A taxing endeavor, indeed. The average American toils for a staggering 13 hours to complete their annual tax return, leaving them $250 lighter per household. A lucrative quarry for companies such as Intuit and H&R Block, which offer their services to aid citizens in navigating the labyrinthine filing process. For years, their robust multi-million dollar lobbying efforts have succeeded in thwarting the Internal Revenue Service (IRS) from simplifying this arduous procedure. However, change appears to be on the horizon.
To submit an independent tax return, citizens must wrestle with the notorious Form 1040, a formidable document adorned with appendices, exemptions, and deductions. Despite being the creator of this tax return behemoth, the IRS itself cautions against its use, directing the populace towards commercial tax-filing providers.
Thus, even Americans unburdened by vast wealth or intricate corporate interests find themselves reliant on external services to manage their yearly tax obligations at an estimated annual cost of over $11 billion to the nation.
The most favored tool among American taxpayers is TurboTax, a subsidiary of the publicly traded Intuit. This online service promises to trim the filing process down to a mere 30 minutes. However, the costs associated with TurboTax usage quickly accumulate. Users initially encounter a modest $40 fee for the basic version but are often enticed to upgrade for the sake of easier deductions. Additional charges for state income taxes and the upselling of ancillary products such as insurance only further inflate the final tally.
The ease with which the company profits from this system is largely due to the extensive deductions afforded by the American tax code. When filing via H&R Block or TurboTax, fees are immediately deducted from the anticipated refund, numbing users’ financial sting.
The status quo proves immensely profitable for Intuit, boasting a $12.7 billion turnover in the previous fiscal year, with $3.9 billion sourced from individual tax returns. Additionally, the firm offers small business accounting software, QuickBooks, and a credit scoring service, Credit Karma. Over the past half-decade, Intuit’s market value surged by 150% to a formidable $124 billion.
To avoid burdening lower-income households unduly, an arrangement exists allowing families earning up to $73,000 to file tax returns free of charge through commercial services. Nonetheless, companies like TurboTax exert considerable effort to shepherd users toward paid options. Although 70% of Americans qualify for free services, a mere 3% took advantage of this last year. In a lawsuit where several US states accused Intuit of deceptive practices, including rendering the free service unsearchable via Google, the company settled for $141 million, agreeing to reimburse millions of Americans up to $90, but without admitting culpability.
In 2003, former President George W. Bush championed the concept of free tax filing for Americans. Nevertheless, each time such proposals emerged, they met staunch resistance from corporate lobbyists. The central argument posits that a government-developed tax return system would be inherently untrustworthy due to conflicting interests; the IRS seeks to maximize tax revenue and, therefore, might neglect to inform taxpayers of all eligible deductions. To ensure this argument resonates with US politicians, Intuit and H&R Block have invested millions in lobbying efforts, including substantial donations to both Republican and Democratic election campaigns.
Open Secrets, a research platform, reveals that Intuit has spent nearly $50 million over the past two decades lobbying against a free tax return program in Washington, DC, enlisting the expertise of over 40 individuals formerly employed by the government, including four ex-Congress members. H&R Block, its competitor, has also been an avid lobbyist, allocating $40.5 million to the cause during the same period.
Despite these significant outlays, Intuit’s prosperous business model appears to be increasingly imperiled. The company’s settlement has intensified criticisms surrounding the absence of a free system. Experts from the US Treasury Department and the Federal Reserve have previously posited that tax returns for almost half of all Americans—primarily those on lower incomes—could be accurately completed using pre-existing IRS data.
President Joe Biden’s Inflation Reduction Act, a colossal package of grants and measures passed by Congress last summer, earmarked funds for the IRS to explore the development of an in-house filing service. Treasury Secretary Janet Yellen expressed in the Senate that there is “no reason a modern country should not have a system that makes returns easier for large groups of taxpayers.” While no funds have been allocated for the actual establishment of such a service, the move is indicative of shifting attitudes.
Under vociferous Republican opposition, the IRS will receive an additional $7 billion to address the chronic understaffing issue that plagues the tax authority. In 2021, the IRS operated on a budget of $12 billion. Accounting for inflation, the IRS budget has shrunk by 19% since 2010, even as the number of tax returns increased by 7% during the same period.
These constraints have deleterious effects on the IRS’s operational capacity. The workforce responsible for reviewing returns plummeted from over 50,000 to a mere 35,000 in the past decade. Consequently, the US audit office observed a marked reduction in the frequency of checks conducted on wealthier citizens. Furthermore, contacting the IRS has become a fruitless endeavor, with only one in nine callers successfully reaching a representative in 2021.
