It is a truth universally acknowledged that preparing and filing your taxes causes pain comparable only to root canal or passing a kidney stone.
If you’re looking for someone to blame, look to the commercial tax preparation firms Intuit (maker of TurboTax) and H&R Block.
As City Atty. Mike Feuer alleges in lawsuits filed Monday against Intuit and H&R Block, the two companies have connived for years to discourage millions of taxpayers from taking advantage of a free, simple online system provided by the Internal Revenue Service.
Feuer accuses the firms of “actively undermining public access to the IRS’ ‘Free File’ program.” That’s a program allowing the lowest-earning 70% of taxpayers — those with adjusted gross income of $66,000 or less — to prepare and file their federal and state taxes online for free, using the commercial services.
I want to hold the tax-preparation companies accountable, and I want to deter this behavior.
Feuer compared the tax-preparation firms’ behavior to that of Wells Fargo, another of his corporate targets. Feuer’s 2015 lawsuit against Wells Fargo helped blow up the scandal over the bank’s opening of thousands of bogus accounts for customers and others. “That was a major corporation taking advantage of the consumer,” he says. ”There are some parallels. I want to hold the tax-preparation companies accountable and I want to deter this behavior.”
Free File is a full-featured program that serves those taxpayers no matter how complicated their taxes. But it’s little-used; according to an investigation published last week by ProPublica, on which key elements of Feuer’s lawsuits are based, only 3% of eligible taxpayers use Free File. That’s 3 million of the 100 million taxpayers eligible.
They’ve done so despite having made a commitment to offer free online tax-prep and filing to the majority of taxpayers. Starting in 2002, the online tax-prep industry agreed to do so in return for a commitment by the IRS not to compete with its own free online tax preparation and filing services. The agreement has been periodically renewed, most recently through Oct. 31, 2021.
But Feuer alleges that Intuit and H&R Block have deliberately concealed Free File from taxpayers and steered them instead to their own “free” programs, which are watered-down versions of software for which Intuit charges as much as $120 and H&R Block as much as $105. The firm’s “free” programs are useful only to taxpayers with wage income from employers. That leaves out independent contractors or those with itemized deductions.
The programs charge for state filing; they’re also an opportunity for the firms to sell software upgrades for customers who don’t find their free programs sufficient. Feuer calls those ostensibly free services nothing but “decoys.”
It’s been virtually impossible to find IRS Free File from the main web pages of TurboTax and H&R Block. Instead, taxpayers have had to know enough to track down the IRS program on their own, at TurboTax’s “tax freedom” website and H&R Block’s “Free File” site. They can also go to the IRS Free File site, which will steer them to one of the tax-prep firms’ own Free File programs.
Last month, ProPublica reported that Intuit even took a step to hide its Free File web page from search engines such as Google, so consumers wouldn’t find it via a routine web search. ProPublica says that after its report, Intuit changed the page coding so it would no longer be hidden from Google.
In a statement issued through spokesman Rick Heineman, Intuit says: “We stand behind our actions as being both appropriate and consistent with our values. Any suggestion that Intuit does not support the IRS Free File Program is flat wrong.”
The tax-preparation services have lobbied to hamstring competition from the IRS for years. It’s not hard to figure out why: Intuit reported revenue of $2.5 billion last year from TurboTax, and H&R Block reported $243 million from “DIY tax preparation,” including its software programs.
Over the last decade, according to the Center for Responsive Politics, Intuit and H&R Block each have spent more than $24 million in lobbying on Capitol Hill, in addition to millions of dollars in campaign contributions.
Those efforts appear to have borne fruit. Last month, the Democratic-controlled House passed the “Taxpayers First Act,” which includes a provision codifying the 2002 commitment, flawed as it is, into law. “That was a victory for the companies,” Feuer says. The measure now goes to the Senate.
The commercial tax-prep firms and the conservative anti-tax lobby share incentives to keep tax filing complicated for most Americans; the firms want to build their customer base, the anti-tax warriors want to stoke resentment of the IRS. They’ve both opposed allowing the IRS to prepare taxpayers’ returns for them by sending forms pre-filled with all the information the IRS already has about them.
As economist Austan Goolsbee proposed in 2006 before becoming an economic advisor to the Obama administration: “The IRS already receives information about each of their sources of income directly from their employers and banks. The IRS then asks these same people to spend time gathering documents and filling out tax forms, or to spend money paying tax preparers to do it.”
Obama mentioned such a plan during his first presidential campaign, but it died under lobbying assault from the tax-prep companies and anti-tax crusaders. California introduced its own program of pre-filled firms, known as ReadyReturn, in 2005. Despite constant criticism from the anti-tax lobby, many of its elements still are available under the label CalFile.
Feuer in his lawsuits is seeking three remedies under California unfair competition law: restitution for the millions of taxpayers who were eligible for the free IRS service and paid unnecessary fees to the companies instead; injunctions barring the firms from erecting barriers to taxpayers’ knowledge of the IRS system and access to it; and steep financial penalties.