously completed tax forms for review or correction. Goolsbee estimated that his system would save taxpayers more than US$2 billion a year in tax preparation costs.
Although never implemented, the two proposals illustrate what we all know: No one likes filling out tax forms.
So why do we have to do it?
As an expert on the US tax system, I see the costly and time-consuming US tax filing system as a consequence of its relationship with the commercial tax preparation industry, which pressures Congress to maintain the status quo.
A costly and time-consuming system
Deposit without return is not difficult.
At least 30 countries allow deposit without return, including Denmark, Sweden, Spain and the United Kingdom.
In addition, 95% of US taxpayers receive at least one of more than 30 types of information returns that allow the government to know their exact income. These information returns give the government everything it needs to complete most taxpayer returns.
The US system is 10 times more expensive than the tax systems of 36 other countries with robust economies. But those costs disappear in a no-return system, along with the 2.6 billion hours Americans spend preparing taxes each year.
You might be wondering if Congress is just lagging behind, unaware that it can free us from tax preparation? Not true.
Commercial tax preparation
About two decades ago, Congress ordered the IRS to provide low-income taxpayers with free tax preparation. The agency responded in 2002 with “Free File”, a public-private partnership between the government and the tax preparation industry. As part of the deal, the IRS agreed not to compete with the private sector in the market for free tax preparation.
In 2007, the House of Representatives rejected a law to provide free government tax preparation to all taxpayers. And in 2019, Congress tried to legally ban the IRS from providing free online tax preparation services.
Only a public outcry turned the tide.
The public part of Free File is that the IRS directs taxpayers to commercial tax preparation websites. The private part consists of those business entities diverting taxpayers to expensive alternatives.
According to the Treasury Inspector General for Tax Administration, which oversees IRS activities, private partners are using computer code to obfuscate free websites and lead unsuspecting taxpayers to paid sites.
If a taxpayer discovers a free preparation alternative, private preparers impose various restrictions such as income or the use of various forms as an excuse to refer taxpayers to paid preparation.
As a result, of the over 100 million taxpayers eligible for free help, 35% end up paying for tax preparation and 60% never even visit the free websites. Instead of 70% of Americans getting free tax preparation, corporations have reduced that percentage to 3%.
Tax savings and evasion
You might guess that there are valid political justifications for avoiding government and empowering the private sector. Judge these arguments for yourself.
One of the arguments of commercial tax preparers is that taxpayers will lose valuable tax savings if they rely on free government preparation.
In effect, government software would mirror the same laws used by paid preparers with the same access to tax-saving deductions or credits. Additionally, tax preparers like H&R Block promise to pay all taxes and interest resulting from a failed audit. Therefore, these services have every incentive to adopt conservative and pro-government tax positions.
A second argument is that government-prepared tax returns encourage tax evasion.
In a non-return system, the government reveals its knowledge of the taxpayer’s income before the latter files his case. So, the argument goes, the taxpayer knows if the government missed something and has reason to let the error stand.
But taxpayers are already familiar with the information forms available to the government because they receive duplicates of these forms. The incentive to lie does not increase because the taxpayer avoids weeks of tax preparation.
Finally, there’s the anti-tax argument for onerous tax prep: Keep the nasty tax prep to fuel anti-tax sentiment.
In the past, Republicans have opposed high taxes. But after decades of tax cuts, Americans are no longer swayed by this argument.
Infuriating tax preparation, the argument goes, helps keep the anti-tax fever high. And that fuels public hatred of the government and the tax system.
Unfortunately, the anti-tax contingent’s desire to force Americans to spend time and money on tax preparation dovetails with the tax preparation industry’s desire to collect billions of dollars in fees.
Tax preparation companies are lobbying Congress to keep tax preparation expensive and complicated. Indeed, Intuit, maker of TurboTax tax preparation software, has listed government tax preparation as a threat to its business model. ProPublica reported in 2019 on the company’s 20-year fight to stop the government from making tax filing simple and free for most citizens.
An example of this complexity is the Earned Income Tax Credit, a government program for low-income people. Credit is so complicated that 20% of eligible people never file, missing out on thousands of dollars in savings.
If the government prepared everyone’s tax returns, I believe that more than that 20% would receive government assistance.
Nonetheless, H&R Block reportedly lobbied lawmakers to make credit harder, pushing more taxpayers toward paid preparation services.
I believe that only public outcry can change the system.
This article has been edited to clarify how tax preparation companies have lobbied Congress.
This is an updated version of an article originally published on March 22, 2021.