Elizabeth Warren Wants To Take Down TurboTax

Sen. Elizabeth Warren (D-MA) CREDIT: AP PHOTO/J. SCOTT APPLEWHITE

Elizabeth Warren wants to make tax filing season simpler and cheaper for most Americans.

On Wednesday, the Democratic senator introduced a bill with seven cosponsors, including Democratic presidential candidate Bernie Sanders, seeking to make significant reforms to the Internal Revenue Service (IRS). Under the bill, Americans with simple tax obligations would have the option not to complete a tax return at all, but to instead receive a pre-prepared return from the IRS with their liability or refund already calculated for them. The IRS already gets most employer and bank information on taxpayers’ obligations — such as W2s and interest earned — so all it would have to do is calculate what they would owe for them.

A report released by Warren’s office on the tax preparation industry estimates anywhere from 8 million to 60 million households would no longer have to file any returns under such a system. Advocates for such a system have said in the past that this could save them $2 billion and 225 million hours of time spent preparing returns, collectively.

For others with more complex situations — those who want to itemize their deductions or with many dependents who have to provide more information — the bill would direct the IRS to develop a free, online preparation and filing service that would allow everyone to file directly with the government, rather than relying on third party filing services like TurboTax or H&R; Block. And taxpayers would be able to download the tax information the IRS already has.

Tax Day has become an opportunity for corporations to profit off of confusion over our complicated tax code

Warren’s report estimates that taxpayers will pay $200 to a tax preparation service this year, on average, and spend 13 hours preparing and filing their returns. That cost eats up nearly 10 percent of the average federal refund.

The bill would also prohibit the IRS from entering into agreements that would restrict its ability to provide such free, online services directly to taxpayers. The IRS has signed a number of binding agreements with the tax preparation industry over the years that blocks it from offering free services directly to taxpayers itself, saying that it will “not enter the tax preparation software and e-filing services marketplace” and “not compete” with private service providers.

While the Free File program, a partnership between the IRS and private preparation companies, supposedly gives 70 percent of taxpayers free services, less than 3 percent actually used it in 2012. When it first launched in 2003, many companies offered nearly universal access to free filing software, and 5.1 million people were using it by 2005. But some companies pressed for changes in the next agreement inked between their industry and the IRS, which dropped 40 million people from eligibility. Meanwhile, companies have begun offering deceptive Refund Anticipation Loans that come packed with high fees and interest rates and other products that aren’t part of free file.

The IRS’ declarations that it won’t enter the tax preparation space fly in the face of what it’s been mandated to do. In 1998, Congress passed a bill requiring the Treasury Department to develop a “return-free” tax system by 2008 for those with simple obligations, computing what those people owe with information the IRS already has. Yet Warren’s office argues that the IRS has instead turned control of the process over to private tax preparation companies.

Cash Cow For TurboTax

That control has come after heavy lobbying and spending from the tax preparation industry. It’s a big business for companies like Intuit (owner of TurboTax), H&R; Block, Jackson Hewitt Tax Service, and others: In 2014, more than half of all the individual tax returns filed with the IRS were prepared by tax professionals, while about 80 percent of taxpayers rely on a preparer or software to file. Every taxpayer who needs assistance represents a profit opportunity. “The tax preparation industry relies on a complicated tax code to charge consumers high fees, and thus opposes simplification efforts — particularly those that make it easier to file returns,” Warren’s staff report notes.

These companies’ filings with the Securities and Exchange Commission (SEC) underscore the threat simpler taxes would pose to their businesses. As far back as 1998, Intuit’s SEC filings indicated that simpler taxes could “reduce demand” for their services, something it has continually brought up in filings since then. In its most recent statement, it warned investors that the development of government tax return systems “may cause us to lose customers and revenue.” Liberty Tax Service explicitly said in its 2015 filing that “demand for our products is related to the complexity of tax return preparation,” saying that government initiatives that would make things simpler “may decrease demand for our services or financial products.” And Jackson Hewitt has regularly cited government programs to simplify tax returns as a fundamental threat to its business model.

To maintain control of that business and keep those profits, the industry has spent heavily on lobbying Congress. According to the Sunlight Foundation, major tax preparers have spent nearly $28 million on lobbying since 1998. Intuit is at the front of the pack, having spent more than $24 million in that time period on lobbying, with 36 of its 41 lobbying disclosures related to maintaining the Free File program. An industry group, the American Coalition for Taxpayer Rights — made up of companies like Intuit, H&R; Block, Jackson Hewitt, Liberty Tax Services, and others — has also spent $765,000 since 2011 to lobbying the government on issues like simple tax filing.

A Long, Bipartisan Fight

Warren and Sanders pushed back on those companies as they introduced their bill on Wednesday. “Congress should be making it easier for Americans to file their taxes each year, not bowing to the interests of the tax prep industry,” Warren said in a statement.

“Tax Day has become an opportunity for corporations to profit off of confusion over our complicated tax code. That is wrong,” Sanders said. “We must make tax filing as easy as possible, not direct profits to private companies at the expense of working families.”

The idea of return-free taxes isn’t new, nor necessarily partisan. President Reagan called for Americans to “not even have to fill out a return” in 1985 and a year later included the idea in his Tax Reform Act. More recent bills to simplify taxes have garnered bipartisan support.

Yet some anti-tax groups that say they want a simpler tax code have fought against these efforts. Grover Norquist, founder of Americans for Tax Reform, has testified and advocated against a return-free system. Republican presidential candidate Ted Cruz has consistently called to abolish the IRS, rather than get on board with plans to direct the agency to make things easier for taxpayers.

Update:

Sanders’ presidential rival Hillary Clinton sent ThinkProgress a statement supporting the legislation, saying, “This important piece of legislation will help us build a better, fairer tax system… Special interests who benefit from the system’s current complexity need to stop standing in the way of progress. As President, I will work to simplify the tax system for working families and give them tax relief, and I applaud Senator Warren for her excellent work.”