The next big Joe Biden spending package is coming: This week, the Senate narrowly passed, on party lines, a budget resolution designed to enable as much as $3.5 trillion in new spending over 10 years.
Congressional Democrats say the spending package will be paid for, and they have been clear about one of the main sources of funding: the IRS. The Biden administration has proposed an $80 billion funding boost to the agency over 10 years as part of its “American Families Plan,” an increase of more than 50 percent to the agency’s normal budget. The Biden team estimates that could raise nearly $700 billion over that same period, paying for itself nine times over. That could fund a huge number of other Biden initiatives, from an enhanced child tax credit to paid family and medical leave to child care assistance.
President Biden delivered remarks on the need for his administration’s proposed $1.9 trillion coronavirus relief legislation alongside Treasury Secretary Janet Yellen in February 2020.Stefani Reynolds-Pool/Getty Images
But it could also pay for an improvement to the tax system itself. While no one in the administration or Congress seems to be making much noise about this, the IRS funding plan could be a golden opportunity to force the agency to join the rest of the world in offering a free, easy-to-use service that all Americans can use to file their taxes.
The timing is auspicious for such an endeavor. As you may know, if you make $72,000 or less, you’re eligible for a free return through the IRS Free File program, including software provided by Intuit, the company that operates TurboTax. If you make more, you’re eligible for Free File Fillable Forms, an Intuit product.
That system is now falling apart. Intuit is pulling out of its arrangement with the US government, which could mean the end of the only online tax filing systems available free of charge to all Americans.
But this collapse may present an opportunity.
For decades, the tax prep industry has succeeded in preventing the IRS from doing what the tax authority in just about every other country does: providing a free, effective, easy-to-use online service where all taxpayers can file their taxes. But it’s doing so just as the Biden administration is attempting to pour billions in new funding into the IRS.
The end of Free File and the conversations in Congress around IRS funding could make this the perfect moment to dismantle our broken tax filing system and build something better.
How to file your taxes for free, explained
Right now, if you’re an American who wants to file your taxes without paying any additional fees to a private company or preparer, you have three options (besides limited “simple return” promotions by the big companies).
You can role-play as someone living in the 1970s and print out the 1040 tax form, along with any associated schedules or forms for tax credits and deductions for which you may be eligible, and compute it all by hand, meticulously collating physical copies of your W-2 and 1099 income statements and any other documentation you need.
Your second option is only slightly less tedious: You can use Free File Fillable Forms, a free service implemented by Intuit that simply copies the physical IRS tax forms and makes them “fillable” so you can type in the numbers. It’ll even do some basic math for you. But you still have to manually enter everything, you can’t import PDFs of your W-2 or other statements, and it’s easy to get confused about exactly which forms you’re expected or required to fill out. I’m an IRS-certified tax preparer, and I gave up using the website this year out of frustration.
Your final option is only available if you make $72,000 a year or less. In that case, you’re eligible for a free return on private tax software through the IRS Free File program. But careful: You might get a ton of spam from whatever company you choose trying to upsell you and get you to pay for fancier options. One investigation found that 14 million Americans were charged by companies for Free File returns that should have cost nothing.
The IRS also funds community tax organizations that can file returns for low-income people, but I can say from experience as a volunteer tax preparer that these groups are underfunded and overworked.
This is an unacceptable state of affairs. Americans should not have to choose between these obviously inadequate and half-baked free options for tax filing and paying a private company. Paying taxes is a legal requirement, and it should be possible to easily do it for free. And it just isn’t possible right now; it’s no wonder that over 91 percent of individual returns filed in 2019 were filed through a paid preparer or a private online service. The current system almost forces you to pay for the privilege of paying your taxes.
Intuit, H&R Block, and America’s broken tax filing system
The Free File and Free File Fillable Forms systems can perhaps best be understood as a kind of peace treaty between the IRS and the private tax preparation industry, specifically Intuit and H&R Block.
For years, the government leaned on those two companies to provide free tax services to Americans in need. But the basic problem with relying on private sector companies that provide paid tax services to provide free ones is that they will always have an incentive to make the free service worse and to make the paid one more attractive. That’s been the story the past couple of decades.
In 2002, as part of a broader effort to improve government technology to take advantage of the internet, the Bush administration proposed that the IRS develop “an easy, no-cost option for taxpayers to file their tax return online.”
This, as ProPublica’s Justin Elliott and Paul Kiel reported, led to a massive lobbying push from Intuit, including a coordinated letter from Republican members of Congress demanding that the IRS not “compete” with private companies, with an implicit threat of reduced IRS funding if it did try to offer free filing.
So the IRS, hamstrung by limited funding to start its own free filing program anyway, negotiated a deal with the tax preparers: The companies would offer low-income Americans free tax prep software, and in exchange, the IRS would promise not to set up a free filing program of its own.
Blame the H&R Block guy for making your taxes suck. Well, not the actor, he’s just doing his job. Blame the CEO, Jeff Jones.David Paul Morris/Bloomberg via Getty Images
This is the system that has held from 2002 to the present. The IRS brags that 70 percent of Americans are eligible for Free File, but for the 2019 tax season, only 4.2 million returns out of 157.2 million total were filed through Free File, or 2.6 percent.
H&R Block and Intuit succeeded in making the program a non-entity. In 2019, Elliott and Kiel began documenting how the two companies were undermining Free File, from hiding their Free File options from Google results to tricking their clients into paying when they could file for free.
Their reporting led by the end of the year to significant changes to the Free File program. The IRS added an addendum to its deal with tax preparers. The new provisions prohibited companies from blocking Free File search results and tried to reduce deceptive marketing, and, more crucially, dropped the ban on the IRS developing its own free file option.
This, perhaps unsurprisingly, led to backlash from the tax prep industry.
Last year, H&R Block became the first preparer to leave the Free File Alliance, meaning it would no longer provide free returns to all low-income Americans through the program. Intuit followed suit this July by announcing it would pull TurboTax from the program as well.
This doesn’t entirely gut the program — other services like TaxSlayer and TaxAct are still available — but it removes the program’s two most popular service providers. Most importantly, Intuit’s withdrawal throws the future of Free File Fillable Forms, which it develops for the Free File Alliance, into question.
This chaos is particularly important for low-income people. Some of America’s most important safety net programs exist as parts of the tax code, in particular the earned income tax credit (EITC) and the child tax credit (CTC); so did the economic impact payments, better known as “stimulus checks,” last year. Having access to a free program to file taxes and access these credits is consequential for a lot of families.
But this chaos could also provide an opening for something better.
How Biden and the IRS can fix tax filing
The IRS desperately needs to put together an easier-to-use, simpler way for people to file their taxes and access benefits free of charge. Accomplishing that, of course, is easier said than done. The IRS has been underfunded for decades and does not have sufficient in-house technical expertise to build a free file system on its own.
But there are signs suggesting that the limitations keeping the IRS from enabling free filing are falling away.
First, the agency removed the ban limiting it from offering such a product in 2019. Then the Biden administration made increased funding to the agency one of its top domestic spending priorities, as well it should — funding the IRS increases tax revenue and pays for itself several times over. While the provision fell out of the bipartisan infrastructure deal over Republican opposition, it’s set to be used as a pay-for in Democrats’ $3.5 trillion spending package.
That could provide the funding necessary for the IRS to make free filing a reality — and Intuit’s withdrawal from the Free File program could provide some sense of urgency. “The problems with Free File lead me to conclude that it is time for IRS to develop the technology that will allow individuals to access our tax system with minimal burden,” Leslie Book, a professor of tax law at Villanova, told me, in a judgment that echoes many tax law experts I’ve spoken with.
In the near term, the IRS will need a stopgap measure for free tax returns next spring, especially if no provider in the Free File Alliance steps up to replace Intuit in running Free File Fillable Forms. The IRS will likely not have funding and staffing in time to set up an in-house program by then, which means that on a temporary basis it will likely have to repeat the Free File formula of relying on private preparers.
Daniel Hemel, a professor of tax and constitutional law at UChicago, has proposed a simple temporary fix: have the US government pay TaxSlayer, TaxAct, or any of the other remaining Free File companies on a per-return basis to prepare returns for taxpayers, at least low-income ones.
Congress would say: “Hey TaxSlayer, FreeTaxUSA, & anyone else who wants to get in on the game: We’ll pay you $10 for every valid Form 1040 w/adjusted gross income <$100k e-filed via you, provided you also allow the taxpayer to file a free state return" 2/
— Daniel Hemel (@DanielJHemel) July 21, 2021
Hemel notes that while this isn’t the same as having the IRS do things in-house, it’s also an improvement on the Free File model, in which tax preparers aren’t compensated at all for Free File returns and thus have tremendous incentive to upsell. “Under Free File, companies have literally nothing to lose if they try to upsell & then you quit,” Hemel writes. “Now, they’d be losing out on real revenue.”
In the long run, though, there’s no reason to compensate private firms on a per-return basis. What the government could do instead is build its own free-to-use software for tax filers.
Nina Olson, who served from 2001 to 2019 as the national taxpayer advocate, a position in the IRS advocating for taxpayers and for improved customer service, has been proposing this for years, and today argues for it as executive director of the non-government Center for Taxpayer Rights.
Here’s how it would work: The IRS would start by putting out a request for proposals (RFP) for a new system to be built by private software/IT firms. That RFP could lay out a replica of today’s system, with full-featured software for low-income people and Free File Fillable Forms for others. But it could also just make the full-featured software available to everyone — and should, in my opinion.
It could also create a simplified system for people who don’t owe taxes but are owed the earned income tax credit or child tax credit, to keep the IRS updated on how many children they have and what they’re earning so they can receive their full benefits.
As part of this process, the government would likely lean heavily on some in-house technical expertise. Groups like the US Digital Service, housed in the White House, and Technology Transformation Services, a division of the General Services Administration (GSA) that provides technical assistance to federal agencies are home to software engineers and project managers who can help with designing the RFP and the procurement process.
“What Intuit’s leaving has done is created the momentum. There’s a vacuum now. The IRS is going to have to take some action. It’s an opportunity for US Digital Services etc. to see if they can be of assistance,” Olson says.
A world without tax returns
The IRS could also go a step further from just free filing and experiment with pre-filled returns, an idea that has been floating around tax policy circles for decades.
The actual work of doing your taxes mostly involves rifling through various IRS forms you get in the mail. There are W-2s listing your wages, 1099s showing miscellaneous income like from one-off gigs, etc. The main advantage of TurboTax is that it can import these forms automatically and spare you this step.
But here’s the thing about the forms: The IRS gets them, too. When Vox Media sent me a W-2 telling me how much it paid me in 2020, it sent an identical one to the IRS. When my bank sent me a 1099 telling my wife and me how much interest we earned on our savings account in 2020, it also sent one to the IRS. If I’m not itemizing deductions (like 70 percent of taxpayers), the IRS has all the information it needs to calculate my taxes, send me a filled-out return, and let me either send it right back to the IRS if I’m comfortable with their version or else do my taxes by hand if I prefer.
A sample return from California’s ReadyReturn pilot, which briefly allowed for pre-filled returns to be mailed to most Californians, sparing them from filing themselves.Via Austan Goolsbee/Brookings Institution
This isn’t a purely hypothetical proposal. Countries like Denmark, Sweden, Estonia, Chile, and Spain already offer ”pre-populated returns” to their citizens. California experimented with a version called ReadyReturn before it was shut down under pressure from H&R Block and Intuit.
Olson notes that an RFP from the IRS could demand that a free-file option enable pre-filled returns or, at the absolute least, automatically import forms that have been sent to the IRS associated with your or a family member’s Social Security number.
The steps needed from here are simple.
Congress needs to authorize more funding for the IRS. It also ideally would pass the Tax Filing Simplification Act, a proposal dating from 2017 and championed by Sen. Elizabeth Warren (D-MA) that would order the IRS to put together a free-filing system and to offer pre-filled returns. The act could perhaps be included in Democrats’ forthcoming budget reconciliation bill.
The hardest steps toward simplification would involve fixing the tax code itself. In 2019, Olson in her capacity as national taxpayer advocate enlisted Book and other experts to propose changes to make tax code benefits easier to access. They proposed simplifying the earned income tax credit so it was paid out without reference to how many kids a worker has, which could make it easier to pay out over the course of a year rather than at tax time. In exchange, the child tax credit would be enhanced and made bigger, which President Biden has already made steps toward.
A reform like this could make tax filing totally unnecessary for most low-income people. Eliminating breaks like the mortgage interest and charitable deductions would make returns unnecessary for most middle- and upper-middle-class people too.
But those are heavy lifts. A huge first step would be to simply fund the IRS adequately, have it pay private tax preparers to process returns for now, and have it hire a software firm to build a real free-file system with pre-filled returns. That would eliminate the tax prep industry’s stranglehold on our tax system and make the entire process vastly easier for Americans, especially low-income Americans.