As GOP Tax Overhaul Shapes Up, Democrats Push To End The Tax Return

Taxpayers might love return-free filing, but the tax preparation industry does not

Massachusetts Sen. Elizabeth Warren is leading the latest effort for return-free tax filing. (Bill Clark/CQ Roll Call file photo)
Massachusetts Sen. Elizabeth Warren is leading the latest effort for return-free tax filing. (Bill Clark/CQ Roll Call file photo)
Posted April 28, 2017 at 5:04am

Treasury Secretary Steve Mnuchin promised the “largest tax reform in the history of our country” on Wednesday as the White House and congressional Republicans gear up for a major overhaul.

But while their plans emphasize large tax cuts for corporations and more modest ones for individuals, some Democrats are promoting something far more radical: the end of the tax return.

Led by Massachusetts Sen. Elizabeth Warren, the Democratic effort is something many taxpayers might cheer, but tax preparation companies are working hard to oppose that proposal. 

In countries where return-free filing exists, the government sends taxpayers returns filled out with information it has collected. If a return looks right, the taxpayer signs it and sends it back. If it doesn’t, the taxpayer can contest discrepancies, or send in their own return.

The latest effort for return-free tax filing began shortly before Tax Day this month, when Warren and 10 other co-sponsors announced plans to reintroduce the Tax Filing Simplification Act, legislation that the Massachusetts Democrat originally introduced last Congress.

But tax preparation companies vigorously oppose return-free tax filing for fear that it would cut into their business of helping taxpayers navigate the process of filling out tax returns.

And they’ve found common cause with anti-tax Republicans who see IRS-prepared returns as harmful to their cause.

Thirty-two years after President Ronald Reagan endorsed return-free filing in a 1985 address to the nation on revising the tax code, his party has largely turned against the idea.

Where’s the alternative?

Intuit, the company behind TurboTax, and H&R Block have pushed hard against return-free filing, lobbying against bills that would institute it, and for bills that would block it. Intuit has also been linked to a campaign in which lobbyists created the impression of a grass-roots campaign against a return-free filing program, ProPublica reported in 2014.

Warren’s bill would have the Internal Revenue Service develop a free online service to allow taxpayers to prepare and file taxes directly with the government.

“The IRS would simply enter the information they already have on file, send it to the taxpayer, and let the taxpayer know how much they owe or will be refunded,” she said.

There is a free filing program already in place, in which taxpayers with yearly incomes under $64,000 can file their tax returns with preparers like TurboTax for free, but only 2 percent of filers actually file for free. Warren said that’s because preparers guide customers toward paid products

“The tax prep companies make it almost impossible to figure out if you qualify for free filing. Each company has different criteria, and they all up-sell new products every click of the way through the return,” she said.

Warren’s bill would also prohibit the IRS from entering into an agreement that would restrict the agency itself from offering free preparation and filing.

That is a direct response to a lobbying effort by Intuit and H&R Block to stop return-free filing before it starts. 

Eachcompany spent a portion of its multimillion dollar lobbying effort in 2016 to support the Free File Act of 2016, with Intuit especially focused on the bill. The legislation would have permanently restricted the IRS from providing free tax preparation and filing. It would also have created a permanent arrangement with a group of private tax preparation companies called the “Free File Alliance” (which includes Intuit and H&R Block) to provide free tax filing to low-income Americans. Tax preparation companies and their political action committees have given generously to the authors and supporters of the bill. H&R Block also lobbied against  Warren’s 2016 return-free tax filing bill.

Groups like Grover Norquist’s Americans for Tax Reform, which advocates a flat tax, have also opposed return-free filing, saying it would allow the IRS to “intimidate” taxpayers into paying whatever is on the pre-filled return. 

Richard Phillips, a senior policy analyst at the left-leaning Institute on Taxation and Economic Policy, said anti-tax organizations also want people to find doing taxes burdensome. He said their calculation is “if people spend hours doing taxes, it will make them hate taxes and contribute to their anti-tax agenda.”

Phillips said polling shows the biggest problem people have with taxes is not how much they’re paying, but in filing returns: “They think the system is complicated, it’s inconvenient and time-consuming.”

As a smaller step, the Taxpayer Advocate Service, an independent office within the IRS, formed to protect taxpayer rights, has called for the existing “free file” system, that works with private companies, to end and instead let taxpayers file directly with the IRS.

Is there a downside?

Companies in the Free File Alliance say the IRS shouldn’t be preparing the returns it collects. Gene King, a spokesman for H&R Block, said receiving an IRS-prepared return would “intimidate” taxpayers into paying whatever the IRS said they owed, as well as requiring a larger IRS budget to implement.

“With the government focused on maximizing revenues, can taxpayers really expect the IRS to scrutinize every return to ensure taxpayers are paying only what they owe?” he said. “Doubtful.”

Joseph Bankman, a tax law professor at Stanford Law School, said the Free File Alliance’s concerns are unfounded and having the IRS prepare returns would be beneficial to taxpayers in a number of ways. Besides saving money in filing for free, taxpayers could also choose not to correct a mistake the IRS might make in their favor. And the more than 1 million Americans who don’t receive the refund they are owed because they didn’t file a return would get their money.

Phillips said it was “pretty rich for the tax prep industry to say the IRS has a conflict of interest” considering their own.

“Their bread and butter is people paying for tax help at the local H&R Block or paying for prep software,” Phillips said. “This would cut them out of the business.”

With strong industry opposition and little organized support beyond liberal Democrats, return-free tax filing hasn’t entered the discussion in congressional Republicans’ already-contentious tax overhaul agenda. Their efforts to simplify tax filing have instead focused on trying to fit the whole tax return on a postcard-sized piece of paper. A recent independent analysis of this proposal, however, shows it would involve doing the same amount of paperwork, then condensing it onto the postcard.

Phillips said a simplified tax code, something GOP lawmakers say is an objective of their overhaul plan, would improve return-free filing.

“Warren’s bill says right now not everyone would get a return-free system because it gets too complicated. There are all these different deductions and pieces to make it work,” he said. But simplifying the tax code “would work for the vast majority rather than a smaller slice.”

Correction 1:02 p.m. | Due to an editing error, an earlier version of this story misstated the number of co-sponsors of the legislation known as the Tax Filing Simplification Act of 2017. It has 10 co-sponsors.