It’s Tax Day in Massachusetts, and millions of us are pouring huge sums into a wholly unnecessary enterprise.
No, we’re not talking about the federal government. We’re talking, instead, about the hundreds of millions of dollars that Americans sink into H&R Block, TurboTax, and the entire tax preparation industrial-complex — money that Congress could put back in our pockets if it were willing to stand up to the industry.
Senator Elizabeth Warren has repeatedly filed legislation that would direct the federal government to create a free TurboTax-like preparation and filing service. The measure would also allow many Americans to choose a “return-free” option, where the government would prepare their returns for them.
This is not some pie-in-the-sky idea. It’s not even a particularly new — or partisan — one. President Reagan backed it in a speech in 1985. “We envision a system where more than half of us would not even have to fill out a return,” he said. “If you decided to participate, you would automatically receive your refund or a letter explaining any additional tax you owe. Should you disagree with this figure, you would be free to fill out your taxes using the regular form. We believe most Americans would go from the long form to the short form to no form.”
In most cases, the Internal Revenue Service already has what it needs to do your taxes. When your employer mails you a W-2 form, listing your wages, and your bank ships you a 1099, detailing the interest you earned on your savings account, they send the same information to the federal government.
Now, some people have taxes so complex, they’d still need to prepare their returns on their own — or pay accountants to do the work. But tens of millions could take advantage of the return-free option — saving time and money and, in some cases, realizing tax benefits they might have otherwise missed. Under the current file-on-your-own system, about one-fifth of low-income taxpayers eligible for the Earned Income Tax Credit don’t claim it.
There are plenty of models for this sort of approach. About three dozen countries already have some form of a return-free system in place. Sweden, Chile, and Spain offer pre-populated tax forms for citizens to review. And in countries like England, the withholding is so precise, most taxpayers don’t have to file at all.
Why have we yet to adopt a similar system? There’s a certain amount of inertia, of course. But also this: Companies like Intuit, the maker of TurboTax, have spent millions lobbying against return-free legislation.
They’ve also forestalled the development of a government-run online tax preparation service by participating in Free File, a consortium of for-profit companies that offers free software to about 70 percent of taxpayers. The trouble is, the program is little promoted and little used, with only 3 percent of eligible taxpayers taking advantage. And critics say the participating companies use Free File to upsell users on products they don’t need.
We seem to be headed in the wrong direction. Just last week, the House of Representatives passed legislation cementing the Free File system and apparently banning the federal government from developing a tax preparation service of its own.
Sponsors of a companion bill in the Senate insist there is no ban in the legislation. They should do whatever it takes to clarify it.
But they’ve got to go much further than that. It’s time to create a government-run TurboTax-like service, provide a return-free option for taxpayers, and end the Tax Day rip-off from these companies.