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It Could Be Free Free Free: How the tax preparation industry is cheating taxpayers out of billions of dollars and hours spent filing taxes

The days leading up to April 15 are filled with panic for many Americans who, upon realizing that their tax returns are due, must search frantically for their W-2s and open up TurboTax or a similar software. Taxpayers collectively spend over 3 billion hours annually filing their taxes. But this tedious ritual begs the question: Is all of this necessary? The short answer is no. The Internal Revenue Service (IRS) has the technical capacity to make tax filing easy and costless to taxpayers, and Congress should grant the agency the resources to implement pre-populated tax returns.

Since the 1990s, Intuit, the owner of the dominant tax software TurboTax, has aggressively lobbied the government to protect the tax preparation industry. When the Bush administration created an initiative to modernize government and directed the IRS to create a free online tax filing solution, Intuit lobbied politicians to fight against “government encroachment.” The IRS, stuck between industry pressure and a presidential initiative, partnered with tax prep companies to form the Free File Alliance. Taxpayers with an adjusted gross income below a declared threshold—usually ranging from $39,000 to $72,000—would be eligible to file their federal tax return for free through a participating company. In return, the IRS agreed to shelve their own tax filing so ware.

But companies are not required to actively advertise the Free File option. Instead, they advertise deceptively named products like “Free Edition,” “Free Online,” or simply “Free,” which are distinct from their IRS “Free File” programs and are only complimentary to those with the simplest tax returns. Until recently, Intuit even hid their “Free File” option from search results, instead leading customers to their “Free Edition” product. Because of these deceitful tactics, only about 3 percent of eligible taxpayers have led their returns through the Free File program, and ProPublica estimates that taxpayers eligible for IRS Free File pay $1 billion a year in unnecessary filing fees.

American taxpayers are being held hostage by the tax preparation industry and its lobbyists. Americans who do not qualify for Free File are forced to choose between filing electronically using expensive software or filling out paper forms with hundreds of pages of indecipherable instructions. However, it doesn’t have to be this way.

For starters, the IRS’s database already includes each taxpayer’s income. When you receive your W-2 stating your income and withheld tax, the IRS receives and stores an identical copy. These forms, called “information returns,” are issued to you and the IRS in most taxable transactions, such as collecting bank interest, receiving unemployment compensation, or paying loans or mortgage interest.

Other countries with similar systems of data collection use them to the taxpayers’ advantage. Japan sends all taxpayers a postcard each spring, stating how much the taxpayer earned, the withheld tax, and the tax due to be paid or refunded.

Filings are only required if taxpayers themselves dispute the government’s data. The Swedish tax authority sends a simple text to taxpayers each year with a link to a pre-filled tax return. If they agree with the government, they can confirm it on their phone, and the process is done. In Estonia, 40 percent of taxpayers are able to file their returns with just one click in less than a minute.

This practice is made possible thanks to the use of “pre-populated returns.” These pre-populated returns ensure that the taxpayer only needs to con rm data the government already has, rather than requiring the taxpayer to compile that data themselves. Imagine if ling your taxes was as simple as logging onto the IRS website and clicking “confirm.” We know that the IRS is fully capable of this, as it sends out millions of “Automated Underreporter Notices” per year a er cross-referencing tax returns with information returns from third parties. For example, if someone accidentally reports $50 of stock dividends instead of $500, the IRS will send them a notice with the additional tax due. Yet the IRS currently doesn’t use this information to help taxpayers, and the prospect of the IRS actually doing so is so frightening to Intuit and the tax industry that they have lobbied Congress many times to legally prohibit pre-populated returns with mixed results.

It is absolutely infuriating that the IRS has the technical capability to save taxpayers billions of hours of their time, yet lobbyist influence and budget constraints prevent the agency from doing so. It seems as though the government is making it as difficult and expensive as possible for taxpayers to follow tax laws. Fortunately, there is still hope. After the 2019 ProPublica revelations, Congress retracted a bill that would have legally prohibited the IRS from creating its own tax software, and the IRS retracted that same promise with the Free File Alliance. There is now nothing stopping the IRS from implementing pre-populated returns for taxpayers using its own so ware. Congress should grant the IRS the resources it needs to implement such a program, if only to make April 15 a little less stressful and a little less expensive for everyone.