Brooke Gladstone: Every year around this time, i.e, tax time, messages pop up in our Twitter feed referring to a story we did a few years back about tax filing. It's become something of a PSA. Why? Because filing taxes is a fraught business. Thank goodness there are companies like say, H&R Block, who can step in and simplify it for us.
Audio clip tax advert: Your life is busy, growing. We might say it has layers. That means tax complexity. We get it and we're on it.
Jessica Huseman: [laughs] They do get how complex the tax system is because their business model is based on it staying that way.
Brooke: CNN's Jessica Huseman says that when tax prep companies aren't helping you through our overwhelming tax system, firms like Intuit, which makes TurboTax, spends heaps of cash to ensure that it stays sufficiently overwhelming.
Jessica: Last year, Intuit spent almost $2.5 million lobbying. H&R Block spent more than $3 million, and they're also spending money giving direct donations.
Brooke: What is it like doing taxes right now?
Jessica: I'll just tell you how I do my taxes and maybe that will be representative because I don't think that I'm very good at it. I keep all of my documents in a pink shoe box, and I stuff them in there all year long. A couple weeks before April 15th, I sign up for one of these paid tax services and I meticulously go through all of my returns from the company that I work for, from any freelance work that I might have done, and I take all of the receipts that I've also saved, I spread them all out over the floor, and I add those up, and I try to figure out which box I should type these numbers into. It takes hours and the entire time I have this sick feeling in my stomach that I've lost a return or maybe I'm being too generous with how much I've spent on my business all year long and then I hit send and hope for the best. It could be so much easier than that.
Brooke: How could it be better?
Jessica: Well, think about all the things that the IRS already knows about you. Your bank is already giving them information as to how much money you have and where that money is coming from. Your employer is also giving them information as to how much they are paying you. In a lot of European countries, tax authorities use that information that they already have and send you a slip saying, "This is how much we think that you owe." You can either say, "Yes, that's correct." Sign it off, send a check back with it, or you can use your own tax preparation service to do your taxes yourself.
Brooke: If they say you owe us $3,000 and you say, "Wait a minute, I have spent more on my business beyond the standard deduction." You can just add that additional information to their pre-filled out return?
Jessica: Right. The only thing that this return-free system would do, would be the IRS telling you everything it already knows about you and making a best estimate as to how much it thinks that you owe. It would be great if I knew what the IRS knew about me. There's a lot of power in that and a lot of people might, in fact, be able to take advantage of such a system, right? If the IRS isn't aware of some income that you might have, maybe you just don't say anything.
Brooke: Not that you're advocating.
Jessica: Not that I'm advocating this, everybody should file their taxes.
Brooke: If it's simple for most of us, why do we turn to companies like H&R Block?
Jessica: Because the federal government is presently barred from offering its own system like that. They have signed a contract with the Free File Alliance. The Free File Alliance is a group of 13 private, for-profit, tax preparation companies, to provide the majority of Americans with a free system of doing their taxes. Free filing is supposed to be available to 70% of the taxpaying public. In exchange for these companies offering a free product, the government says alright, we will not offer a free product ourselves.
The problem is that nobody knows that this system exists because the IRS's budget for marketing this system is zero dollars, and the tax preparation companies have no incentive for you to use their free products instead of their paid-for products. Last year, less than 2% of the people who paid taxes did so through the Free File System, even though it's supposed to be available to 70% of the taxpaying public.
Brooke: Intuit has been quite frank in its quarterly statements by saying, "We don't want this prefilled system because it'll hurt our bottom line." That's not in their commercials.
Jessica: No, it's not in their commercials and they, in fact, are for things that would make the existing system easier for you, less boxes for you to fill out. They do lobby for bills that would simplify the tax system in that way, but the ultimate way that they could make the tax system easy, is if the government were to offer a system of return-free filing, which they are inherently opposed to.
Brooke: There have been bills on both sides of this issue. Where do they stand now and what do you think is likely to happen?
Jessica: Last year in April, there were two bills that were proposed within days of each other. One in the Senate, some Democrats sponsored a bill that would have created the system of return-free filing to simplify your taxes. In the house, a bipartisan bill would make permanent the system of Free File Alliance. Both of those bills died in committee. The Free File Alliance agreement expires in 2020 and so before then, we would either have to renew that agreement, make it permanent, or replace it entirely with this system of return-free filing.
Brooke: You've mentioned that anti-tax libertarians like Grover Norquist side with the tax prep companies. It would seem to me that simplifying filling out your taxes would be at least theoretically more up his alley.
Jessica: Right. When folks like Grover Norquist talk about this system, their talking point and the talking point that the Free File Alliance uses, is that it is an inherent conflict of interest for the person you are paying your taxes to, to also tell you how much you owe, and that it wouldn't be in the IRS's interest to offer up all of the deductions that you might qualify for. They might exaggerate how much you owe.
Brooke: I think part of the problem is that most people think you can't fight the IRS.
Jessica: Right, but there are a couple of problems with that argument. First and most obviously, they leave out the fact that it is an entirely voluntary system. You get to tell them if you disagree with that number. Then also I think something that gets left out of this conversation, is that there are hundreds of thousands of people every year that don't file their taxes at all, and thus don't qualify to get a return, and so the IRS has hundreds of millions of dollars that are unclaimed from people who didn't file their taxes and thus paid too much and they could get money back, but they just never filed their taxes to begin with.
Brooke: When you hear ads from tax prep companies like the one we played at the top of the interview, can you imagine sort of an alternate text that would be closer to the truth?
Jessica: It would be great if their commercials said something like, "We're for making your taxes easier, as long as we have to do them for you." It kind of boggles the mind. What they're actually advocating is that they want to make their software simpler to use. They want you to be less annoyed when you're using their software, but what they don't want to happen is a system that's so simple that you don't need their tax software at all. They want to simplify it but not too much. Your taxes could take minutes to do, instead of days or hours, and they want to keep it at hours instead of minutes.
Brooke: Thank you so much, Jessica.
Jessica: Yes, no problem.
Brooke: Jessica Huseman is a reporting fellow at Pro Publica.
Audio clip tax advert: You're busy. Friends, family, kids. No wonder you don't have time to do your taxes. That's why we at Easy Tax are committed to making your filing experience easier. Not very much easier, just a little bit easier. Like, still bad, but maybe 10% less bad. Imagine if the government just told you how much they thought you owed as a starting point. Imagine if the government even told you if they owed you money, without you even having to file, or better still, imagine the exact same system we already have, but with a new app, so you can take your stress anywhere.
At Easy Tax we offer the best service possible, while also ensuring that you remain entirely dependent upon us and our product. Is it the best system? Of course not, but it could be worse. You could be dead. Easy Tax, making your life slightly better, within limits.
Brooke: Tim Hugo is a Virginia state legislator and executive director of the Free File Alliance. Welcome.
Tim Hugo: Thank you for having me today.
Brooke: The Free File Alliance is a public-private partnership whereby tax prep companies offer a free filing system for low and middle-income Americans in exchange for a promise that the government will not provide such a service itself, right?
Tim: Anybody making under $64,000 a year adjusted gross income, can go to irs.gov and get a free federal tax return. We've done over 50 million free returns for Americans. That's about $1.6 billion worth of free product that we've saved taxpayers money. We also save the IRS money too. They don't have to do the servers. They don't have to provide helpline.
Brooke: Now in theory, 70% of Americans are eligible to use the free service, though only about 2% used the free service last year. How do you account for that?
Tim: Well, 10 years ago, the IRS had about $20 million for advertising budget. This year it's zero. I'm hoping a lot of people listen to your program, go to irs.gov/freefile and get a free federal return. I just wish more people knew about it.
Brooke: Why don't the tax companies advertise that free service themselves? The prep companies that are now benefiting from the current cumbersome process, actually have the opportunity to live up to their part of the bargain.
Tim: I don't think it's cumbersome. It's pretty easy.
Brooke: The reason why these companies exist is because it is hard now to fill out one's taxes. Why don't the tax companies advertise this free service themselves? I mean, invest a little money in it.
Tim: Why doesn't the IRS? That's what I keep saying. They did $20 million a decade ago, when I first started doing this. It's literally gone down to zero. I think we need to talk to some of our friends in Washington, D.C to get the IRS a little more money for advertising to make people aware.
Brooke: Maybe Congress ought to allot that money, but Congress isn't going to because it isn't in the interest of the many lobbyists who spend millions of dollars on this issue. I ask again, why don't companies invest a little money in advertising this so that you can get that usage number above 2%?
Tim: We do ads all over the country.
Brooke: You do spend money on ads for this process?
Tim: We do. We do some Facebook ads. I do interviews. I set up interviews all over the country, literally, and we send out press releases, Twitter.
Brooke: How much money?
Tim: That's proprietary, but January 15th, we send things out all [unintelligible 00:12:01]
Brooke: How is this a better alternative than having the government provide people with what it knows, cutting out the middleman?
Tim: One, it's free, so I don't see why a free service to the government is a bad thing, actually it's a good thing. Two, I would be a little concerned if I was the American taxpayer, having the IRS being the tax preparer and the tax collector. That's like having the fox guarding the hen house. I think you've got to be very wary about that, because who's going to find every one of your deductions? Who's going to find every one of your exemptions? Is the IRS going to do it? That's what these companies, that's what they do.
Brooke: You're suggesting there's a conflict of interest here. That would be true if this process weren't transparent and voluntary. What the government simply does is reveal what it knows. It does that heavy lifting upfront. You wouldn't be--
Tim: Why would you want the government to pay for something they already get for free?
Brooke: Because they aren't getting it for free. People aren't using it.
Tim: Why would you ask the IRS to spend hundreds of millions of dollars hiring employees, computers, and stuff, to do what we do for free?
Brooke: The IRS knows what it knows. H&R Block doesn't know what the IRS knows. Also, everyone would receive these prefilled returns, including the millions of Americans who are due tax refunds but don't get them because they don't file. I think in 2012, the IRS said more than a million Americans didn't receive their refunds amounting to something like $950 million, because they didn't file. Now they will get the chance to actually get refunds.
Tim: What you're suggesting is that what we give the IRS for free, they should pay for. I just don't think that's a good proposition for the taxpayer. I don't think it's a good proposition for the IRS.
Brooke: The tax-prep companies like to talk about the conflict of interest.
Tim: It is a conflict of interest. Fox guarding the hen house.
Brooke: But Intuit which produces TurboTax, every quarterly report includes the line, "Our consumer tax business faces significant competition from the public sector at no cost to taxpayers which may cause us to lose customers and revenue."
Tim: Let me throw a proposition out to you. You see more and more states that had their government-run program now moving back to the Free File model, including New York state, including Massachusetts. They had their own government-run program and you know what? They figured out it didn't work. They said, "You guys are giving it to us for free, why don't you do it?" So you can't--
Brooke: How does this address the issue that I'm raising? What about the fact that Intuit--
Tim: That's the question right there. Why are these states--
Brooke: I'll ask you that question once you answer mine, okay?
Tim: Why are these states moving back? It's because they see the value proposition in getting the product for free and all the work is offloaded on somebody else.
Brooke: Relatively speaking, only a tiny fraction of the people who could use it, do use it, and it strikes me that given that Intuit has said that it fears competition from federal and state taxing authorities, is what is behind the big push here obviously, right?
Tim: I'm just excited more people are going to listen to your program. I think a lot of people are going to use free file this year in the last few weeks of filing [unintelligible 00:15:26] I'm excited about that.
Brooke: Thank you very much for pulling off the road and talking to me.
Tim: Well, thank you for having me. I appreciate it. I hope everybody goes to irs.gov/freefile.
Brooke: Bye-bye Tim.
Tim: Thanks, bye-bye.
Brooke: Tim Hugo is a Virginia state legislator and executive director of the Free File Alliance. That's it for this podcast extra. See you Friday for the Big Show which we post around dinnertime, in which we'll be discussing this week's biggest story, the Britney Spears documentary. Oh yes, and the impeachment too. See you then. I'm Brooke Gladstone.
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