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California tried to save the nation from the misery of tax filing — then Intuit stepped in

Joe Bankman stands smiling with crossed arms
Stanford professor Joe Bankman helped guide California through a test run of a “return free” tax system and still advocates for the project that he said participants loved. “People were thanking the government for taking something that drove them crazy and improving it.”
(Josh Edelson / For The Times)

An unexpected letter from the state tax board is the kind of thing known to spike blood pressure. But the note that arrived in tens of thousands of Californians’ mailboxes in 2005 promised to ease anxiety.

The state proposed that these mostly modest-income taxpayers skip the aggravations of hunting for W-2s, the hassling with tax software, the lost evenings and weekends completing returns. Instead, the state could do it for them.

Californians participating in this test run of a “return free” tax system — a goal tax reformers had been chasing since President Reagan proposed it to the nation in 1985 — were so impressed that the thousands of comments that poured into a survey brought tears of joy to Joe Bankman, the Stanford law professor who guided the state’s effort, which was branded “ReadyReturn.”

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“They were just so touching,” he said of the comments about ReadyReturn, which was designed as a voluntary offering targeted at taxpayers on the lower end of the income scale. “One said, ‘Finally the government is doing something to make my life better for a change.’ Almost all the comments had the words ‘thank you.’ People were thanking the government for taking something that drove them crazy and improving it.”

Yet not everyone was thankful. Tax software firms faced an existential threat if the federal government were to follow California’s lead. Over the next decade and a half they worked relentlessly — and successfully — to stymie the California project and prevent others like it. They persuaded the Internal Revenue Service for more than a decade to pledge in writing not to adopt California’s innovation or develop any other offerings that threatened their business model.

Sen. Elizabeth Warren holds sheets of papers while speaking into a microphone.
Sen. Elizabeth Warren, shown Sept. 28, has called on the IRS to embrace a voluntary return-free tax system.
(Patrick Semansky / Associated Press)

“Can you imagine?” said Sen. Elizabeth Warren (D-Mass.), who for years has been calling on the IRS to embrace the California experiment. “Whose side are they on? ... This is the kind of problem we face in Washington over and over. A small number of well-funded corporations can keep Washington from doing the right thing, even when millions of people are hurt.”

Those companies persuaded the IRS to let them provide the government’s congressionally mandated free electronic filing service meant for most Americans, which was branded Free File. And now they stand accused of using that authority to swindle taxpayers by obscuring the Free File offerings online and luring consumers to other products marketed as free, but which often include steep fees.

Amid the unraveling of the industry-government partnership, California’s blueprint for ending the nightmare of tax filing for millions is getting another look at the national level.

No state has had a bigger impact on the direction of the United States than California, a prolific incubator and exporter of outside-the-box policies and ideas. This occasional series examines what that has meant for the state and the country, and how far Washington is willing to go to spread California’s agenda as the state’s own struggles threaten its standing as the nation’s think tank.

This follows years in which a coalition of software firms led by Silicon Valley-based Intuit, the maker of TurboTax and a colossus that boasts 73% of the market share for tax preparation services, fought against California’s plan to follow the lead of countries like Germany and Japan. In those places, tax day is a nonevent. Citizens may get a pre-filled return that has all the salary, investment and other information the government already has in its files.

“There are about 30 countries that do this for a big chunk of their populations,” said William Gale, a senior fellow at the Brookings Institution, who has been writing since the mid-1990s about the potential for the U.S. to go that route. “I would have thought we would be further along by now.”

The tax preparation industry guided Washington down a different path.

It has ultimately led to the Federal Trade Commission and multiple state attorneys general girding to sue Intuit, alleging consumers eligible to file for free were lured into paying steep fees, according to filings at the FTC and Intuit corporate disclosures.

The Los Angeles city attorney and Santa Clara County are already enmeshed in their own court fights with Intuit and H&R Block, accusing them of exploiting low-income taxpayers. In a related class-action case, U.S. District Judge Charles Breyer in San Francisco this year rejected as too stingy a proposed $40-million settlement with taxpayers who say Intuit duped them. Now, some 126,000 TurboTax users have pursued arbitration claims against Intuit.

Intuit TurboTax software is displayed at a retailer in Foster City, Calif.
A coalition of software firms led by Silicon Valley-based Intuit, the maker of TurboTax and a colossus that boasts 73% of the market share for tax preparation services, fought against California’s plan.
(Peter Barreras / Associated Press)

Among the many who say they were misled is 49-year-old Loren Goldstein of Laguna Niguel, whose modest income as the operations manager of a small real estate appraisal and tax services firm qualified him to file for free. Yet Goldstein says in a court filing that when he clicked to a page Intuit billed as its free product, and then spent an hour inputting his information, he was informed at the end of the process he would have to pay.

“I felt manipulated into paying them,” Goldstein said in an interview. “I had spent an hour of my time already. What am I going to do? ... I questioned whether that was their intention the whole time. They are offering a free product. And then they are hitting you up for money before anything can be processed. It made me angry and frustrated.”

The lawsuits followed revelations, first reported by ProPublica, that Intuit and other companies coded their Free File websites so they would not turn up on most Google searches from taxpayers seeking no-cost filing. The findings were confirmed by independent government investigations, including one by New York state that led its superintendent of financial services, Linda Lacewell, to declare Free File “is broken and was exploited by commercial tax preparer companies to drive their own profits.”

The program was meant to aid more than 100 million lower-income taxpayers, but only 2.5 million were filing for free under the arrangement by 2019. Millions more were paying unnecessary fees, according to the investigations.

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The companies deny wrongdoing. The agreement they struck with the IRS did not necessarily prohibit them from steering eligible taxpayers away from the Free File program, according to an independent review commissioned by the tax agency. The review, by the Mitre Corp., suggested the IRS update the language in its agreement with the companies.

Intuit said in a statement that it has “at all times been clear and fair with our customers” and that 17 million taxpayers filed for free last year using TurboTax, mostly with editions other than the Free File offering. The company says it supports simplifying tax filing, but not a return-free system, which it argues would make the tax collector, investigator, auditor and enforcer also the tax preparer, creating a conflict.

Company lawyers said in court proceedings that it was the responsibility of the IRS, not Intuit, to market the Free File program and ensure customers eligible to file without any charges were guided to websites where they can do that.

Amid the lawsuits and investigations, Intuit in July exited the Free File partnership with the IRS, following the same move by H&R Block last year. The departures came after the IRS said companies could no longer hide Free File from searches and after the agency in 2019 ended its pledge not to design software that competes with the tax preparers’ products.

That pledge had been pivotal to depriving the California experiment of oxygen.

Nina Olson leans on a rail with a stand of trees behind her
Nina Olson, executive director of the Center for Taxpayer Rights, fought with tax preparation companies over their largely successful efforts to keep the government from offering any tax software that was a threat to their profits.
(Kent Nishimura / Los Angeles Times)

“Now the IRS has no product,” said Nina Olson, who was the national taxpayer advocate at the IRS from 2001 to 2019. “So where are we? We are where we were 20 years ago. It is exactly what the software industry wanted.”

Where the IRS goes next is unclear. It has a new head of tax policy at the Treasury Department, Lily Batchelder, who is considered an ally by Warren and other return-free proponents. Officials at the department, which oversees the IRS, said the administration is committed to simplifying tax filing but declined to elaborate.

There is debate among independent experts over just how big of a technological and policy undertaking it would be for the IRS to offer the type of return-free system California aspired toward; the state limited its experiment to taxpayers with modest incomes, who had simple-to-complete returns. Some question if the tweaks that would need to be made to the federal tax system and the IT overhaul required of the IRS are just too heavy a lift.

A new Intuit-funded report released by the technology industry group Technet argues that the cost and technological requirements are insurmountable, taxpayers aren’t all that interested and the IRS could use a return-free system to steer taxpayers toward paying more than they owe. Similar findings have been echoed in other studies over the years, some of them also funded by the tax preparation firms.

“I am skeptical that this would not make things worse,” said former Sen. Bob Kerrey, a Nebraska Democrat who shepherded an overhaul of the IRS through Congress in the 1990s. Kerrey does occasional consulting work for a nonprofit funded by Intuit.

Intuit argues that the government lacks the information it needs “to accurately complete tax returns for tens of millions of taxpayers, specifically for those that are low-income and claim the Earned Income Tax Credit, the nation’s largest anti-poverty program.”

Yet dozens of highly credentialed scholars from such institutions as Stanford, Yale, Berkeley Law, University of Chicago and Georgetown University are adamant that the U.S. could easily transition to a return-free model. They acknowledge the U.S. tax system is more complicated than that of countries now using it and that adjustments would be needed in the tax code to make it work here. But recent innovations at the IRS, they say, show the agency can give taxpayers a viable return-free option.

Scholars at the New America Foundation argue in their own white paper that it could be available in time for people to use in filing 2022 taxes. They say the IRS is already showing itself capable with a portal it created this year that helped 10 million low-income Americans fill out returns so they could access federal stimulus payments.

The biggest obstacle, the New America experts warn, is the lobbying power of Intuit and its allies.

The dominance of TurboTax over the filing process has helped turn Intuit’s co-founders into multibillionaires, and has been nurtured by the firm’s potent political alliances. When Brad Smith, the former Intuit CEO who led the company through its explosive growth, retired in 2018, Silicon Valley Democratic Rep. Anna G. Eshoo made a speech on the floor of the House praising his generosity and wisdom, calling Smith “a trusted friend who has informed my thinking and my understanding of a number of important public policies.”

Left, Rep. Anna G. Eshoo and right, Rep. Zoe Lofgren.
U.S. Reps. Anna G. Eshoo (D-Menlo Park), left, and Zoe Lofgren (D-San Jose) championed legislation that could have made it illegal for the IRS to ever launch its own experiment with return-free filing.
(Associated Press)

Eshoo and fellow Silicon Valley Democrat Zoe Lofgren, among the benefactors of Intuit’s political giving, championed legislation that could have made it illegal for the IRS to ever launch its own experiment with return-free filing. Intuit spent more than $4.2 million on lobbying and political giving last year, according to the Center for Responsive Politics.

Eshoo’s office did not respond to requests for comment. Lofgren said in a statement that she is “disappointed by the pitfalls of the Free File program” but remains “concerned that the IRS, as tax collector, shouldn’t also be the tax preparer.”

The lobbying blitz Intuit unleashed in California — when the state began tinkering with return-free filing under Republican Gov. Arnold Schwarzenegger — was intense. It tapped into into the anti-tax sentiment of Republican lawmakers and the influence of an entrenched corporate lobbying firm with ties to Big Tobacco and Big Pharma, and Intuit’s efforts to kill ReadyReturn shot to the top of the agenda in Sacramento.

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Intuit had a potent ally in Americans for Tax Reform, whose leader Grover Norquist was among conservatives warning that government would use any expanded role to entrap taxpayers and wring more money out of them. Return-free filing is a rare plank of Reaganomics the group rejects.

California Republicans were eager to align with the anti-tax activist Norquist, who was deeply popular with the GOP base.

The Intuit-backed coalition more than once played an outsize role in delaying passage of the entire state budget — risking California’s credit rating and holding up billions in funding for critical government programs — as GOP lawmakers demanded the program’s elimination as part of any spending deal.

Legislative leaders buckled. Funding for the program was eliminated in 2006, impeding the tax board’s ability to expand it. As California retreated, other states followed. Bankman said proponents of a return-free system in Maryland threw in the towel when things stalled in California. At the behest of tax preparation firms, Virginia abandoned plans for state-sponsored software to compete with products like TurboTax.

Schwarzenegger administration budget chief Tom Campbell, a former GOP congressman, said in a Los Angeles Times op-ed that year that in all his time in government he “never saw as clear a case of lobbying power putting private interests first over public benefit.”

A parallel campaign with Intuit’s financial backing targeted nonprofits that represent low-income people and people of color. It warned that the California program was a “waste of scarce taxpayer dollars” and made claims about the cost and which taxpayers were using it — claims that, according to UC Davis law professor Dennis Ventry, were “simply untrue.”

The campaign persuaded some nonprofits, which demanded lawmakers leave the work of helping low-income taxpayers prepare their returns to the industry’s Free File program — the same program that now stands accused of cheating millions of those taxpayers.

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Intuit and its allies built on their lobbying successes in California with an equally intense campaign in Washington, where the President’s Economic Recovery Advisory Board encouraged the Obama administration in 2010 to explore a return-free system. President Obama had endorsed the concept during his campaign. But underfunded and overburdened, the IRS did not follow through. The chair of the IRS advisory committee on electronic tax administration that year was an Intuit vice president.

The agency instead repeatedly signed a memorandum of understanding with the Free File firms that included the pledge “to not enter the tax preparation software and e-filing services marketplace.”

At the urging of Intuit and other firms, meanwhile, a formal “Free File Caucus” was created in Congress; its members introduced bills aiming to ban the IRS from developing a return-free system. Intuit in corporate filings warned investors that a California-style return-free system “could potentially have material and adverse revenue implications.”

The firm and its allies were so successful at preserving the status quo that even the most ardent proponents of a return-free system grew exhausted by the fight, finding little space for it in a Congress that favors debates that generate partisan rage.

“The benefits are so obvious,” said Rep. Brad Sherman (D-Northridge), an author of more recent bills that would force the IRS to offer return-free filing. “You mean I can just push a button and be done with my return — and the IRS would have no reason to question it? But making government work better is less sexy than defeating your opponents in the abortion battle.”

 Joe Bankman sits outside at Stanford Law School
Stanford tax professor and ReadyReturn creator Joe Bankman at Stanford Law School.
(Josh Edelson / For The Times)

Bankman isn’t giving up. The professor is so committed that at one point early in the fight he took leave from Stanford, hired a professional Sacramento lobbyist and roamed the state Capitol to pitch lawmakers on ReadyReturn. He compares his quest to make tax filing simple to Charlie Brown trying to kick a football.

He gets close, and then the ball gets pulled away.


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