The tax preparation racket


The deadline for filing one’s taxes in the US is April 15th of each year though this year it is April 18 due to holidays. I always do our own tax returns without using any commercial software and just finished preparing our tax returns. Over the years I have developed my own spreadsheet that automates much of the process, so each year requires just a few tweaks to update it. But it still took many hours of work over many days. Most people cannot be bothered to learn how to do their taxes on their own and either turn to paid preparers or buy commercial software, little realizing that they are being coerced into doing this by the collusion of tax preparation companies and the government that deliberately keeps the process complicated.

Jessica Huseman of ProPublica writes that for the overwhelming majority of people, it should not be like this.

Here’s how preparing your taxes could work: You sit down, review a prefilled filing from the government. If it’s accurate, you sign it. If it’s not, you fix it or ignore it altogether and prepare your return yourself. It’s your choice. You might not have to pay for an accountant, or fiddle for hours with complex software. It could all be over in minutes.

It’s already like that in parts of Europe. And it would not be particularly difficult to give U.S. taxpayers the same option. After all, the government already gets earnings information from employers.

So why doesn’t the US have this system? Because just like the insurance companies with health care, there are people in the middle who oppose any such simplification because they benefit from the needless complexity imposed on people. And they lobby the government hard to make sure that no such simplification takes place.

Intuit spent more than $2 million lobbying last year, much of it spent on legislation that would permanently bar the government from offering taxpayers prefilled returns. H&R Block spent $3 million, also directing some of their efforts towards the bill. Among the 60 co-sponsors of the bipartisan bill: then congressman and now Health and Human Services Secretary Tom Price.

The bill, called the Free File Act of 2016, looks on the surface to be consumer-friendly. It makes permanent a public-private partnership in which 13 private tax preparation companies — called the “Free File Alliance” —have offered free online tax filings to lower- and middle-income families. The Free File Alliance include both Intuit and H&R Block.

But the legislation would also permanently bar the IRS from offering its own free alternative.

Sen. Elizabeth Warren, D-Mass., offered a bill last year that would have actually allowed the government to start offering prefill tax returns. While Intuit did not lobby against Warren’s bill — presumably because the legislation had little chance of success — tax giant H&R Block did. (H&R Block did not respond to a request for comment.)

Neither Warren’s bill nor the Free File Act made it out of committee.

Very few of those eligible for the industry’s no-charge filing program actually use it, perhaps because the system is confusing and pushes people toward paid products.

While the Free File Alliance says 70 percent of U.S. taxpayers can use the service, less than 2 percent of all individual tax returns were filed through the program in last year, according to a National Taxpayer Advocate’s report to Congress.

“Let’s call the so-called Free File Alliance what it really is — a front for tax prep companies who use it as a gateway to sell expensive products no one would even need if we’d just made it easier for people to pay their taxes,” said Warren in a statement to ProPublica.

When members of congress talk about ‘simplifying’ the tax code, they are not talking about the kind of thing Warren is trying to achieve and Huseman recommends. Their ‘simplification’ is a Trojan horse designed to give even more benefits to the wealthy by reducing the tax rates in the higher income brackets or reducing capital gains tax rates. (See Paul Buchheit’s article on how the tax system favors the wealthy.)

This is partly why I grit my teeth and do my own taxes. I do not see why I should give in to what is essentially extortion by the tax preparation companies, let alone give them access to all my personal information.

Comments

  1. jws1 says

    I’ve used these services before. Then a friend hooked me up with an accountant who used to do what I do (I’m a server in a fine dining restaurant). Turns out the IRS allows servers a “tip out” adjustment, as they are paying their coworkers’ salaries by tipping them out. It’s a cost of business expense, I guess. This year it took $21,000 off the top of our (I’m married) taxable income. H&R Block, etc., never ever mentioned this adjustment.

  2. Roj says

    I’m in Canada, and have been using a free software package since 2005. Its made by an accounting firm that sells it to tax preparers, and allows it for personal use for up to 20 individuals. It is great software, improving every year.

    As well, for the last 2 years the Canada Revenue Agency has let you download your tax data on file with them at the start of the preparing process, so in effect all you are doing is verifying the numbers (and, in co-ordination with the software wizards, optimizing where necessary).

    So yes, the US should join the 21st Century and offer the same conveniences.

  3. says

    Today is the first day Swedish tax returns can be filed. I got the forms over email some weeks ago, and as I have no corrections to make, I’ll take a minute or two to send in my electronic signature this evening (the app is a bit clumsy IMHO).

    Then again it must be about 50 years since Hans Alfredson proposed his simplified tax form:
    A) How much did you make last year?
    B) How much do you have left?
    C) Send it in!

  4. kestrel says

    I long for the days of being able to do it myself… but you are right, it is deliberately convoluted and and complicated. No reason at all except to confuse. I’m self-employed and a farmer besides, I have so many forms to file it’s ridiculous. It’s far easier and far less time-consuming to pay someone, not to mention I was making mistakes and he has not so far. The plain truth is though, there is no excuse for such a complicated and stupid method, except of course to make certain people even wealthier than they already are. Infuriates me.

  5. Pierce R. Butler says

    Intuit spent more than $2 million lobbying last year… H&R Block spent $3 million…

    So their combined efforts come to less than$10K per congressperson (and most of that going into lobbyists’ pockets, I betcha). Chicken feed, mere courtesy offerings to keep the doors open.

    Okay, not if they don’t distribute their generosity evenly and concentrate their largesse on tax-committee members. But even without such inducements, the members of a certain now-majority party probably want to keep the system user-hostile just so they can stoke anti-government resentments and offer themselves as the fix.

  6. Jörg says

    Officially “elster” here means ELektronische STEueRerklärung”, electronic tax return. But the logo of the software has been a picture of a magpie.

  7. Smokey says

    I’m impressed over how thoroughly corrupt the US is.

    In Norway, just as it apparently is in Germany, we just log in and find everything already there, income, properties, vehicles, loans, bank accounts, stocks, shares, spouse, children, everything. It’s all there. Which makes it difficult to avoid taxation on anything, but we don’t mind helping others, apparently in stark contrast to the US. We’re not afraid of socialism.

    How do I file my taxes? I log in, I identify myself through my Android phone (there are lots of other options), I cast a cursory (or preferably better) glance over it, press “OK”, and I immediately know how much I get back or have to pay. It can be done in less than 5 minutes. I can even go back and change stuff or add forms as long as it’s within the filing deadline. There are no paper forms involved. No post, no mailings, no cheques (nobody uses cheques in Norway). If I get money back, it’s transferred directly to my chosen bank account at a later date. If I have to pay, I transfer the money directly from my online bank in just 5 more minutes.

    And key values are available for browsing online afterwards. We can check everyone’s income, politicians, neighbours, or co-workers. We know if we’re being underpaid.

    It’s all done online. No fuss, no muss. No software or spreadsheets needed. It’s stupidly simple.

    Norway. Come for the fjords, stay for the common sense and health services. Beware the lutefisk.

  8. cartomancer says

    Here in the UK it’s only self-employed people who have to fill out their own tax returns – the rest of us have it done for us automatically. HM revenue and customs just sends us a letter telling us how much tax we’ve paid and if we think there’s a problem we can start an inquiry to get it sorted out.

  9. enkidu says

    In New Zealand, we have a pay as you earn system (PAYE), most wage and salary earners don’t have to file a tax return at all. You really only have to if you have income not taxed at source eg rental income.
    Though we do have tax software, its not really necessary. I too use a spreadsheet, though its really just a copy of the return (max 6 pages) to make sure the sums are correct.

  10. hyphenman says

    Mano,

    When I was on active duty in the Navy back in the ’70s, I would routinely fill out the short forms for many of the sailors in my division. Every year I would show them that the job was a no-brainer, but still they would come back the next year asking for my help.

    I don’t think that they were really unable to perform the task–these were guys trained to handle nuclear missiles after all–but they had a deep seated fear of going wrong somehow and the taxman was a very frightening beast in their minds.

    Cheers,

    Jeff

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