Considering your employer and your bank report your financial information to the IRS throughout the year, it would seem logical that the federal government could help you do your taxes, since it has all the data it's asking you to provide. However, there are some unsettling reasons why that is not how filing taxes works in the United States.
How things got the way they are.
"The government can and should make filing easier," Joseph Bankman, a leading tax law scholar and law professor at Stanford University, told ATTN:. "Intuit and other companies have lobbied successfully to prevent that."
Intuit is the company that runs TurboTax, and it has been at the forefront of making sure paid services like its own are how people get taxes done when tax season comes around.
"Years ago the IRS signed a memorandum of understanding with the consortium of e-based tax preparation software programs, with Intuit leading the way, that said the IRS would not impede against it," Dennis Ventry, a tax policy expert and a professor of law at the University of California, Davis, told ATTN:. The IRS and these companies created the Free File Alliance, which is a nonprofit that now handles filing free federal income tax returns online, instead of the IRS.
Those making under $58,000 are supposed to be eligible for the free federal income tax preparation. Some members of the Free File Alliance, like Intuit, cap that income limit closer to $30,000.
Ventry said in the past he has had many students come to him saying they started their free federal income tax form with TurboTax or another company, and then they're asked if they want to do their state forms as well, which ends up costing money. These companies also offer other services, which they'll try to sell users during the process.
"All of a sudden something will come up that says, 'Hey, do you want us to help you with your state return?' And the user says, 'Yeah, that sounds good,'" Ventry said. "So they finish the federal, they start the state, they get all the way through the process with the state, and then something comes up that says, 'Hey, you owe us $25 or whatever the fee is,' which is totally disengenous."
Ventry called this "upselling of the worst kind." Bankman referred to this kind of sales technique as a sly marketing tactic.
ATTN: reached out to Intuit and H&R Block for comment and did not receive a response before this article was published.
In 2010, Intuit published a blog post arguing that TurboTax doing federal tax preparation costs tax payers nothing, unlike if the IRS did it. The post also said that the IRS preparing tax forms could be a "conflict of interest," since the agency would then be preparing, collecting, and enforcing tax policy at the same time.
How things could be done.
If you want a shining example of how taxes could be handled, look no further than countries like Denmark, Sweden, and Spain. In those countries, the government simply sends you a prefilled out tax form, and you either just sign it or make a few changes to it before you sign and send it back.
Richard Wolff, an economist at the University of Massachusetts, Amherst, said it's "ridiculous" that America doesn't manage taxes like these countries, "since most tax returns are simple and straightforward, [and] could be done by software and then passed by individuals to make any last minute changes." He said that politicians have cut funding to the IRS in efforts to demonize the agency and promote "free market" alternatives that the government ends up relying on. Those companies give many politicians money.
According to Mother Jones, Intuit has successfully lobbied against multiple bills that would have made the process in America the same as what's done in Denmark, Sweden, and Spain. Intuit argues that people won't get as much money back if the government is in charge, but Ventry claims there's no reason to believe the government wouldn't give everyone the return they deserve.
"When the IRS is processing returns, if you've missed, for instance, your eligibility for the earned income tax credit, the IRS catches that mistake (assuming the return provides sufficient information to make such a determination), recognizes the taxpayer’s eligibility, and provides the taxpayer her appropriate credit amount," Ventry said. "It's not like the software system thinks, 'Oh sweet. They missed it. We're saving some money.'"
California already started something called California Ready Return in 2005 that does people's taxes for them like how it's done in those European countries. "The largest and most populace state in the country did it," Ventry noted. "Forty million people." The state has its own online filing option now. If a state that large can do it, Ventry thinks the country can do it too.
Companies like Intuit have argued the IRS handling federal tax preparation will "minimize the taxpayers' voice and control over the tax process," as Intuit’s chief tax officer David Williams told the New York Times in 2015.
Ventry noted that the IRS could easily set up software similar to something like TurboTax that helps people walk through tax forms online so they can customize their return to their needs.